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Rusty Russell: The Corrosion of Ethics in Cryptocurrencies (medium.com)
90 points by JepZ 8 months ago | hide | past | web | favorite | 75 comments



I certainly found my own state of mind deleteriously affected. The decision logic of buying and selling in a market of pure speculation is very strange. I wanted to believe it was at worst amoral but I am more and more convinced it has a corrosive immoral effect on me (at least) and I am glad I stopped. Every time I note that I got out ahead, it implicitly means somebody came out behind.


I bought in at $800 and sold at $2000. It paid my rent and living expenses for half a year, getting a driver's license, and a trip to the US. A bigger idiot than me paid for that. Most importantly my early exit vaccinated me against FOMO. Now I feel bad for saying anything positive about cryptocurrencies when friends ask how they can buy in. If you're asking now, you're too big of an idiot to ever gain from it.

I look forward to the day where cryptocurrencies are more commonly understood (and thus feared) and the technology isn't chronically lagging behind the hype.


It's not idiotic to buy something with a 95% chance of failure if the 5% chance has a 1000x return.

I bought at $3 and I started selling at $200. I sold a ton at $1000. Then a little at $5k and the rest at around $15k.

The entire time I held them I thought "the government will either ban or regulate this and they'll probably ban it" and you know what? It doesn't stop you from making money anyway.

Now that's a fun story right? Look at smart 3pt14159. What you don't see is the other 7 things I did with 0 payoff whatsoever. I bought a ton of emoji .ws domains. Why? I dunno, I stupidly thought they'd be the only TLD that would render as emojis. I hindsight, of course not, and once the others came out I reduced the number of domains I controlled. Nobody sees the lost weeks and $$ there, unless I happen to bring it up in a comment like this.

But the core idea behind both of those actions was this: Look for the low probability, high payoff investments. Unless you have $100m+ it's usually worth your time and most people don't have an intuitive grasp of inelastic supply curves and their impact on price.


I think you misunderstood the parent.

At 2,000$ each they can't have 1000x returns. So the person buying at 2000$ is more likely to be a sucker than someone buying at 3$, but less likely than someone who buy's at 15,000$.


Sure they can: https://imgur.com/ag2kNr9


That is pointing to 200 not 2000. Can it be worth significantly more than all the worlds checking accounts... no.


> It's not idiotic to buy something with a 95% chance of failure if the 5% chance has a 1000x return.

It is not. It is idiotic, however, to buy something that you don't know it's probabilities of payoff.


This is my investment allocation and it's worked well over the years.

95% in ultra-safe government bonds and bank CDs.

5% in ultra-high-risk moonshots.

Cut the losers quickly and let the winners run.


If you're asking now, you're too big of an idiot to ever gain from it.

When you bought, someone else was saying the same thing about you :)


> When you bought, someone else was saying the same thing about you :)

Thus the hierarchy of idiocy. I believe the decision, as someone who has studied CS and economics and became deeply interested in the white paper and the game-theoretic and macroeconomic consequences of cryptocurrencies, to buy post-MtGox (which I did) vs. everyone and their grandmother feeling FOMO (and quite literally expressing this as their motivation) as they seek to buy during last year's explosion in popularity, suggests quite different risk assessments, neither of which I can morally defend in retrospect.


> When you bought, someone else was saying the same thing about you :)

This logic is flawless until one day the market collapses and we find out who the "greatest fools" are.


Alternatively one could say that you left a lot of money on the table by selling prematurely

clearly, cryptocurrencies offer significant value over fiat currencies and their advantages will only continue to grow as development maturity surrounding the actual technology becomes more solidified


I think you are being downvotes for the word "clearly". I think that is an extraordinary claim and requires something to back it up. I'd say (and have said [0]) that the fiat value of cryptos is the least valuable part of this technology.

0: http://isg-one.com/research/research-detail-page/cryptocurre...


That's not actually true. Economics is not zero sum, and neither are markets, provided that they continue to rise commensurate with economic productivity. It remains to be seen if cryptos will retain their high valuations, but presuming that they do, nobody needs to have 'lost' due to your trading activity.


Economics is not zero-sum because of production which is what real investment is tied to, and is where the returns come from.

Speculation is more zero-sum, but can send useful price signals when tied to an asset that relates to production.

However, speculation that is completely disconnected from production is just gambling... zero-sum. Actually negative-sum, if we include wasted energy and time.


> Economics is not zero-sum because of production which is what real investment is tied to, and is where the returns come from.

Yes.

> Speculation is more zero-sum, but can send useful price signals when tied to an asset that relates to production.

Yes, with the qualifier that the individual trades are what’s zero sum, with the aggregate activity and emergent signals causing the positive sum in real investment.

> However, speculation that is completely disconnected from production is just gambling... zero-sum.

No. Uninformed speculation is less useful for price discovery than informed speculation, but it does not nullify informed speculation. Furthermore, efficient price discovery is facilitated by liquidity, and uninformed speculation is a net improvement in liquidity.


In simpler terms, you are saying that there is a huge bounty on guessing what other peoples' guesses are about the future usefulness of a currently useless technology.


Sure. I don’t think that captures all the economic nuance (you’re just reducing it to a Keynesian beauty contest), but yes.


It does create incentive for people to try to figure out the usefulness, if any. I agree with that. It also creates lots of other incentives that have no pro-social value.

Furthermore, the incentive may be much higher than is actually required, and creates a lot of collateral waste in the process.

Every bit of time, energy, and resources spent in this speculative endeavor crowds out other activities. And a large amount of this effort is just spent on a cybersecurity arms race over these hypothetically valuable tokens.

I realize you were trying to make a point about speculation in general, such as with futarchy. Any kind of speculation over things related to real production, including bets about CEO performance, would have some obvious informational value. But bets about sports do not.


That would imply an unlimited lifespan. Lasting say 100 years is not enough. If they die in 10,000 years then someone will lose out in 10,000 years.


That's not really how economic growth works. It's not zero sum. People who bought gold in the year 1500 didn't cause people today to 'lose'.


Sure they did, if they had invested in something productive the current economy and their descendants would be better off.

Picture 500 years of interest vs a small bit of gold. Granted this assumes they buy the gold as an investment but if it's not sold for 500 years that seems reasonable.

Except I am saying it goes to 0 so they don't actually get any gold. So, it's option A get nothing or option B possibly get something of value. I don't see how option A is better.


What you’re saying doesn’t make sense, because the price of a single asset is not a closed system - it exists in the market, which is full of variable interactions. Concretely: for any asset appreciating in value, you can earn interest on it. This interest comes at the cost of personal liquidity, but not personal value - indeed, interest and asset appreciation are going to be positively correlated.

While the single dimension of buy and sell price for any asset can be negative sum if it depreciates after your purchase, whether or not the complete value of the asset is net positive or net negative is a function of 1) the quantifiable advantages, like (but not necessarily) dividends or risk reduction, and 2) the amount of time spent holding it. This second point is also why the frequency of price changes (and net change in any discrete measure of time) is a very important part of the analysis.


Actual gold has physical storage costs aka a bank vault etc, those costs must be paid making gold negative sum.

Say I buy 1,000,000$ worth of gold and agree the vault owner can sell gold to cover the costs for the next 100 years. Alternatively, I can spend 1,000,000$ but get less than 1,000,000$ worth of gold to pay for the vault. In either case in 100 years someone needs to keep paying for the vault. Any finite amount of gold is not enough to pay for it's storage costs forever.

PS: You can spend less on security but you risk having nothing of it's stolen. Given enough time and it will be.


> Actual gold has physical storage costs aka a bank vault etc, those costs must be paid making gold negative sum.

You can quantify those costs for the same measures of time that I keep talking about in this thread. As I keep saying: the cost of storing the asset is economically, demonstrably lower than the value of the asset for any meaningful, discrete timespan.

> PS: You can spend less on security but you risk having nothing of it's stolen. Given enough time and it will be.

By this logic, literally everything is negative sum according to thermodynamics. You’re not using a reasonable, accepted definition for this concept in the context of game theory.

We know the heat death of the universe is going to happen, so does that mean the aggregate activity of the market is negative sum? This isn’t just incorrect, it’s incoherent.


No, what you're missing is positive sum interactions are transformative. I want gasoline for my car even if the raw oil it comes from contains more energy that oil is less useful.

Gold sitting in a vault stays gold sitting in a vault the outputs are identical in form and lower in amount.

PS: A bank safety deposit box costs ~60$ a year store 1,000$ worth of gold for 20 years and you lost money unless it's worth more than twice as much inflation adjusted. Store 1,000,000$ worth of gold costs more than 60$ / month, but not 1000x more so it's not as pointless.


Same holds true with gambling. For instance, the 'smart' poker players think that the odds will even out. However, they rarely take the time scale into account. Sure, your luck will get better (it may take more time than you'll be alive though)


No, it doesn't. Because gambling is done with a fixed-size pie. Allocating capital to productive enterprises is positive sum.


How to you picture holding on to a coin as a productive enterprise? I buy a coin and in 100 years I sell it. In that time the coin has gained value because that coin what?


I'm not going to deep-address comments on this note, but I think some people got to the same place I did. pure speculation might have been a bad way of saying it. I think most people speculating in coins and cryptocurrency right now are not setting future value price for a use case outside that gain. They are not usefully informing the market of sentiment over real goods, or services. The banks and fintech institutions who continue to discuss blockchain based ledger models have no interest in ICO and speculative gains on coins, they are going to deploy use-tokens for a system which is definedly NOT for speculation. for instance inter-bank settlement. Or providing (etherium contract style) certainty in payment for farm-to-mill delivery of forward priced goods. (If there is a market, a CFD in inter-bank settlement rate I don't think it expresses in the SDO units used to do the settlement), The forward price thing in wheat futures, is dependent on measurement at the mill of the specific quality of the goods presented, and the farmers get 90 day or worse settlement rate, and are stuck behind ruinous loan rates. So there, use of tokens which lock in a price model and commit the contract on completion without 90 day settlement delay are really good for the farmer.

I certainly believe there is useful hedge functions in forward pricing expectations. Speculation on coins just doesn't feel like it has that dimension. Its gambling but instead of taking on "the house" its taking on somebody else.

"Gamble responsibly" is one of those "half pregnant" statements which raises a wry smile but the underlying message is "you can't"


I had the same sensation. Felt like a ponzi tbh. But surprisingly it had two effects (totally unforeseen):

- to avoid obsessing over something shallow I ended up focusing 2x times more on learning and coding, so vanity made me more active in a very significant way

- if it turns into a passive income and I can leverage a bit more, I plan to give regular food money to homeless people. I find the idea of grabbing a few bucks from the cryptowealthy to the poorest fun and worthy. (robinhoodcoin)

- also, when I do PE when reading charts so it's never totally wasted


I never traded, but is it really different from any other competition? For you to win the gold, someone else had to settle for silver.


But in your analogy, nothing was lost. Sure the training didn't get the silver medalist into first place, but it's not as though that training somehow becomes useless.


Trading activity is the same way. Individual pairs of bids and asks are zero sum, but the emergent behavior of the market is non-zero sum (liquidity, price discovery, efficiency, etc). Sure, one trader might lose, but the trade contributes a signal to the market, the effect of which is a gradual increase in overall value that benefits everyone.

Categorically speaking, they are the same. The difference is one of degree: financial markets consist of many two-party competitions with material loss, and sports consist of multi-party or competition with non-material loss.


If cryptocurrencies don't follow the path of the Beanie Baby, sure.


That's only true if it's a zero-sum game. If it's a bubble that will crash to nothing then it's zero-sum, but if it actually grows into a major economic player then it's not.


Ehh, crashing tomorrow or in 100 years is not necessarily different outside of the timing. Also, mining makes crypto coins negative sum, to be positive some they would need to generate more value than the cost of mining which is unlikely.


> Ehh, crashing tomorrow or in 100 years is not necessarily different outside of the timing.

Yes it is. The frequency of events occurring in a specific measure of time is both mathematically and financially meaningful. In particular, the periodicity (if any) of such events is very important.

> Also, mining makes crypto coins negative sum, to be positive some they would need to generate more value than the cost of mining which is unlikely.

At this point you’re introducing new measurements, and you need to rigorously define the “game” to determine if it’s zero sum or not. Proving that a set of objects and their actions on each other is zero sum is very difficult because it’s very rare. As a trivially obvious example, for any integer n in the infinite set of all integers Z, there exists only one -n such that the sum of the pair is exactly 0.

Most real world systems do not satisfy that property, and you’re sort of hand-waving to make it fit. When you model a bid and an ask, it satisfies a zero sum because trading is specifically designed to do that. But the aggregate activity of the market is not zero sum, because it results in net positive growth in aggregate financial value over time.

> Also, mining makes crypto coins negative sum, to be positive some they would need to generate more value than the cost of mining which is unlikely.

If you’re defining your game as the interactions comprising cryptocurrency mining and cryptocurrency trading, then mining generates net positive value in conjunction with trading. If it did not, it wouldn’t be sustainable due to gradual decay over time. Again, frequency and periodicity of profit and price movement here are meaningful. We don’t have to talk about what’s likely, because it’s demonstrated for us economically.

The only way forward for you to assert that cryptocurrency trading or mining is negative sum or zero sum is by introducing new, reasonable interactions to the game and quantifying their relationships with the existing interactions.


If I buy exactly 100 bitcoin style coins on a block chain I can't turn around and sell exactly 100 coins because of in network transaction costs. Making it literally negative sum.

More abstractly miners must be paid to do work. Billions of hours worth of compute time has direct material and energy costs.


> If I buy exactly 100 bitcoin style coins on a block chain I can't turn around and sell exactly 100 coins because of in network transaction costs. Making it literally negative sum.

No, because the aggregate value of the market is increasing. And what you’re describing is a liquidity cost, not a value cost - those coins still exist and their value has not changed, your ability to capture their utility has. The conventional markets are very similar in this regard with respect to derivatives and trading fees.

> More abstractly miners must be paid to do work.

Yes, and at the same level or abstraction: if the activity was not positive, it would (by definition) not be sustainable, given that we are measuring interactions between miners (and their aggregate costs) and the market (and its aggregate costs). Which brings me to...

> Billions of hours worth of compute time has direct material and energy costs.

Yes, and the same principle - the compute time and energy costs have quantifiable costs, and those costs are under the potential profit of mining.

Note that I’m not saying growth is sustainable in perpetuity (that’s thermodynamically impossible). I’m saying that the game, with the interactions and constituents you’ve described so far, is positive sum, and therefore sustainable with growth for the foreseeable future.


I don't think you understand costs. Saying as long as people put infinite value into a system (constant * infinite time) ait can maintain finite value directly means it's negative sum.

Worse you are proposing exponentially increasing investments forever.


I’m not talking about putting infinite value in a system or exponentially increasing investments. I haven‘t made a case for either of those.

I’m sorry, I don’t really know how to express the point more clearly at this juncture, so I guess this will have to do:

1) in finite, discrete measurements of time, the activities of a game can be positive sum;

2) corollary to point 1, the aggregate market valuation trends upwards over time.

You keep focusing on infinite or underspecified measures of time for your arguments, which is frankly incoherent for the discussion at hand. This indicates to me that you don’t believe anything can be zero or even positive sum, because according to your logic - as literally stated - the value of gold is negative sum because resources are finite and time is not, so gold will eventually be stolen.

Not only is the probability of a thing being stolen outside the interactions of the game we’re considering, it’s not relevant to valuation unless you rigorously quantify its cost (such as through insurance) for a discrete measure of time. In essence, you’re conceptually refuting central tenets of game theory by invoking Murphy’s law.


I have no objections to things being positive sum.

Consider planting crops. The 'output' of the system over time is lower due to entropy, but the value of chemical energy in corn is vastly higher than the value of nuclear energy in the Sun. note it's the transformation that's providing value.

The problem is coins and gold are not being transformed AND there are costs that are inherently part of the system. Poker with N players is ~zero sum, poker with N players and a house stake is negative sum among the players. Clearly, coins follow the second example with a house (equipment) taking profits off the table.

Now, if you want to say commerce is positive sum and coins can provide value as a medium of exchange that's an argument around their relative utility. Which is currently generally* less than money as you go money > coin > stuff vs money > stuff. However, coins as an investment is a different argument. If I hold a coin for 200 years then it's not part of any transaction.

* Coins as a means of circumventing currency controls is yet another argument.


But the coins stay in the system. They are transferred from one party to another party in exchange for a service.


A physical object needs to operate in the real world to have a crypto currency. Yes, miners get paid in coins, but that just means the network is paying for that physical hardware.


Not everyone is buying and selling, some are mining and selling, or mined and are now selling.


You might be interested in speaking with Janet Yellen, Ben Bernanke or Alan Greenspan. When the Fed printed 4 trillion dollars to bail out Wall St., they must have had some seriously good therapists on board to help with dealing with those unwanted feelings you mention. Well, I think they have even learned to enjoy those feelings otherwise they would have demanded changes to Wall St along with the value transfer from the American worker that they were given.


You know the banks have already paid out and the us government has actually made money in interests from them right?


Ugh... The US Federal Gov was mostly paid back money that the US Federal Government loaned, which was a small fraction of the total bailout. My comment is not even about that. The comment is about a non-government entity, the US Federal Reserve. The banks have not "paid back" one cent of the 4 trillion dollars which was showered on them.

The fact that so many people could upvote this is a troubling signal of the misunderstanding and lack of awareness that exists even among educated, intelligent professionals.


The US government is not a business, its typical income is taxes. This policy of printing trillions of dollars to, essentially, give a loan to banks, all the while devaluing USD for every holder, sounds like a new form of taxation.


Was there actually any inflation caused by that? I keep seeing people saying inflation has been stagnant for a decade. I wonder what would have happened to the USD if the economy were allowed to implode the way it wanted to, perhaps the "inflation tax" would have been more desirable.


Asset inflation because of low interest rates. It’s made the rich much richer and put housing out of reach of many young people.


There is nothing inherent in the world which declares investment banks must be subsidized by working people. Once they make that the case, and convince the public it is so, people willingly allow themselves to be robbed.


In my humble opinion, burning fossil fuels to create electricity to “mine” this “currency” is unethical because it literally has no net gain to society, not even entertainment. The same goes for the manufacture of the electronics used to mine. You hear a lot of condemnation for businesses willing to pollute to create wealth, but many of those same people don’t see that cryptocurrency mining is exactly that.


> In my humble opinion, burning fossil fuels to create electricity to “mine” this “currency” is unethical because it literally has no net gain to society, not even entertainment.

A true peer-to-peer digital currency enabling you to make payments globally without a third party being able to censor has very real benefits.

For example:

  * Donations to wikileaks or similar organizations
  * Payments in gray areas, for example porn
  * Transfers to and from inaccessible areas, for example war zones or dictatorships
It might be inefficient but the concept isn't completely useless. So far alternatives without mining are being researched but are lacking in various ways.


We say it is inefficient but I've not seen a detailed study on the origin and amount of electricity used for Bitcoin mining vs. the origin and amount used to keep a similar portion (by transaction volume) of the VISA network (not just the main clearing house) running.

I hear much of the electricity is hydro power in China.

Lastly, Bitcoin isn't finished yet. I was dialing up to the internet on a 56kbps modem just 20 years ago. I can't imagine where crypto currencies will be in 20 years.


You can say that pretty much about everything. Why have big malls when you can do online shopping? Why have big skyscrapers that are super expensive to maintain when you can live comfortably on small studios?

The answer is we consume for our understanding (or assessment) of value. Bitcoin is not burning electricity. People are burning electricity to generate bitcoin.


What percentage of mining energy comes from burning fossil fuels?


Transmission losses for sending electrical power across the large diagonal of china is <10%. That's the worst case scenario, because in reality most of China is densely populated and hydroelectric plants weren't build somewhere where they had to wait for bitcoin to come around to find demand for their electricity.

Considering hydro power supposedly consumed by mining would be generated no matter what (the costs are largely fixed), almost all the power used by mining is ultimately produced by coal plants, which are the main source for adjustable electrical generation in China.


No, most bitcoin mines are located next to hydroelectric dams in China and the USA. There are no large transmission losses, because you don't need to transmit the power.

In the USA, mines are mostly located in 3 counties in central Washington State, along the Columbia river. Power rates there are much cheaper (around 2.5¢/kW), which is the main incentive to put your mine there.

Mining on coal is stupid because it's expensive and miners want to make a profit: https://en.wikipedia.org/wiki/Cost_of_electricity_by_source


> here are no large transmission losses, because you don't need to transmit the power.

You've misunderstood the argument: "being close to" implies that the electricity would otherwise go to waste.

But because transmission losses are low, distances to markets aren't as large as one might believe, and the Chinese weren't stupid enough to build hydroelectric dams in places where the energy would uselessly go to waste, that argument is wrong.


Most bitcoin mining is on hydropower. The fossil fuel ratio is around 2%.


You have a citation for that? That's a very bold claim with no actual facts to back it up. I'm willing to bet the fossil fuel ratio is way WAY higher than you have asserted here.


2% seems too low to me, but I'd be surprised if it was much over 20%. Professional level bitcoin mining has been a thing for 5+ years now, and it's highly optimized for efficiency. Hydroelectric power is often where the best deals can be cut, so the industrial scale miners have tended in that direction.


Okay, let me pose a question to you then - how much electricity do banks consume in their data centres, their offices, etc. etc.?

How is that any different?


Banks are very different from cryptocurrency. The economic value of banks is through loans, not monetary transfer. Through loans, and regulations/backing of a central bank, money is created. This economic effect is what enables economic growth. The money created by banks likely offsets the energy/overhead. https://en.wikipedia.org/wiki/Fractional-reserve_banking


Bitcoin cannot replace banks, even at full adoption we would need banks for loans, investments, financial planning, etc. Bitcoin could replace Visa, but it uses orders of magnitude more energy per transaction. So yes, it is an environmental disaster. I don't see any possible way that a decentralized system that is secured by doing useless computations could ever use less energy than a centralized one, it just doesn't make sense.


The entire crypto coin world including BitCoin is totally awash in scams and heists. I know some devs like Rusty have the best of intentions and are true believers, but they are so vastly outnumbered it's not even funny. Being unregulated and so anonymous and transactions being largely irreversible, it's a utopia for bad actors.

I was never a true believer, but even being skeptical things are worse in the cryptocoin world than I even thought they would get before the hype died down and it turned into whatever kind of niche hobby thing it's gonna be in the long term.


System designed to turn lead into gold attracts charlatans. Act surprised.


Bonds, stocks, and real estate are all collapsing as we speak. Have fun with that mindset. I've happily holding my bitcoin I've had for years, even buying more.


Which has collapsed more in the last month or two, Bitcoin, or the stock market?


While people agree on most of ICOs being scammy what is really disheartening to see is that many big names in cryptocurrency space end up being featured as "advisers". I have been told that these many of these guys are given lot of ICO coins for free or charge up to 10 btc.


it's called market signaling. I just read it from a previous HN post/commentary. Example: Once they use VB as their adviser everyone just thinks the coin will go to the moon. 99% of these ICOs really don't need a blockchain and are just selling a prepaid discounted giftcard where the discount is not determined until a maturity date and you don't even know if the company is there for you to redeem your giftcard.


The real question is actually... who will lose?


Absolutely.

Just take a look at the developers behind Bitcoin Core. It's difficult to ignore the obvious conflicts of interests of doing everything to block on-chain scaling while their company's business model is off-chain solutions.




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