Sunday, February 13, 2022

Sunday Night Links

  • I've become convinced that this problem is indeed fundamental. The simplistic version of the problem is this. The income to a participant in a P2P network of this kind should be linear in their contribution of resources to the network. The costs a participant incurs by contributing resources to the network will be less than linear in their resource contribution, because of the economies of scale. Thus the proportional profit margin a participant obtains will increase with increasing resource contribution. Thus the effects described in Brian Arthur's Increasing Returns and Path Dependence in the Economy will apply, and the network will be dominated by a few, perhaps just one, large participant. The advantages of P2P networks arise from a diverse network of small, roughly equal resource contributors. Thus it seems that P2P networks which have the characteristics needed to succeed (by being widely adopted) also inevitably carry the seeds of their own failure (by becoming effectively centralized). Bitcoin is an example of this. [David Rosenthal]
  • The big point here is the if you are a customer of a cryptocurrency exchange, you risk being a general unsecured creditor of the exchange if it should file for bankruptcy. It doesn’t matter that the exchange’s contract with you says that you “own” the currency. That’s not determinative of what will happen in bankruptcy. If you’re a cryptocurrency exchange customer you’re actually in a worse position than if you dealt with a traditional financial institution for a bank deposit or security, as the exchange is not regulated for safety-and-soundness and there’s no insurance protecting your assets. [Adam Levitin]
  • Federal Reserve officials are in no rush to raise interest rates prior to their scheduled policy meeting next month, nor is a half percentage-point move in March yet likely, despite a bigger-than-expected jump in consumer prices that stoked speculation about such options. An emergency increase risks signaling panic and cementing criticism that the central bank is too far behind in reining in inflation, while Chair Jerome Powell only last month predicted the pace of price increases would cool later this year. [Bloomberg]
  • Canadian oil majors, royalty owners, and hydrocarbon pipelines are all priced as though disruption - actual replacement by wind and solar and electric vehicles - is going to happen in the next five years or so. But simple back of envelope economic calculations based on physics and energy density tell us that replacing fossil fuels (again, 80% of current world energy consumption) with those energy sources, the so-called "energy transition," is impossible. That means that the world is seriously under-investing in hydrocarbon production and traditional energy infrastructure, and over-investing in electric vehicles (TSLA) and in wind and solar boondoggles that will collapse the way the previous iteration (e.g. Suntech Power, Evergreen Solar, A123 Systems) did a decade ago. [CBS]
  • You'd get worried if you saw something like Ken Heebner's CGM Focus mutual fund, all-in on natural resources and being called "America's hottest" in the summer of 2008. (At the trough in 2016, the CGM Focus Fund's assets were down 90% from peak in 2008.) Just to look at his June 30, 2008 holdings with $10 billion in the fund is to marvel. When was the last time you saw a mutual fund that was 17% in steel? He had 19% in oil services, 10% in oil refining, 11% in oil E&P, 10% in coal, and 8% in copper miners. Even the people today who believe in the energy transition and think that electric vehicles will take over (and which use 10x as much copper per vehicle) are not making a copper bet like that. Which goes to show that professional investors have lost the ability to translate a worldview into a portfolio if it involves natural resources. [CBS]
  • Prior art. I discovered French Toast about 20 years ago, and immediately knew that I had to tell Dominus about it. He replied that in fact he and Ranjit had invented it ten or so years before that, and called it "Plenty Questions". Also, the Divergent Association Task is the opposite of Semantle. But I wasn't thinking of French Toast when I invented this. Instead, I was thinking about Wordle and Worldle and about the dimensionality of data sets. I considered Filmle, a movie guessing game: You say "The Matrix", it says "Keanu Reeves has a bacon number of 3 where bacon is the lead actor in the target film." (and so on for Carrie-Ann Moss, Laurence Fishburne, and Hugo Weaving for actors at corresponding billings). But I don't care about movies. Too bad, because IMDB actually has exactly the data that you would need to implement it in a really easy form. Then I remembered word2vec, and here we are. [Semantle]
  • Internal documents from the Canadian Security Intelligence Service (CSIS), our equivalent to the CIA, released through an access to information request, show that the state and its security apparatus underestimated the size of the convoy, though any half-wit could have seen the tremendous chain of trucks that were headed their way. [American Mind]
  • It is also worth remembering that in the entire history of advanced civilization, there has never once been a transition to a technology platform that is less economically and energetically efficient than the prior model. In this respect, EVs are attempting a transition that is unprecedented - at least with respect to the current state of technology and relative cost structures. [LT3000]
  • For those that haven’t seen the video ‘Line Goes Up - The Problem with NFTs’ you should immediately stop reading this and go watch this nearly two hour documentary that masterfully deconstructs the crypto narrative and shines a very bright light on the dark side of the crypto bubble. This film is so important to the current discourse that it rises to the level of public service and probably deserves a YouTube equivalent of a Pulitzer Prize for the craftsmanship and research that went into making it. [Stephen Diehl]
  • My only surprise is that the twilight of Securities Act hasn’t led more private equity firms to just start raiding the nearly 600 listed zombie companies and turning them into exchanges and crypto pump and dump farms on the back of existing brand recognition. If I was a corporate raider my head would be spinning with dollar signs with the opportunity to basically gut large portions of the NYSE and squeeze every last bit of value out of them into an offshore crypto slush fund completely beyond the reach of the tax authorities. Once PE firms finally realize this, there are literally trillions to be made from the regime change of the United States from rule of law into hypercapitalist digital anarchy. If you want to profit from collapse, this is easiest and surefire way to secure your chunk of the American economic carcass in some offshore tax haven so you can sip mojitos from the beach and watch the end. [Stephen Diehl]
  • The real world has fundamental constraints that make the technology unworkable, whenever it has to interact with the outside world the benefits of decentralization disappear and the solutions end up simply recreating slower and worse versions of processes and structures that already exist. Despite that, for the last thirteen years these projects have done nothing but scam people by creating synthetic asset bubbles for gambling and destroying the environment. There are fundamental limitations to the scalability of blockchain-based technologies, and every use case is better served by another simpler technology except for crime, ransomware, extralegal gambling, and sanctions evasion; all of which are a drain on society not a benefit. Taken as a whole the technology has no tangible benefits over simply using trusted parties and centralized databases. Crypto coins are simply speculative gambling products that only create a massive set of negative externalities on the world. It is introducing artificial volatility into markets untethered to any economic activity and creates an enormous opportunity cost where the only investment opportunity is as an economically corrosive synthetic hedge against all productive assets. [Stephen Diehl]
  • On a compute basis, blockchain networks don’t scale except by becoming the very same plutocratic and centralized systems they allegedly were designed to replace. There is an absurd cost to trying to do censorship resistant computation. In this regime there is a hard incentive to minimize program execution time because the entire network is forced to recompute every single program as part of it’s insanely wasteful process of attempting to reach consensus about a giant global state machine. This inevitably drives the cost per program instruction into the stratosphere. The Ethereum virtual machine has the equivalent computational power of an Atari 2600 from the 1970s except it runs on casino chips that cost $500 a pop and every few minutes we have to reload it like a slot machine to buy a few more cycles. That anyone could consider this to be the computational backbone to the new global internet is beyond laughable. We’ve gone from the world of abundance in cloud computing where the cost of compute time per person was nearly at post-scarcity levels, to the reverse of trying to enforce artificial scarcity on the most abundant resource humanity has ever created. [Stephen Diehl]
  • After years of studying it, I believe that cryptocurrency is an inherently right-wing, hyper-capitalistic technology built primarily to amplify the wealth of its proponents through a combination of tax avoidance, diminished regulatory oversight and artificially enforced scarcity. Despite claims of “decentralization”, the cryptocurrency industry is controlled by a powerful cartel of wealthy figures who, with time, have evolved to incorporate many of the same institutions tied to the existing centralized financial system they supposedly set out to replace. The cryptocurrency industry leverages a network of shady business connections, bought influencers and pay-for-play media outlets to perpetuate a cult-like “get rich quick” funnel designed to extract new money from the financially desperate and naive. [@ummjackson]
  • Bitcoin carries with it the seeds of its own destruction by virtue of it being effectively a pyramid scheme that depends on the greater fool theory and consistent inflows to sustain the collective delusion in the viability of infinite recursive speculation on hot air and libertarian fantasies. If we as citizens in democratic countries simply restrict the inflows and on-ramps, the entire scheme will collapse on its own in a highly predictable and politically expedient way without much effort. And the world will be better off without it. [Stephen Diehl]
  • The third failed narrative is the “digital casino model” where cryptotokens are speculative assets that people can bet on detached from any stated purpose, economic activity or utility. This is the predominant view today, however it is highly irrational from an asset valuation perspective. Any non-zero valuation for bitcoin depends on it either yielding some positive cashflows—which is impossible—or depends on an infinite chain of economically irrational actors who will all continue to pour money into the scheme ad infinitum irregardless of fundamentals. There are indeed a lot of fools in this world, but to presume an infinite chain of them as the core of an investment thesis is beyond absurd. So unless all of modern economics is wrong then the market value of bitcoin must converge on its fundamental value of zero in the limit as time tends towards infinity. That makes it a very poor long-term speculative asset and any gains one might make are derived purely from recruiting greater and greater pools of fools into the scheme on short time scales before it collapses, much like a Ponzi scheme. Massively negative sum investment schemes where for every one person who makes a return nine others lose money is not innovation. [Stephen Diehl]

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