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Dissecting Ponzi schemes on Ethereum: identification, analysis, and impact (arxiv.org)
221 points by moh_maya on June 1, 2017 | hide | past | favorite | 121 comments

This satiric white paper is really, really worth the read:


Written by a former cryptocurrency dev who later joined Lyft.

Some choice quotes:

"Context—and wide margins—are the bedrock of every white paper."

"We’re living in a world where developers are Kickstarting Pets.com every week"

Author of PonzICO white paper here (proof: https://keybase.io/cin )—thank you! Still optimistic about cryptocurrency but the impending ICOpocalypse does not bode well for anyone in the space...excepting satirists I suppose. ;)

Great to see your reply. I only came across your paper a few weeks ago, through fortuitous circumstances:

A very smart but non-engineering friend of mine was asking about cryptocurrencies, and - in trying to explain why i think ethereum's "improvements" over bitcoin are anything but - I directed him to read about The DAO.

He promptly rabbit-holed and came up an hour or so later with your gem of a paper.

So ... nice work! A sanskrit professor found, understood, and thoroughly enjoyed the paper. And then hipped his programmer friend to it :)

Straight question: do you have a good link for the main technical differences between ethereum and bitcoin?

OK - I've read the paper on arXiv - can see that ethereum (for better or worse) has smart contracts layered on top where as bitcoin does.

I seem to recall that there was another more fundamental difference at the blockchain level, was wondering whether there was any link for that ...?

re: blockchain differences: I hear that Ethereum is planning to move to proof-of-stake, rather that proof-of-work, but I don't have an opinion on that. There may be other salient differences I'm unaware of.

It's the 'smart contracts' that I think are foolish.

Replacing the legal system with code only makes sense if all of the following obtain:

(a) the code is 100% bug-free (b/c accidents cannot be rewound)

(b) all code-writers are 100% honest (their code does what they say)

(c) all contract participants are 100% perfet code readers (so as to not enter into fraudulent contracts)

(Strictly speaking, only one of (b) and (c) needs to be true).

None of these conditions will ever obtain.

And even then you haven't really replaced the legal system if you are dealing with any goods that exist outside of the blockchain, since no matter what the "smart contract" code does, those ultimately need to be transferred outside the smart contract system and subject to the legal system.

(And, actually, even transactions entirely within the blockchain may trigger legal consequences, so even for them you've merely supplemented, rather than replaced, the legal system.)

Thank you for your detailed & useful clarification.

Damn nice. 3,203.09 in eth in that wallet hehe

About 15 eth, worth about $3,200. But he can hope for more.

Good luck in buying the Tesla with all the profits, certainly put me off investing (and my dream of buying my Tesla by Christmas with the profits from my $1 investment)

This is brilliant, thank you for finding this. My personal favorite quote "But reality is divorced from this vision—indeed, the destruction of value after most of these scams are revealed will ironically employ more lawyers than Ethereum would otherwise claim to make redundant."

"kudos to the developers for discovering a class of rich, pseudo-intellectual suckers willing to value the work they haven’t done at multipliers that would give a private equity partner an aneurysm"

This is pretty great.

Well stated. Were I to design a Ponzi for the 21st century, it would look and feel like Bitcoin. The essence of a good scam is to capture the imaginations of people who believe themselves to be smart and unable to be conned.

More specifically, we search the Ethereum blockchain for contracts whose bytecode (which is always stored on the blockchain) is similar to that of some known Ponzi scheme. We use the normalized Levenshtein distance (NLD) as a measure of similarity between two bytecode files.


This search resulted in further 55 potential new Ponzi schemes, not included in our original collection of 137 contracts.

It's so awesome that it's possible to do this and that it actually works!

> To this purpose, we count the number of transactions from July 30, 2015 (the date of the origin block in Ethereum) to March 6, 2017 (the date when we extracted the transactions), obtaining a total of 16082269 transactions. Since we counted 17777 transactions related to Ponzi schemes, we have that Ponzi schemes only constitute ∼ 0.05% of the transactions in the Ethereum blockchain.

I've been sort of amazed at how brazen people are in cryptocurrencies about pyramid schemes. They'll even call themselves ponzi schemes. And how many people will join them, knowing that it's a scam, just assuming they won't be the last suckers in.

People have argued that cryptocurrencies themselves are pyramid schemes - the people who start mining early win out, and the people who join later to speculate on the currency have less and less chances of striking it rich.

(Obviously this is based on the view of cryptocurrency as purely speculative, not as an actual currency with which to buy things, but even now, it's still pretty difficult to buy a lot of things with Bitcoins.)

Those people don't understand what a pyramid scheme is.

The acquisition of bitcoin by newcomers in no way enriches earlier adopters, as in a classic pyramid scheme. Miners continually invest huge sums in capital equipment with the hope that the price continues to rise. If it does not, they are toast. This is not gambling or a Ponzi; this is just a risk/reward business decision. It's the exact decision that the capitalist makes when she decides to build a new production line at the factory.

Buying bitcoin early is like investing early in any new technology: it could be worth nothing, or it could go bananas. Many alt-coins have trickled down to very low prices over time or stopped functioning altogether. There are no sure things in this space, even for the early adopters.

> The acquisition of bitcoin by newcomers in no way enriches earlier adopters, as in a classic pyramid scheme.

Of course it does. Bitcoin used to be at $1, now it's at $1,xxx. What happened in between was a massive influx of newcomers.

The difference to, for example, the stock market is in the "underlying value". If I buy some stock and it's price collapsed the next day, I'm still entitled to my share of future profits etc. If the company is sound, I have lost nothing.

A ponzi scheme's underlying value is only the future growth of the scheme itself.

I'd say the jury is still out for bitcoin et alt: how much of the growth is being fuelled by speculation, and to what extend is that speculation actually speculating on future speculation?

> Of course it does. Bitcoin used to be at $1, now it's at $1,xxx.

And you can bet those who bought at $1 sold all they had at $10 ("wow, it's like 10 times what I invested, this is insane, this probably won't go any further!"), those who bought at $10 sold everything at best at $100, those who bought at $100 sold at $1000, etc. Actually, I'm not sure the people bitcoin made rich are that many. I have yet to see an article explaining how someone got millionaire by getting early into bitcoin.

As for fundamentals, the underlying value of cryptocurrencies is to be a store of value that is not as easily stolen than cash, while still not sitting in at a bank. You can see it as cash that can be transmitted over the network, in small or big amount (and quite fast in that case, comparatively to a wire transfer). Of course, whether this tech will become mainstream is yet to be seen, it can still fail. On the other hand, the company you bought stocks from can also bankrupt and close.

If someone got millionaire on Bitcoins, spending it would not be easy; the IRS might want to know how you are living beyond what your paycheck allows...

Or they may declare their gains to IRS. Bitcoin is not just a tax evasion thing :) (and it's actually quite dumb to use it for tax evasion, given how the ledger is public and will always be there)

That's not that easy. It assumes you have tracked your cost basis, for example.

AFAIK it's not illegal to make money off of bitcoin speculation. It's just like selling any other form of property.

In Germany it's tax free if you where holding them for more than one year. A person can also move to another country where they don't care so much.

there are lots of people operating entirely on cryptos around the world right now.

That doesn't mean it isn't a scam. Bernie Madoff's customers were all quite happy for many years.

>Bitcoin used to be at $1, now it's at $1,xxx. What happened in between was a massive influx of newcomers.

That argument does not follow. An equivalent argument is:

"A house in San Francisco used to cost at $100k, now it costs $1000k. What happened was a massive influx of new people to San Francisco."

What happened is that the utility of a house in San Francisco changed and no one was willing to sell below $1000k.

> "A house in San Francisco used to cost at $100k, now it costs $1000k. What happened was a massive influx of new people to San Francisco."

Seems pretty reasonable to me.

Except that it isn't--it's a bubble and at some point that bubble is going to pop. We already went through all this in 2008 and people have already forgotten the lesson! It's amazing how fungible the human mind is. "This time it will be different." That's what every communist who ever lived thought, too. This time, the stupid scheme of wealth transfer will work perfectly if we just can pass a few more laws and control a little bit more of people's behavior, we can build our everlasting, perfect utopia.

Real estate crashes when the last marginal buyer is priced out of the market. California real estate has crashed 2-3 times just in my lifetime. It will crash again and whoever bought at the top will be bagholders. It is the immutable law of bubbles.

Asset prices move because bids /and/ asks change not because the number of people who hold the asset increase.

> Of course it does.

Let's assume the newcomer is a miner, spending money to acquire the newly-created bitcoins from block coinbase transactions. That new money is created through inflation, which makes all existing bitcoin less-scarce. The miner must pay electricity costs, probably in terms of fiat currency, so there is continual sell pressure from coin inflation.

That doesn't sound like it enriches earlier adopters. Rather, mining hurts the value of earlier coins through the two mechanisms of inflation and continual selling pressure.

If the newcomer purchases bitcoin on an exchange, then it may cause upward pressure on the price (it depends on market conditions / liquidity). If the newcomers are purchasing bitcoin at a slower rate than the miners produce & sell, then there may be a decreasing price.

And finally, those with lots of coins cannot simply dump them on exchanges and expect not to drive down the price.

There is no direct mechanism whereby newcomers to bitcoin enrich existing holders. Instead, all value is derived from market forces of supply & demand on the exchanges. Bitcoin is no more a Ponzi / pyramid than Google stock.

Conversation going on at http://avc.com/2017/06/icos-and-vcs/ today ...

> The difference to, for example, the stock market is in the "underlying value". If I buy some stock and it's price collapsed the next day, I'm still entitled to my share of future profits etc. If the company is sound, I have lost nothing.

Bitcoin is a payment network (Even if the price collapses to really low).

Ethereum is a smart contracts platform, so you can still build certain kind of apps on it even if it's price collapses.

A ponzi scheme as NO business model (or the business model claimed, isn't a valid one).

Using bitcoin I can actually transfer wealth from one part of the world to another, similarly using Ethereum I can create decentralized applications funded by payment (like pay-to-seed bit torrent network).

On the surface Bitcoin is a payment network, that isn't all there is though. If Bitcoin or the other cryptocurrencies didn't at least have some value or perceived value to its users, then they wouldn't gain adoption. This usefulness doesn't negate that it has a Ponzi scheme structure to it. In a traditional Ponzi scheme, the value is the big returns you're getting - being fed by the next investor in line to be scammed. That only works when the Ponzi artist targets people with substantial amounts of money - however Bitcoin now enables that for very small transactions, globally. That Bitcoin has value outside of the Ponzi aspect, doesn't negate that it's a Ponzi structure.

I think it does. A ponzi has one issuer, and it's worthless. Bitcoin is speculation and it's a brand, and a plattform whitch is usefull.

A Ponzi scheme is only worthless and useless once it ends because the issuer decides to run off with a chunk of money; that likely should easily equate to people selling off their Bitcoin to eager investors who see this stock-market like system that if they get in 'early' on - or at a low enough price - they can make money selling back out.

That Bitcoin is speculation, a brand, and useful in some ways - that is why it can be sustained ... because the network of speculators/investors is global, and people with $100 or people with $10s of millions that want to gamble can join in on.

The 'single issuer' could also be considered the Bitcoin blockchain itself.

Years ago I met someone who sold off $20MM+ of Bitcoin, bought real estate for rentals, then bought more Bitcoin when low to rinse and repeat. How many people are doing this which keeps Bitcoin going, while slowly increasing the price? It could easily be 50%+ of money, of course everyone with Bitcoin is incentivized to increase adoption - so their Bitcoin doesn't become worthless, and so in fact it becomes worth 100x.

None of what you say negates the fact that it is a Ponzi. Plenty of Madoff's customers did the same things--they were "lucky" in the sense that they weren't at the last layer of the Ponzi. Someone will be. There was research done about Ponzi schemes and I don't remember all the details except that none get past 11 levels because it would require more people to invest than exist on the planet.

Ponzi systems end. A speculative asset might drop hard, but then it stabilises. There is simply no reason to stop using or holding BTC when the price increase stops.

I think the points stated in my above comment could cover why it may look like a speculative asset.

I wasn't trying to negate it being a Ponzi. :)

The 11 level limit intersecting with time will dictate how much time Bitcoin folks have to gain mass adoption..

> Bitcoin used to be at $1, now it's at $1,xxx.

It's now at $2,4xx.

Which is evidence of nothing.

It's evidence of the price of Bitcoin.

Wow.. The biggest game of JENGA in history!

The US dollar will collapse one day too.

>The acquisition of bitcoin by newcomers in no way enriches earlier adopters

Doesn't it though? The reason we're talking about ethereum here is because it's got the best adoption of any of the newer altcoins. And the more people talk about these altcoins the better they seem to do. Hence things like "this is good for bitcoin", they're trying to get buy in.

I suppose. But there is no guarantee of return, or even the promise of return, which is something a Ponzi scheme almost always offers.

As OP pointed out, everyone who is investing in mining / purchasing these coins is hoping they will be a store of value that will appreciate. At some level, it's no different from betting on specific commodities​. No one is promising anything. I think that's an important distinction.

The comment I'm replying to is talking about pyramid schemes so for clarification: the subject of this thread is ponzi schemes on an alt-coin but my belief is that the altcoins themselves are a classic pyramid scheme.

>there is no guarantee of return, or even the promise of return

You should check out some altcoin subreddits and /biz/ and I think you might disagree with yourself.

"Frgtpsswrdlame-coin is going to the moon! You guys need to hop onto this, I already have a 100% return. Plus it's safe because frgtpsswrdlame-coin has <encryption gibberish>. It's still early so get in!"

"Buy the dip! If you look at frgtpsswrdlame-coin's charts you can see that there's a <technical analysis gibberish> pattern forming which means this is going to bounce right back!"

Perhaps what seperates this from a more traditional pyramid scheme like door-to-door knife sales is that you can't point to the guy who convinced you to buy in and you can't point to the guys at the top of the hierarchy but they still exist and they still misled you. It's just obfuscated because of the internet.

It's a pump and dump, not a Ponzi scheme.

Who invented Bitcoin? WE DON'T EVEN KNOW!!!! Who the hell would buy such a thing? Idiots.

There is a marked difference between investing and outright gambling. When you invest, you are placing capital at risk in order to achieve some kind of gain, be it growth or dividends. At the end of the investment, there is the return of your original principal. There are legal mechanisms in place that govern real investments. That's not to say that you can't lose all that initial principal, you can, but it's still a remarkably different process than what these Ponzi schemes look like. At least to me.

Look, every Ponzi that ever existed has anecdotes about those who made it big--it's part of the con. Getting rich quick is the dream of every peon everywhere.

I agree. Nobody at any time promised anything. If you invested early, it was a high risk that the whole cryptocurrency could just have imploded and actually for many it did (BTC and Mt.Gox or lost wallets). Now a few years later it pays out for those who cared early about it. Congratulations for those.

It's a Ponzi.

> people who start mining early win out, and the people who join later to speculate on the currency have less and less chances of striking it rich

If that's all it takes to be a pyramid scheme, then any high-growth stock is a pyramid scheme. I could have struck it rich by buying Apple in 1999, but I don't think it would happen now.

A stock is part ownership in a corporation. There are laws and rules that govern stock issuance and stock investing. You have proxy voting rights with many stocks. You can go visit the physical corporation which has a "book value" and you can determine worth based off that value plus revenue and earnings minus operational costs and decide whether you want to invest.

There have been stock swindles in the past--the 1800s up to the 1920s were full of them. There have been insurance and bond swindles, too.

High growth stocks may be bubbles, but are not pyramid schemes.

Hence my clause "if that's all it takes." My point is that outsized rewards for early investors do not make something a pyramid scheme, which is a specific illegal structure. Neither stocks nor cryptocurrencies are pyramid schemes.

Bitcoin is a finite supply store of value like gold.

To argue that's a Ponzi scheme reduces down to arguing that the entire economy is a Ponzi scheme. There are some Marxists who argue that. If that's true we have bigger problems.

A great explanation of crypto coins (ethereum in particular, and carrying on to its DAO fiasco) is here: https://www.reddit.com/r/Buttcoin/comments/4uzw81/eli18_ethe... - it basically comes down to people trying to persuade you that their shiny new tokens (that they created from nothing) are really worth something.

This is not so different from any fiat currency. It's only worth something if you believe it's worth something. For that matter, any valuable thing. But at least you can't print gold. (No I'm not a goldbug)

Bitcoin, ethereum, dollars, euro - there isn't anything fundamentally different. Printed money is just that, and the guy who controls the printer can choose to print more and inflate the currency. But we all believe it's worth something... Because we believe it. It's a tautology. Cryptocurrencies are no different.

Except they are different. Gresham's Law--bad money chases out good. We do have a problem with fiat and who controls the issuance, no argument there. However, "money" or "currency" is also based on history. The dollar has a reasonably good history up until 1971 when Nixon took it off the partial gold standard, the value plummeted.

Consider this: Would divers risk their lives to recover paper money from a sunken 1930s era shipwreck? Yet for gold or silver, they will readily do that. I'm not gold bug, but I can understand why--gold and silver have a loooong history as stores of wealth. That's probably more important than any other consideration--how long has the "money" been "money?"

> the people who start mining early win out, and the people who join later to speculate on the currency have less and less chances of striking it rich.

Replace "mining" with investing and currency with stock and tada.

That's not a pyramid scheme, that's risk/reward investing 101.

The difference being that companies are meant to be trying to make money and give that to their investors, whereas cryptocoins are nothing but a string of numbers.

I agree having a company trying to produce revenue is arguably more valuable, but keep in mind cryptocurrency isn't _just_ a string of numbers -- what you're buying into is a massive network of machines verifying your transactions and protecting the system from things like double-spends. Sure, Bitcoin has scaling issues, but there is still an insane amount of computing power backing it, and that isn't changing. I'm not 100% sure I see as much value in Ethereum, for sure -- since throwing that much computing power at verifying programs is more dubious to me, as is the switch to proof of stake.

Ethereum does the same thing as Bitcoin. It's just that you can also have scripts on the network that move money around.

That's as much a liability as it is an asset -- for instance, https://www.reddit.com/r/ethereum/comments/6eruqb/if_your_ex... ("QuadrigaCX exchange lost 60000 Ether due to smart contract problems").

You have to be careful, but people have gotten a lot better at being careful. The contract used by QuadrigaCX was written last summer, and violated a well-known best practice, which is no longer necessary due to an improvement in Solidity. Human error is always a problem, but these days it's common to hire at least one security auditor for any contract that handles nontrivial amounts of money. (I'm a full-time Solidity dev/auditor.)

It's still a little scary, but I'd say it's less scary than safety-critical embedded code.

Gold doesn't make money either. Gold isn't as valuable as a commodity for engineering (what's it's actually useful for) as the markets sets its price at.

Gold, like fiat currency, like "cryptocoins" are all just stores of value that a market sets a value to.

Sure, except with gold, you could buy a nice suit and steak dinner in any era.

Because a market decided that it is valuable. Same with crypto.

"the people who start mining early win out, and the people who join later to speculate on the currency have less and less chances of striking it rich."

The people that were born early win out, and the people who are born later have less and less chances of striking it rich.

So human societies in general.

Not true: the general trend is that later generations are richer than earlier generations. Just compare yourself to the average person in your country 100 years ago.

"less and less chances of striking it rich."

Never said we weren't generally better off. But none of us have a shot at being oil barons, logging millionaires, retail moguls, etc.

Striking it rich now generally means achieving a higher level of knowledge and education first, then you can try to make your mark.

The previous generation hordes vast sums of wealth from endeavors that required less up front preparation and less capital (which was often provided rather no strings attached by the government, a tap which is being shut off (look at IBM's history of being gifted government funded inventions, among others)).

Crytocurrencies like Bitcoin and Ethereum are legitimate stores of value and have been compared to the use of other finite stores of value such as precious metals.

The market capitalization of gold currently stands at 7.5 trillion USD. All cryptocurrencies combined currently stand at a market capitalization of 87.6 billion USD (1.14% of the market capitalization of gold).

Cryptocurrencies with a finite supply can supplant other finite stores of value and actually provide a number of benefits over existing finite stores of value (instant exchange to sterling currencies, improved transactional ability, traceability and general liquidity). It is likely we are just getting started.

Calling any legitimate store of value a Ponzi scheme is missing the point.

>Bitcoin and Ethereum are legitimate stores of value

What does legitimate mean? The only difference between monopoly money and bitcoin is that people right now believe in bitcoin. But that belief could easily falter.

The same could be said about gold, but gold a very long history and has somewhat strong demand for use in jewelry.

At this point in time, essentially all demand for cyrpto is for speculation purposes. There is some use for illicit markets but it's very minor.

I wouldn't call it a ponzi scheme because those are intentional. But the current pricing for cryptos is definitely an embodiment of the Great Fool Theory of investing.

Neither agreeing nor disagreeing with your general point about legitimacy, but there are a few big differences between monopoly money and bitcoin. I could fairly easily and cheaply buy a decent printer and print my own fake monopoly money that you wouldn't be able to tell apart from the real thing. Also, even genuine monopoly money could be easily printed in vast quantities by the makers if it ever actually became valuable enough to give them a reason to do so. You can't do the same with bitcoin. There is a known, genuine supply of bitcoin, a known schedule for creation of more, and forgery is impossible (at least not currently discovered to be possible).

If you have invested in gold or bitcoin at $1000 per unit, does it matter if the price after the faith in its value goes away is $0 or $10?

The vast, vast majority of the price of gold is the same "it is scarce and other people value it so I too value it" that composes bitcoin or usd or any other thing you consider valuable.

By comparison, a lot of metals like aluminum have relatively low portions of their valuation wrapped up in stores of wealth.

We really should strive to replace gold with crypto. All the gold reserves in the world could be put to much better use than sitting in a vault as bricks. The artificial price inflation caused by the use of gold as reserve has inhibited its use in many practical applications due to its dramatically higher price per gram compared to many other metals in similar problem domains.

OP isn't calling cryptocurrencies a Ponzi scheme, but specific contracts (e.g. in Ethereum you could make a "smart contract" that acts as a Ponzi scheme).

The market cap was $25 billion one month ago [0]. $60 billion in growth in one month. Sound a bit fishy?

[0] https://cryptolization.com

>compared to the use of finite stores of value

Ethereum has no cap on supply. Bitcoin is capped at 21m coins.

i was talking about literal ponzi schemes:

Search for ponzi: https://dapps.ethercasts.com/

The last ICO I attended totally felt like an MLM meeting. Just like in MLM, one does not talk about the pyramid but instead talks about the commodity product/service/asset that enables the pyramid to be built. But everyone knows it's about making money through the pyramid. The commodity is just a distraction to give it some legitimacy.

If you knowingly join a ponzi scheme, it's pretty much like a casino - you go there knowing there's a pretty good chance you will loose your money, and a slim one you will win some. Some people like the rush.

This was eye-opening for me. This explains actually the adoption scammy operations that are ponzis have: people are not against participating in a ponzi scheme at all, its just the lottery effect ("i wont be one of the losers").

The dumb money is always, always, always 100% certain that it is actually the smart money.

Look to your left, look to your right. If you can't spot the sucker--it's you!

The paper points out that many of the Ponzi contracts on Etherium have exploitable bugs. Some can be induced to compute too much and thus run out of "gas", aborting. Some allow an attacker to change the party who gets the fees. Some can be stalled out with a suitably constructed transaction.

Making Etherium contracts a full byte code execution engine was a big mistake. That form is too bug-prone and led to the DAO debacle. It should have been something simpler, such as a decision table.[1] That simple declarative form can handle most useful business logic, but can't loop. It's always decidable and is easy to hand-check.

[1] https://en.wikipedia.org/wiki/Decision_table

Well, given that ether has appreciated 10x since the DAO debacle makes it somewhat unconvincing to use that as evidence of a design mistake.

   full byte code execution 
   engine was a big mistake
An even better scheme would have been proof-carrying code: a contract should have been a pair (c, p) where c is the program expressing the contract (in a Turing complete language) together with a proof p in a suitable program logic (for total correctness) that proves that c does not do a bad thing (e.g. consume too many resources). It's easy to check that the proof p is valid for c.

Too complex for the purpose.

Yes and no.

The proofs could be auto-generated for decision table based contracts, so a decision table could be a convenient DSL for simple contracts, without preventing more complicated contracts. The average contract writer would never need to see the full language or be exposed to proofs.

Try implementing the DAO as a decision table?

I think the vast majority of coins and tokens are near worthless. People invest in them because other people invest in them, in hopes of seeing returns like early investors in Bitcoin and Ethereum did. There will be a correction at some point.

But that's not to say that a blockchain with functionality aside from store of value (like Ethereum) couldn't pan out and enable a whole new universe of use cases for trade, company formation and ownership, and contracts in general, on a global, super-fast, completely automatable scale. It could be yuge - but since no-one knows what will happen and it's still early days, the current valuation of Ethereum is also highly speculative. If it works out though - maybe the current valuation of Ethereum will look cheap in retrospective.

I can see the use of blockchains and networks like ethereum, but it seems like the majority of use cases could run on a private network. I still don't see the appeal of a single public network. Why not a dozen or a hundred? That's why the value or Ether seems so useless to me. There was a backlog of transactions lasting hours yesterday and this is supposedly just the beginning.

So far, there hasn't been any killer use case for ethereum yet. Everything it does, can be done more efficiently outside of the ethereum network. Some say that its "decentralized" on ethereum though, but this isn't true, because a lot of the inputs to ethereum contracts originate from a centralized source. For instance, if you want to make a smart contract that sends you 100 eth based on the outcome of a basketball game, the centralized source where you get the trigger on who won the game, is the centralized source your contract has to trust. It doesn't really matter whether the contract was executed on the ethereum network, it is still vulnerable to centralization. Whats the difference between that and just making it work on bitcoin by having a service sign a multisig transaction sending you btc if the basketball team wins? The only way something can truly be decentralized, is if all the actions in the smart contract are primitive actions based within the network itself. For instance, if y address receive 1 eth, send x address 2 eth. Neither action requires trust outside the ethereum network.

I think the future may well be lots of blockchains talking to each other via something like Polkadot (http://polkadot.io).

There may also be use cases for private blockchains, and there are startups pursuing those, such as http://chain.com (though I'm not sure why regular databases wouldn't work for most of those use cases), but I think there is also a need for a global decentralised network (or networks) for other use cases - global transactions/contracts, decentralised companies, probably other use cases yet to emerge.

Current scaling/latency issues with blockchains - there is ongoing work to solve those via off-chain networks, sharding etc - it's still early days, it will take some time to develop.

I think one use-case that makes some sense is Mysterium (https://mysterium.network). VPNs actually have material benefit from decentralization, and the ability to actually cover costs in operating exit nodes is somewhat of a game changer relative to something like TOR (I do realize they have different security profiles, though).

Data storage is also a moderately interesting application. Decentralizing data persistence, and being able to take advantage of the enormous amount of excess hard drive space that exists in the world is an interesting concept. Things in this category are Sia, Storj, and MaidSafe. While i'm not sure the economics and logistics will actually work out, I do think there is something there.

yeah there are speculation bubbles, which correct and if you are trying to profit off of the waves you can get bit... sure this one needs a correction... but so does my 401k. It's hard to call this tulip mania anymore... the overall price has been going almost uniformly up on bitcoin for over 4 years now.

The price of USD has gone down steadily since its inception.

I don't think you can say it's "near worthless" to keep your value in an appreciating medium rather than a depreciating one..

My bitcoins are probably not worth the $2400 they traded at today... but they are definitely worth more than the $400 of USD they used to be (now worth $376 USD2013).

The difference is that there are fairly objective measures of value that you can apply to equities. We are probably a little overpriced right now based on P/E ratios. But unless something world shattering happens, we can be pretty confident the S&P wont be at 50% of what it is today. If for no other reason than because you actually have an ownership stake in the companies.

But is there any coherent explanation for why bitcoin should be priced at 2500 dollars rather than 2.5 dollars? or 2.5 cents?

The US dollar is a bad example because it's not supposed to be used as long term store of value at all. The inflation is purposeful and much more importantly fairly predictable. A bank can lend me 1,000,000 dollars to buy a house because they can be fairly confident that inflation is going to be ~2%.

>we can be pretty confident the S&P wont be at 50% of what it is today.

except that time the S&P dropped 57% (2007 to 2009 from 1,565.15 to 676.53)

>But is there any coherent explanation for why bitcoin should be priced at 2500 dollars rather than 2.5 dollars? or 2.5 cents?

Are you similarly skeptical about the price of gold? There is a universal need for a store of value which is not only insulated from global financial markets, but also a hedge against them. Due to mathematically certain scarcity and decentralized resistance to manipulation, crypto fulfils that need better than gold. Assuming that gold is priced primarily to fulfill this same market need, and that no gold is ever mined again, a bitcoin should be valued at $377,000.

There is no mathematically certain scarcity because you can always clone ethereum code and launch new cryptocurrency.

But this new currency wouldn't have the same support e.g. by exchange plattforms and not the same popularity.

401k - I agree US equities look overpriced (because of other reasons, mainly interest rates).

>I don't think you can say it's "near worthless" to keep your value in an appreciating medium rather than a depreciating one..

I'm not sure it's useful to group all cryptocurrencies together as a single medium. You should look at them individually and make your own projections. The current valuation the market is giving to 98% of coins, IMHO isn't based on anything except uneducated speculation - there is no utility function or current/potential revenue that reflects the valuation of most coins. If/when there is a correction I don't know - people might just leave their money in for a long time.

So, is this new "Ponzi" going to support Racket, or only plain Scheme?

Also check out "The postmodern Ponzi scheme: Empirical analysis of high-yield investment programs", Moore et al 2012 https://pdfs.semanticscholar.org/0aea/69ae7be6f3ff215dc81828...

Calling ponzi scheme a "ponzi" is pretty epic.

This is also very honest: https://medium.com/@cincinnati/the-ponzico-white-paper-8baa9...

> The possibility of creating "trustworthy" frauds that still make users lose money, but at least are guaranteed to execute "correctly".

So.. Gambling. It's like academic clickbait.

Programmatic contracts lead to programmatic due diligence, great idea!

All cryptocurrencies are ponzi schemes. The early adopters get richer because more people come into the market later. Eventually the increasing values due to more interest will have to stop, whether because people lose interest or because everybody's already in the pool. At that time whether the late comers are totally screwed or just don't make a profit like the early adopters depends on what exactly happens.

Cryptocurrencies are the baseball cards of a new generation of wealthy libertarians (they have no inherent value like a useful commodity, and they have no backing of a powerful government. They just have value because some people decided they are valuable.) How badly the next financial crisis effects those people will determine how much cryptocurrency values are adjusted.

> They just have value because some people decided they are valuable

This is the basis of any currency. Backing of a powerful government is a mixed blessing.

Is it though? All the meaningful currencies in use today, that I can think of at least, are blessed and regulated quite heavily by governments. Maybe this is a bit of a theory vs real world question.

The part where a government manages a currency can be bad because it can be mismanaged, which could lead to things like hyperinflation.

The good part of the government management is the part where they investigate instances of counterfeit, but that part's already taken care of with cryptocurrencies.

A major good part of management (whether by the government or a semi-public reserve bank) is that it can have adjustible monetary policy (add/remove currency to/from circulation to promote growth or prevent inflation).

Bitcoin is more like Gold, not USD.

With USD, the government can print as much as they want.

Gold, on the otherhand, is finite, and NOT backed up by a government. And, like bitcoin, is basically worthless except as a speculative asset. (gold is not worth even close to the actual price that it is sold at.)

Yes, of course. I buy things with paper. One paper can be worth 500€

Bitcoin is a meaningful currency.

(If those downvoting would care to explain in what way I'm wrong, it would be appreciated.)

I'm not downvoting, but I'd imagine they'd argue the amount of goods and services transacted in bitcoin is incredibly small.

You can also perfectly argue that early adopters get first mover advantage with cryptocurrencies. It is, in the end, the same economic effect - if you get in early you can amass much more money / influence for much less than if you get in late, but your early participation accepts more risk. The later you join the more believable the idea is. The first 100 people to mine bitcoin had low probabilistic reason to think it would be worth $2500 in 8 years than be worth $0.

I do think if we want a cryptocurrency that can also function as money we need one that inflates, rather than deflates, its money supply. It should grow dynamically as a function of the monetary base rather than with fixed payouts (that gradually, due to the amassment of money, mean you are influencing the economy less and less each payout).

For example, you would strive to maintain 1% inflation, and when the velocity of the currency drops you increase that inflation, and when it speeds up you slow or even stop printing money. Its basically automated central banking with an algorithm rather than a commissioner.

dont all early adopters usually win out? except of course for the multitudes that fail.

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