by David Gerard
Dogecoin
Dogecoin (pronounced “dozhe-coin” or “dogue-coin”) started in December 2013, originally as a joke based on the “Doge” Shiba Inu Internet meme.288 The idea was mostly to have some fun with cryptocurrency cheap enough to mess around with; and who knows, maybe we’ll all get rich!
Dogecoiners (“shibes”), gathering on Reddit /r/dogecoin, still dreamt of a cryptocurrency payday – but they made an explicit point of being nicer as a community than Bitcoin advocates, who had quite a reputation by this stage.
Dogecoin got caught up in the hype of the Bitcoin bubble and quickly gained in price, peaking in January 2014 at 0.17 of a cent per DOGE, despite almost no use cases (some used it to tip other Reddit commenters) and not being exchangeable for anything but bitcoins. The Dogecoin Foundation, started by Ben Doernberg and the coin’s creator Jackson Palmer, raised nearly $30,000 of Dogecoins in January to send the Jamaican bobsled team to the 2014 Winter Olympics. Doge4Water raised $32,000 for clean water in Kenya.
This attracted the attention of a fellow calling himself Alex Green. “My name is Alex Green. I have zero online footprint.” He quickly set up UK cryptocurrency exchange Moolah. While others tipped single Dogecoins, worth a fraction of a penny, Green caught attention with tips of thousands of dollars.
Dogecoin then raised $50,000 to sponsor a NASCAR racer, Josh Wise. (Green put in $15,000 himself.) Wise’s race in May 2014 was probably the media peak for Dogecoin.
Green started fundraisers on /r/dogecoin for shares in Moolah, and never mind those fiddly regulations about promoting securities to the general public. By mid-June, he had raised over half a million dollars. He had also pushed most of the original Dogecoin crowd into leaving, repeatedly threatening to sue Palmer and Doernberg for harassment for questioning his use of /r/dogecoin to push unregistered securities.
Palmer and Doernberg correctly smelt a rat. It came out that “Green” was formerly known as Ryan Kennedy, Ryan Gentle, Ryan Francis and multiple other names, with a long history of creating scam startups that raised funds and then vanished.289 Moolah shut down in October and “Green” disappeared with the money.
Moolah had taken over cryptocurrency exchange Mintpal in July 2014. That exchange shut down with Moolah in October after a “hack”. Kennedy was caught selling the Mintpal bitcoins on LocalBitcoins in February 2015.290
As well as a serial scammer, Kennedy turned out to be a serial rapist, convicted in May 2016 of three counts of rape291 and jailed for 11 years. He was also charged over the stolen Mintpal bitcoins in June 2017.292
With Green/Kennedy no longer in the picture, /r/dogecoin recovered its spirit somewhat, refused to worry about prices any more and is back to just having fun, though with wistful dreams of crypto riches. Unlike other cryptocurrencies’ claims about their prices, Dogecoin may succeed in going “to the moon!” – the community sponsored sending a physical Dogecoin on an Astrobotic commercial moon shot.293
It came out in May 2017 that the operator of the Dogecoin tipping bot on Reddit had stolen all the deposited Dogecoins two years earlier.294 Much sorry, many loss.
Ethereum
Ethereum was proposed by Vitalik Buterin (an early Bitcoiner and a co-founder of Bitcoin Magazine) and developed by Buterin, Gavin Wood, Jeffrey Wilcke and others. Its key innovation is that you can run smart contracts on a blockchain: programs that are triggered to run automatically in a given circumstance. If Bitcoin is like an Excel spreadsheet, then Ethereum is like a spreadsheet with macros. This new idea was interesting enough to quickly make Ethereum the second most popular cryptocurrency.
Transactions and smart contract programs (which they call “dapps,” short for “distributed applications”) require gas (a certain amount of the currency token, ether, abbreviated ETH), which is paid to the miner whose computer runs the transaction or smart contract. This also keeps smart contracts from running forever.
Ethereum has its own home-brewed Proof of Work hash295 which is designed to be ASIC-resistant, to avoid mining centralisation – it requires a few gigabytes of fast memory on hand, so mining is presently GPU-based. There are loose plans to move to Proof of Stake.296 (For a while during the second crypto bubble, you could actually make money mining ether on last year’s video card, which led to a small gold rush in the video cards themselves,297 and an ensuing glut of burnt-out cards on the second-hand market.)
Ethereum’s pitch has always been ridiculously aspirational. It’s a “smart contracts platform,” it’s a “worldwide distributed computer,” at one point Wikipedia called it “Web 3.0,” at another a “publishing platform.” Anything other than a cryptocurrency. To this day, drive-by editors occasionally swing by the Ethereum article in Wikipedia to remove the word “cryptocurrency.”
Of course, the cryptocurrency is overwhelmingly the main use, and that the cryptocurrency will go to the moon is the main hope.
Ethereum has a block time of around 14 to 16 seconds (Bitcoin’s is 10 minutes). How do blocks make it across the network in that time? Well, often they don’t (though blocks only being a few kilobytes helps298). So there are about 7% valid but orphaned blocks.299 A miner can store up to two failed blocks in their block as “uncles,” and the miners of the blocks that became uncles get some reward too; Ethereum picks the highest-scoring chain, and uncles give a block a higher score. This avoids penalising miners who are further away from the rest of the network, reducing economic pressure to centralise. The unconfirmed transactions in the uncle will usually stay around until they finally make it into a block. The existence of a single canonical blockchain is frequently questionable, but somehow it all muddles forth.
Ethereum has a current maximum of about 14 transactions per second300 (Bitcoin’s is 7 TPS). As at mid-2017 it’s running about 2-3 TPS, having rapidly risen over 2017;301 popular dapps already fill the blocks and clog the system for hours at a time, such as the Bancor and Status ICOs. The Ethereum community seems to have faith in the Ethereum Foundation, so a fix is more likely to be accepted without a Bitcoin-style community civil war; and backward-compatibility-breaking changes in Ethereum are a regular occurrence and are mostly managed without controversy.
The developers have always stated that Ethereum is explicitly experimental and unfinished (and never mind the hundreds of millions of dollars in ether swilling around in it), and that the promised fancy functionality will need years of work.302 They occasionally boggle at people treating it as much more of a finished product than they do.303
Ethereum advocates talk up corporate adoption by Microsoft and other companies – it’s a popular choice of platform for business blockchain trials, and its smart contract functionality is reused by a lot of other blockchain software – but this is adoption of the software to run separate in-house blockchains, not adoption of the public Ethereum chain and currency.
Buterin’s quantum quest
Before Ethereum, Vitalik Buterin put considerable effort in 2013 into trying to convince investors to fund him to build a quantum computer. (Note that no quantum computers able to solve practical problems are verified as existing as of early 2017.) His plan was to use this quantum computer to solve computationally infeasible problems that can’t be done practically on an ordinary computer, such as reversing cryptographic hash functions.304
Since he didn’t know how to build a quantum computer, his plan was to simulate one on an ordinary computer – since this apparently wouldn’t count as just running a program to solve the impossible problem. This was an idea that had long been put forward by Jordan Ash, his associate in this endeavour, who had put considerable effort into this startlingly crank mathematical notion.305
Buterin and Ash’s plan was to use this simulated quantum computer not to revolutionise computation and change the world – but only to use it to mine bitcoins faster than anyone else and corner the market.
Sadly for their Fields Medal hopes, they failed to secure sufficient funding to break mathematics. Investors may have
been put off by the pointed questions from the crowd on how, quite apart from the mathematical implausibility, this would destroy any confidence in Bitcoin and kill the golden goose.
It’s worth noting that a practical quantum computer would be able to solve the SHA-256 hash used in Bitcoin somewhat faster than an ordinary computer306 – but it could also quickly break the conventionally-unbreakable public-key encryption that protects a user’s Bitcoin balance. So if you secretly had a quantum computer, you could mine a bit faster, or you could just steal everyone else’s bitcoins.
Buterin later said he had “greatly overestimated” the likelihood of the team breaking mathematics, estimating this task at maybe 1% to 5% possible (apparently a purely subjective guess, with no basis or working given for this number), and assures us that his skepticism concerning quantum claims has “substantially increased.” He now puts the probability at “<0.1%”, though competent observers would likely consider even that on the high side for a mathematical impossibility.307
ICOs: magic beans and bubble machines
The snappy new phrase for “buy our premined altcoin” is “ICO” (“Initial Coin Offering” or “Initial Crowdfunding Offering”). These are typically tokens running on top of the Ethereum blockchain, usually in a smart contract written to the standard ERC-20 interface.308
There’s no mining involved – you create a smart contract that manages a pile of tokens, sell a small percentage and hold the rest to sell later. You also keep centralised control over the token. If it’s ERC-20 compliant, it’s easy for an exchange to trade in it.
An ICO makes sense for crowdfunding in very limited conditions – if you have a technical problem that requires decentralised, cryptographically verified tokens (if it doesn’t need tokens, they shouldn’t be bolted on); if the tokens are directly usable on the platform itself; if at least a proof-of-concept of the technology verifiably exists. It also helps if the idea is even plausible as a business. Unsurprisingly, most ICOs don’t meet these criteria.
Token offerings have been around a while, but kicked off enormously in the second bubble. The usual pretext is crowdfunding, but in practice the tokens are just traded on the exchanges as commodities. The creators then cash in. The value proposition for buyers is, as for the creators, easy money in a bubble.
Bancor’s ICO raised $144 million with none of the due diligence of an ordinary Initial Public Offering, the barest prospectus and no indication their plan (a “market maker” to sell altcoins that aren’t selling otherwise) would even work. This is clearly superior, for a certain type of seller, to the IPO bubble of the dot-com era, in that these aren’t actually shares, and the purchasers have no influence over the funded enterprise even in theory.
The ideas themselves are as bad as the worst dot-com IPOs. Digix, the first token crowdsale on the Ethereum blockchain itself, is a cryptocurrency backed by gold;309 Golem offers a “decentralized” (buzzword alert!) market in computing, like Amazon Web Services except you can only pay using their token;310 Gnosis offers semiautomatic prediction markets using their token;311 SingularDTV is a bizarre plan to fund a TV show about the Singularity in which a Caribbean island adopts Ethereum as its currency and Austrian economics works (this one gets its own section later in the book); Iconomi is an index fund of other ICOs.312
The token smart contracts are often incompetent in both intended functionality and programming ability.313 This turns out not to matter as long as they do the basic job: attract buyers and sell tokens. Status raised 300,000 ETH (then over $100 million) to … write an Ethereum phone app. Hopefully that’s enough to develop a phone app! It sold out in just a few hours. The actual promises as to what people will get for that $100 million are typical:314
Risk of abandonment / lack of success : The User understands and accepts that the creation of the SNT and the development of the Status Project may be abandoned for a number of reasons, including lack of interest from the public, lack of funding, lack of commercial success or prospects (e.g. caused by competing projects). The User therefore understands that there is no assurance that, even if the Status Project is partially or fully developed and launched, the User will receive any benefits through the SNT held by him.
EOS, founded by serial blockchain entrepreneur Danny Larimer, is as direct as possible in this regard. They’re also marketing it to the general public, with advertisements on the sides of London taxis.315 Here’s how the white paper describes it:316
The EOS.IO software introduces a new blockchain architecture designed to enable vertical and horizontal scaling of decentralized applications. This is achieved by creating an operating system-like construct upon which applications can be built. The software provides accounts, authentication, databases, asynchronous communication and the scheduling of applications across hundreds of CPU cores or clusters. The resulting technology is a blockchain architecture that scales to millions of transactions per second, eliminates user fees, and allows for quick and easy deployment of decentralized applications.
No, that doesn’t end “and a pony.” EOS is a rebranding of Larimer’s 2014 project BitShares,317 which failed to achieve this either.
EOS is releasing one billion tokens, in daily tranches over the course of a year, at a price of “how much money do you have to throw at us?” Really, that’s the price: the day’s take in ETH divided by the number of tokens released that day.
So I send in some ether, and I get …318
The EOS Tokens do not have any rights, uses, purpose, attributes, functionalities or features, express or implied, including, without limitation, any uses, purpose, attributes, functionalities or features on the EOS Platform.
The legal EOS Token Purchase Agreement is a frankly amazing document that everyone should read.319 US citizens or residents are not to buy the tokens (though EOS assures us they totally don’t constitute a security – hear that, SEC?); the tokens are defined as not being useful in any manner whatsoever; forty-eight hours after the end of the distribution period, the tokens will no longer be transferable; the buyer promises not to purchase them for speculation or investment. If there’s any legal problems caused by you buying these officially worthless things, you agree to indemnify EOS.
Crypto fans still lined up to buy them. “Whatever these people do, I’m going all in. Nuff said.”320
EOS was also driven up by another ICO, press.one, a “Content Distribution Public Chain” to run on the forthcoming EOS blockchain.321 The press.one ICO sells 20% of its tokens for bitcoins, 30% for ether and 50% for EOS tokens. Founder Xiaolai Li is an EOS/BitShares investor.
Chinese speculators went all-in on ICOs, buying into dubious proposals from fear of missing out, to the point where exchange BTC38 refused to put new tokens up and warned that illicit fundraising can carry the death penalty in China.322 One Chinese “ICO” broke new barriers in market efficiency: you didn’t even need to put your ether into it yourself! Because the “white paper” contained malware that found your Ethereum wallet and emptied it. Now that’s a smart contract.323
The other big problem with ICOs is that they’re already recreating the Bitcoin transaction clog, but on Ethereum. Both the Bancor and Status ICOs filled the blocks on the day of their release, with Stable’s higher transaction fees blocking all smaller transaction fees for several hours. Some exchanges had to stop trading ETH because they couldn’t get transactions onto the Ethereum blockchain.324
History doesn’t repeat, but it does rhyme. One of the most famous share offerings from the South Sea Bubble of 1719-1720 was “A company for carrying on an undertaking of great advantage, but nobody to know what it is”:325
The man of genius who essayed this bold and successful inroad upon public credulity, merely stated in his prospectus that the required capital was half a million, in five thousand shares of 100 pounds each, deposit 2 pounds per share. Each subscriber, paying his deposit, would be entitled to 100 pounds per annum per share. How this immense profit was to be obtained, he
did not condescend to inform them at that time, but promised that in a month full particulars should be duly announced, and a call made for the remaining 98 pounds of the subscription. Next morning, at nine o’clock, this great man opened an office in Cornhill. Crowds of people beset his door, and when he shut up at three o’clock, he found that no less than one thousand shares had been subscribed for, and the deposits paid. He was thus, in five hours, the winner of 2000 pounds. He was philosopher enough to be contented with his venture, and set off the same evening for the Continent. He was never heard of again.
The finest ICO remains PonzICO,326 a piece of “blockchain performance art” wherein earlier contributors are paid directly from later contributors, with the founder taking a meagre 50% off the top. His pitch – “In today’s age, it seems better to promote the plausibility of future profit rather than waste energy on actually delivering”327 – grossed $4000 as of June 2017.328
Chapter 10: Smart contracts, stupid humans
Dr. Strangelove, but on the blockchain
Smart contracts were originally quite separate from cryptocurrencies and blockchains. They were first proposed by Nick Szabo in 1994.329 You set up a legal agreement in the form of a computer program that triggers when particular conditions are met, and which cannot be interfered with once deployed. The idea is to replace the messy uncertainty and hierarchy of conventional human-mediated legal agreements with the clear, deterministic rigour of computer code, immune to human interference, in order to make business and the law more predictable and effective.
This is a bad idea in every way. Computer code maps very badly to real-world legal agreements, where the hard part is not normal operations, but what to do when things go wrong; immutability means you can’t fix problems, programmers need to write perfect bug-free programs first time every time, and the contract can’t be updated if circumstances or laws change; if the contract acts on real-world data, that data will often need human interpretation. And imagine your money working as reliably as your PC.
