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Tuesday, October 24, 2017
Zero Hedge — Steve Wozniak: Bitcoin Is Better Than Gold And The Dollar
The Woz is apparently a nice guy. I hope he doesn't lose all his money storing it in Bitcoin.
Here's a very interesting discussion by Colton Dillion the young guy who invented the acorns app.
I’m in crypto development and finance, and my opinion is that cryptocurrency tokens are American covered call options on a commodity. The option is unlimited, non-dilutive, and only expires once the chain ceases to exist. But, you don’t buy an option on a specified amount of a commodity, you buy an option on a specified PROPORTION of the commodity which any one protocol can provide.
The commodity on sale is determined by the protocol, whether that commodity is trust, transaction speed, disk storage space, computing power, community governance, etc. Your risk is limited to the money you put in and your upside is based on the future demand and scarcity of the underlying asset.
Protocols can have overlapping domains in the commodity space (eg Bitcoin, Litecoin, Dogecoin). This is like multiple oil companies offering options on their individual stockpiles of oil by the drum. But you’re not buying an option on 100 barrels. You’re buying an option on 1/100th of all barrels that will ever be produced by that company. Hopefully, you own options from the company that will have the largest supply of oil in a market where oil is scarce, and their barrels adhere to standards that third party merchants are willing to operate within.
You purchase an option and you can exercise it by spending the tokens and receiving the value of the underlying asset; you can let the option expire worthless when the chain becomes defunct; or you may choose never to exercise the option because your position is purely speculative, and you can wait to resell the rights of your option to another buyer.
So, when I buy 1 bitcoin, I’m buying an option on the ability to transact securely with an unknown second party and confirm the veracity of that transaction within 10 minutes. Specifically, I’m buying 1/21,000,000th of all transactions that can be made using that protocol, ever.
This ability is measured in block entries on the blockchain, which in turn is described by a variable amount of electricity, hardware investment, network connectivity, expertise, the number of transactions that can fit in a block, and the desire to be included on a block: which can then be converted to a cash value. My option can be exchanged at any time for the discounted future value of the underlying commodity, which is obviously highly discounted because time could theoretically stretch to infinity.
Now the promise underlying this option could change, affecting the value of the option: for a long period this summer, BTC could not execute a transaction within 30 minutes, let alone 10. Though there was more computing power in the network, this computing power only increased the security of the transactions, but not the speed. As a result the underlying value of my options decreased because people did not value security as much as they valued speed.
Imagine buying fractional non-dilutive call options on every startup from the last 20 years and indexing based on GAAP market cap. All of their data is openly available, including number of users, number of supporting vendors, product usage, etc. That is crypto. An indexing opportunity of a lifetime.
1. Is there an intrinsic value that a coin holder ultimately receives as an asset that he can sell ?
2. When you say this is like multiple oil companies offering options on their individual stockpiles of oil by the drum. But you’re not buying an option on 100 barrels. You’re buying an option on 1/100th of all barrels that will ever be produced by that company.
Because there is no ultimate ‘conversion’ or dividend or any future ‘cash flow’ does the coin holder have that kind of equity interest ?
3. You say when you buy 1 bitcoin, I’m buying an option on the ability to transact securely with an unknown second party and confirm the veracity of that transaction within 10 minutes. Specifically, I’m buying 1/21,000,000th of all transactions that can be made using that protocol, ever.
It’s like saying buying a credit card is buying an option to use credit. Maybe true but does that make it a marketable asset ?
4.Is there ultimate demand for this costly bitcoin as bitcoins aren’t actually needed for bitcoin transactions ?
5.Do you think that those developing the software are looking at creating a hierarchy in the network where ‘supernodes’ handle the clearing for lots of underlying blockchain transactions. As The transaction flow is increasingly becoming speculative rather than real.
Where basically supernodes are effectively banks in our world ?
If so how will the current commercial banks lobby their governments if they feel their banking licence is under attack ?
1. Is there an intrinsic value that a coin holder ultimately receives as an asset that he can sell?
Depends on how you define intrinsic value. I define intrinsic value as the end consumption: burning fuel, feeding hay, shaping metals into gadgets. The intrinsic value of equity is the product that comes off the line, or the services that are generated by humans, which are then transformed into profits, dividends, and capital gains. It is the product that is the intrinsic value, and the rest is just auction dynamics.
In the case of Bitcoin, that intrinsic value is a decentralised trust system that confirms transactions faster than current global infrastructure. You have to corrupt at least 50% of the participants in the system to initiate a fraud. The more people that are using it, the harder it is to defraud the system. When you sell your Bitcoin, you are selling your access to that system.
In the case of Ethereum, it is access to a decentralized app store with automated, self-executing contracts (an automated software escrow agent is one example). In the case of the storage coins, that intrinsic value is hard-drive space. In the case of Golem, that intrinsic value is computational power and time. You are selling your access to these systems, which have intrinsic value, when you sell a coin.
2. Because there is no ultimate ‘conversion’ or dividend or any future ‘cash flow’ does the coin holder have that kind of equity interest?
Let’s propose a thought experiment. There is a company that issues shares in their enterprise, but they never issue a dividend and they are always cash flow negative. People buy their product, but they continue burning cash at a higher rate than which they can produce revenue. There is no expectation that anyone will ever acquire them, so there will be no liquidity event beyond the private/public market for their shares.
Is the equity in that company still equity? I think the answer is yes. I can still speculate in Twitter, can’t I?
3. It’s like saying buying a credit card is buying an option to use credit. Maybe true but does that make it a marketable asset?
An option is implicitly credit. The Black-Scholes model is entirely predicated on the idea that you borrow money now to make a trade, successfully execute the trade, then pay back your loan with the proceeds of your trade.
Technically mortgages qualify in your example above. You put money down for the opportunity to borrow and hope that the value of your home goes up faster than the loan does. Sure, a lot of people (and banks) speculate in properties and mortgages, but most people just want a place to sleep.
4. Is there ultimate demand for this costly bitcoin as bitcoins aren’t actually needed for bitcoin transactions?
I’m not sure I follow this question. If you’re saying that there are many Bitcoin clones that can do the same thing as Bitcoin, you’re right. But there are also many companies that sell oil, and advertising, and other services yet we don’t question their existence or the applicability of equity.
The marketplace will decide the value of Bitcoin, and even though Litecoin and Bitcoin Cash accomplish the same thing as Bitcoin, the market currently values Bitcoin higher than the other two. There are a number of reasons for this, eg. hashrate, number of miners, number of support services, notoriety; but the fact that Bitcoin could be abandoned tomorrow does not change its moneyness or derivativeness.
Was the Confederate grayback currency? If the US Dollar was no longer accepted anywhere, either tomorrow or in a century, would it still have been currency? If we started trading Alphabet stock with each other in a highly liquid medium, would Alphabet stock be currency? Would it still be equity?
I think the answer is that they are both. We are merely adjusting to an era of higher liquidity which makes all (digitizable) assets appear as currency.
5. “Supernodes” gives an inaccurate impression of the mechanics of Lightning Network/SegWit/Raiden. A supernode doesn’t have to aggregate 5,000,000 accounts like a bank. A supernode can aggregate transactions for as few as three people. It merely reports the net cash flows from within the supernode to the blockchain as one transaction.
More importantly, anyone who wants to compete in the mining marketplace can broadcast as a supernode, and each supernode is auditable by anyone who wants to run a fisher node, in addition to being auditable by other supernodes. There’s technically no barrier to entry, you are merely constrained by the random nature of being assigned a block based on your proportional hashpower.
So even if supernodes are banks, they’re banks with open auditability by the public, which can be owned and run by anyone. Due to the protocol in place, the banks are also required to be run in a very specific way, else the protocol will reject the node. So are we really talking about just another bank?
Banks can lobby the government, but the distributed nature of blockchain creates a door that can’t be closed without seriously damaging global networking infrastructure or burning a lot of cash to DoS or 51% attack a particular chain. And to your earlier point, if one network goes down another fork will simply pop up in its place. Just look at torrenting technology! Blockchains operate in a very similar manner.
In the end, I think all the smart people working in the space realize that cryptocurrencies will not replace banks due to the time constraints of creating distributed consensus. That is why many banks are betting on protocols like Ripple and Stellar, which shortcut consensus by having nodes declare explicit trust relationships. But these smart people also realize there is room for both, and the financial ecosystem is made stronger by having alternatives available in both the centralized and decentralized realms.
But I cannot agree with him. There is something lacking in that "bitcoin as options theory".
He seems to be in the monetarist paradigm when talking about money. But that's not the main point.
As Warren Mosler puts it, you can use bitcoins to execute transactions. If you are a criminal trying to sell $ 1 million of illegal drugs and hide the financial transactions, it would work more or less like this:
Firsrt, the buyer will spend $ 1 million buying in bitcoins. If his bank manager or the government asks what he is doing, he will just say "I'm investing in bitcoins". So he will be "protected".
Second, the buyer will give (transfer) the bitcoins to the seller (the drug dealer). No one would know that.
Third, the drug dealer would sell the bitcoins he recieve and earn $ 1 million. If asked, he would justify his gains as bitcoin investment.
It doesn't matter whether each unit of bitcoin is priced at $1, $100 or $5000. The transaction would be similar. So, while the bitcoin has a market price and it is sufficient stable, that scheme would work.
So these so called "transactors" don't make the price. For them, it doesn't matter what is the value of the bitcoin.
The ones making the price are people buying and holding bitcoins to use or sell in the future. But what would define the price of a single unit of bitcoin? Why would it be $1, $100 or $5000? As I said, the $1 million transaction would work no matter the price, as long as there is a price.
So I found troubling that "bitcoin as an option" theory...
Fee fi fo fum, I smell the blood of a lib er tare ee yun.....
ReplyDeleteHere's a very interesting discussion by Colton Dillion the young guy who invented the acorns app.
ReplyDeleteI’m in crypto development and finance, and my opinion is that cryptocurrency tokens are American covered call options on a commodity. The option is unlimited, non-dilutive, and only expires once the chain ceases to exist. But, you don’t buy an option on a specified amount of a commodity, you buy an option on a specified PROPORTION of the commodity which any one protocol can provide.
The commodity on sale is determined by the protocol, whether that commodity is trust, transaction speed, disk storage space, computing power, community governance, etc. Your risk is limited to the money you put in and your upside is based on the future demand and scarcity of the underlying asset.
Protocols can have overlapping domains in the commodity space (eg Bitcoin, Litecoin, Dogecoin). This is like multiple oil companies offering options on their individual stockpiles of oil by the drum. But you’re not buying an option on 100 barrels. You’re buying an option on 1/100th of all barrels that will ever be produced by that company. Hopefully, you own options from the company that will have the largest supply of oil in a market where oil is scarce, and their barrels adhere to standards that third party merchants are willing to operate within.
You purchase an option and you can exercise it by spending the tokens and receiving the value of the underlying asset; you can let the option expire worthless when the chain becomes defunct; or you may choose never to exercise the option because your position is purely speculative, and you can wait to resell the rights of your option to another buyer.
So, when I buy 1 bitcoin, I’m buying an option on the ability to transact securely with an unknown second party and confirm the veracity of that transaction within 10 minutes. Specifically, I’m buying 1/21,000,000th of all transactions that can be made using that protocol, ever.
This ability is measured in block entries on the blockchain, which in turn is described by a variable amount of electricity, hardware investment, network connectivity, expertise, the number of transactions that can fit in a block, and the desire to be included on a block: which can then be converted to a cash value. My option can be exchanged at any time for the discounted future value of the underlying commodity, which is obviously highly discounted because time could theoretically stretch to infinity.
Now the promise underlying this option could change, affecting the value of the option: for a long period this summer, BTC could not execute a transaction within 30 minutes, let alone 10. Though there was more computing power in the network, this computing power only increased the security of the transactions, but not the speed. As a result the underlying value of my options decreased because people did not value security as much as they valued speed.
Imagine buying fractional non-dilutive call options on every startup from the last 20 years and indexing based on GAAP market cap. All of their data is openly available, including number of users, number of supporting vendors, product usage, etc. That is crypto. An indexing opportunity of a lifetime.
I Pushed him further and asked...
ReplyDelete1. Is there an intrinsic value that a coin holder ultimately receives as an asset that he can sell ?
2. When you say this is like multiple oil companies offering options on their individual stockpiles of oil by the drum. But you’re not buying an option on 100 barrels. You’re buying an option on 1/100th of all barrels that will ever be produced by that company.
Because there is no ultimate ‘conversion’ or dividend or any future ‘cash flow’ does the coin holder have that kind of equity interest ?
3. You say when you buy 1 bitcoin, I’m buying an option on the ability to transact securely with an unknown second party and confirm the veracity of that transaction within 10 minutes. Specifically, I’m buying 1/21,000,000th of all transactions that can be made using that protocol, ever.
It’s like saying buying a credit card is buying an option to use credit. Maybe true but does that make it a marketable asset ?
4.Is there ultimate demand for this costly bitcoin as bitcoins aren’t actually needed for bitcoin transactions ?
5.Do you think that those developing the software are looking at creating a hierarchy in the network where ‘supernodes’ handle the clearing for lots of underlying blockchain transactions. As The transaction flow is increasingly becoming speculative rather than real.
Where basically supernodes are effectively banks in our world ?
If so how will the current commercial banks lobby their governments if they feel their banking licence is under attack ?
His replies were as follows..
ReplyDelete1. Is there an intrinsic value that a coin holder ultimately receives as an asset that he can sell?
Depends on how you define intrinsic value. I define intrinsic value as the end consumption: burning fuel, feeding hay, shaping metals into gadgets. The intrinsic value of equity is the product that comes off the line, or the services that are generated by humans, which are then transformed into profits, dividends, and capital gains. It is the product that is the intrinsic value, and the rest is just auction dynamics.
In the case of Bitcoin, that intrinsic value is a decentralised trust system that confirms transactions faster than current global infrastructure. You have to corrupt at least 50% of the participants in the system to initiate a fraud. The more people that are using it, the harder it is to defraud the system. When you sell your Bitcoin, you are selling your access to that system.
In the case of Ethereum, it is access to a decentralized app store with automated, self-executing contracts (an automated software escrow agent is one example). In the case of the storage coins, that intrinsic value is hard-drive space. In the case of Golem, that intrinsic value is computational power and time. You are selling your access to these systems, which have intrinsic value, when you sell a coin.
2. Because there is no ultimate ‘conversion’ or dividend or any future ‘cash flow’ does the coin holder have that kind of equity interest?
Let’s propose a thought experiment. There is a company that issues shares in their enterprise, but they never issue a dividend and they are always cash flow negative. People buy their product, but they continue burning cash at a higher rate than which they can produce revenue. There is no expectation that anyone will ever acquire them, so there will be no liquidity event beyond the private/public market for their shares.
Is the equity in that company still equity? I think the answer is yes. I can still speculate in Twitter, can’t I?
3. It’s like saying buying a credit card is buying an option to use credit. Maybe true but does that make it a marketable asset?
An option is implicitly credit. The Black-Scholes model is entirely predicated on the idea that you borrow money now to make a trade, successfully execute the trade, then pay back your loan with the proceeds of your trade.
Technically mortgages qualify in your example above. You put money down for the opportunity to borrow and hope that the value of your home goes up faster than the loan does. Sure, a lot of people (and banks) speculate in properties and mortgages, but most people just want a place to sleep.
4. Is there ultimate demand for this costly bitcoin as bitcoins aren’t actually needed for bitcoin transactions?
I’m not sure I follow this question. If you’re saying that there are many Bitcoin clones that can do the same thing as Bitcoin, you’re right. But there are also many companies that sell oil, and advertising, and other services yet we don’t question their existence or the applicability of equity.
The marketplace will decide the value of Bitcoin, and even though Litecoin and Bitcoin Cash accomplish the same thing as Bitcoin, the market currently values Bitcoin higher than the other two. There are a number of reasons for this, eg. hashrate, number of miners, number of support services, notoriety; but the fact that Bitcoin could be abandoned tomorrow does not change its moneyness or derivativeness.
Was the Confederate grayback currency? If the US Dollar was no longer accepted anywhere, either tomorrow or in a century, would it still have been currency? If we started trading Alphabet stock with each other in a highly liquid medium, would Alphabet stock be currency? Would it still be equity?
I think the answer is that they are both. We are merely adjusting to an era of higher liquidity which makes all (digitizable) assets appear as currency.
5. “Supernodes” gives an inaccurate impression of the mechanics of Lightning Network/SegWit/Raiden. A supernode doesn’t have to aggregate 5,000,000 accounts like a bank. A supernode can aggregate transactions for as few as three people. It merely reports the net cash flows from within the supernode to the blockchain as one transaction.
ReplyDeleteMore importantly, anyone who wants to compete in the mining marketplace can broadcast as a supernode, and each supernode is auditable by anyone who wants to run a fisher node, in addition to being auditable by other supernodes. There’s technically no barrier to entry, you are merely constrained by the random nature of being assigned a block based on your proportional hashpower.
So even if supernodes are banks, they’re banks with open auditability by the public, which can be owned and run by anyone. Due to the protocol in place, the banks are also required to be run in a very specific way, else the protocol will reject the node. So are we really talking about just another bank?
Banks can lobby the government, but the distributed nature of blockchain creates a door that can’t be closed without seriously damaging global networking infrastructure or burning a lot of cash to DoS or 51% attack a particular chain. And to your earlier point, if one network goes down another fork will simply pop up in its place. Just look at torrenting technology! Blockchains operate in a very similar manner.
In the end, I think all the smart people working in the space realize that cryptocurrencies will not replace banks due to the time constraints of creating distributed consensus. That is why many banks are betting on protocols like Ripple and Stellar, which shortcut consensus by having nodes declare explicit trust relationships. But these smart people also realize there is room for both, and the financial ecosystem is made stronger by having alternatives available in both the centralized and decentralized realms.
I found it to be a very interesting discussion.
Footsoldier, that view is very interesting.
DeleteBut I cannot agree with him. There is something lacking in that "bitcoin as options theory".
He seems to be in the monetarist paradigm when talking about money. But that's not the main point.
As Warren Mosler puts it, you can use bitcoins to execute transactions. If you are a criminal trying to sell $ 1 million of illegal drugs and hide the financial transactions, it would work more or less like this:
Firsrt, the buyer will spend $ 1 million buying in bitcoins. If his bank manager or the government asks what he is doing, he will just say "I'm investing in bitcoins". So he will be "protected".
Second, the buyer will give (transfer) the bitcoins to the seller (the drug dealer). No one would know that.
Third, the drug dealer would sell the bitcoins he recieve and earn $ 1 million. If asked, he would justify his gains as bitcoin investment.
It doesn't matter whether each unit of bitcoin is priced at $1, $100 or $5000. The transaction would be similar. So, while the bitcoin has a market price and it is sufficient stable, that scheme would work.
So these so called "transactors" don't make the price. For them, it doesn't matter what is the value of the bitcoin.
The ones making the price are people buying and holding bitcoins to use or sell in the future. But what would define the price of a single unit of bitcoin? Why would it be $1, $100 or $5000? As I said, the $1 million transaction would work no matter the price, as long as there is a price.
So I found troubling that "bitcoin as an option" theory...
That's for sharing that.
ReplyDeleteLike call options, or like tulips? Time will tell.
All these people don’t even understand how the REAL system is operating....
ReplyDeleteTo a libertarian , they’ll do almost Anything but work on understanding the real system..