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The Value Of Bitcoin

Isn't what most people think it is
Friday, January 5, 2018, 7:54 PM

So... in the past week, I’ve been asked for advice on Bitcoin by my brother-in-law, my local realtor, and close friends from as far away as Texas.

None of them cared to learn what it actually is. Or how it works. They just wanted to understand why suddenly so many folks they know are trying to buy Bitcoin hand over fist. And, of course, should they buy in now, too?

If you (or people you care about) have similar questions, this report is for you.

A Brave New World

Remember the scene from the movie Avatar, where the main character first explores the alien world of Pandora? I found that scene astonishing and beautiful. He's encountering an entirely new and completely foreign ecosystem.  Every element is fascinating and wondrous, even the dangerous elements -- yet it all still follows understandable rules.

Everything is involved in either gathering sunlight or eating something else that had. Every niche is filled. Every organism has its own strategy: some light up, some fly, some run, some crawl. As entirely alien as everything is, if you understand the basics of how organisms filled their niches on Earth, you have a great starting point for understanding of the rules of life on Pandora.

Similarly, a great way to begin to understand the new world opened up by Bitcoin (and the other cryptocurrencies) is to realize that it's an ecosystem that, at its heart, maps neatly into the universe you already understand. A few examples: payments, identity, contracts, verification, and record keeping (ledgers).

As with any ecosystem in nature, a new organism will survive and flourish if and only if it's more efficient and effective than the prior model. For example, nothing has displaced sharks in the past 425 million years because they're extremely efficient in their niche. To displace them, a new ocean predator would have to come along that does what they do faster, better, and (energetically) cheaper.

So the operative questions we need to keep in mind when looking at the brave new world of digital currencies are: What problem(s) are they solving?, and, Are their solutions faster, better, and/or cheaper?

These are critical questions to answer. When a new technology is first introduced, all manner of fanciful thinking can cloud people’s better judgment with dreams of easy riches. Think back to 1999: as long as “dot com” was added to the end of a business' name, it could raise abundant funds to pursue all manner of impractical ideas. How well did that work out? Just remember Pets.com, Webvan.com and eToys.co; all certified capital destroying ideas.

Investors would have benefited from demanding clear answers to these basic questions of these companies before shoveling money into all the dot-com companies that eventually went bust. It would have prevented a lot of perfectly good capital from getting vaporized.

Over the years, Peak Prosperity has presented a number podcasts and articles explaining Bitcoin and the digital currencies. We interviewed with the chief Bitcoin architect in 2013, Gavin Andresen, and have run several lengthy reports on understanding the cryptocurrency boom. These previous works are worth taking the time to read/listen to if you're looking to deepen your understanding of crypto technology and its value proposition.

As Charles Hugh Smith wrote for us back in January 2017 (when Bitcoin was trading at a paltry $600):

Let's say a mere 1/10th of 1% of total global financial assets migrates into bitcoin. That equates to a price of $17,000 per bitcoin. That’s quite a rise from its current price of $580.

This is pure speculation, of course; some new scandal could emerge tomorrow that might cut bitcoin’s value in half.

The point is that value is ultimately driven by demand, and demand is driven by utility. As bitcoin’s utility increases in a world of rising financial repression, capital controls and expropriations, devaluations, etc., the demand for bitcoin will likely rise as well. (Note the rise in daily transactions in the chart posted in Part 1.)

And as bitcoin’s stability and valuation increase, the potential for a self-reinforcing feedback loop increases: as bitcoin’s value rises, it attracts more capital, which pushes prices higher, and so on.

(Source)

That was a very bold call to make. But, just 12 months later, Bitcoin is now currently trading at Charles' projected $17,000 target.

A staggering amount has happened since we started following this space in 2013. To assess what happens from here, we now need to broaden our understanding of this vast new ecosystem -- with all its new entrants -- that is evolving so rapidly.

Digital Currencies & Digital Assets

Let’s start by getting our terminology in order. As not all of the related technologies and applications in this space are currencies, the entire range of digital solutions in this new ecosystem, of which Bitcoin is the current alpha organism, are best termed ‘digital assets.’ 

Digital currencies are representations of money that only exist in digital form. We might consider airline miles a form of digital currency. You cannot own any physical airline miles, only digital ones. But by controlling them in your account you can ‘spend’ or redeem them for a wide variety of valuable things. Digital currencies tend to be centralized, meaning that their main record keeping (ledger) functions are housed in a given entity. For example, your frequent flier miles account would be found in a database at American Airlines if that’s an airline of choice for you.

Cryptocurrencies, like Bitcoin, are a type of digital currency. Cryptocurrencies rely upon algorithms and protocols to reliably transmit information (such as a given quantity of Bitcoin) from party A to party B. Two features of the transmission method involve independent verification of the transaction and having a distributed ledger, meaning there’s no one central spot (like a bank repository or single database) that keeps the records. Records are kept by all of the participants in the ecosystem (more on this later) and because of this, the “crypto” portion does not automatically imply ‘anonymity’ as many mistakenly assume. Because the records of cryptocurrency transactions are held by everyone (instead of just someone), they are said to be decentralized.

Other digital assets are springing up all over the place. They are designed to solve or address very specific business needs and problems such as contracts, personal identity or shared ledgers. They are not currencies per se, nor are they trying to be -- although they may issue coins as a means of allowing ownership of a part of the network, or funding the start-up phase of the underlying company.

One example is Corda which is a shared, distributed ledger targeted at the financial industry to improve contracts and basic financial ledger functions -- such as how much money you have on deposit there, or which shares of stock are held in your name:

Another is SelfKey which is a blockchain-based digital identity system designed "to put identity owners in control of their personal data, and to allow them to request identity claims attestations and instantly apply for passports, residency and financial services in a safe, secure manner.”

There's a real need for these kind of 'better ways of doing things'. We shouldn't need another Equifax breach or contested presidential election to understand the importance of a thoroughly trustworthy and secure digital identity solution.

Bitcoin and its digital brethren represent a very complicated world of exciting new software developments that promise to transform some of our most very basic societal processes and practices including money itself, contracts, identity, validation and reconciliation, and ledgers. Taken wholistically, this technical revolution is a very very big deal.

Just remember we are in the extremely early days. The landscape, and the winners and losers, will almost assuredly look very different a year from now.   

So, What Is This 'Blockchain' Thing?

Bitcoin rests upon a specific technology called the blockchain. Despite the tangibility implied by its name (block and chain), its really just software.

Here’s a description (and related image) that explains in layman's terms how the software works:

The person or people who created the bitcoin system under the pseudonym Satoshi Nakamoto solved a problem central to any currency —preventing counterfeiting — and did it without relying on a government’s authority. The software also solved one specific hurdle for digital money — how to stop users from spending the same unit of currency twice.

The breakthrough idea was blockchain, a publicly visible, anonymous online ledger that records every single bitcoin transaction. It’s maintained by a network of bitcoin “miners” whose computers perform the calculations that validate each transaction, preventing double-spending. The miners earn a reward of newly issued bitcoin. The pace of creation is limited, and no more than 21 million will ever be issued.

(Source)

Bitcoin does several things very well, and gets them right.

First, it assures that there’s no chance of a Bitcoin being spent twice. That solves the trust angle.

Second, it provides incentive to miners by rewarding them with Bitcoin. This creates a free and eager army of people and entities to do the computationally (and energy) intensive work of confirming blocks of transactions.

Enough Energy To Power A House

But nothing is perfect. Something that Bitcoin does entirely too well is consuming energy. By design. it requires a hefty amount of computational processing to “mine” and validate a block for the chain.

A Bitcoin mining operation is typically an industrial operation. If you’ve ever noticed how hot your computer gets, that’s largely due to the single central processor unit (CPU) inside it -- often a 2” x 2” chip that forms the core of your computer.

A typical Bitcoin mining operation will have thousands of these CPU’s all blazing away at once:

China is a major mining center with huge operations powered by nearby hydroelectric dams to get the best electricity rates. In fact, it’s been calculated that a single bitcoin transaction now uses up as much electricity as a home might use in a month.

(Source)

Solving the Bitcoin blockchain is a brute force adventure that simply requires a huge amount of processing power. That consumes electricity. A lot of it:

Further, the complex math puzzles solved by Bitcoin miners are designed to become more complicated as more computers join the cryptocurrency’s network. Which means even more power will be consumed in the future as/if Bitcoin grows even larger. One estimate calculates that at its current trajectory Bitcoin is on track to consume 100% of the world’s electricity production by 2020. Clearly that won’t happen; but it illustrates a potent limitation on just how big Bitcoin could possibly get.

So the very feature of Bitcoin that makes it attractive also makes it unattractive. It seems silly to devise a currency alternative that requires the use of a lot of energy. Shouldn’t a currency require almost no energy to persist once it has been placed in circulation? (like, say, a physical silver coin)

The other problem here is that if such vast amounts of electricity and computing power are required to run Bitcoin when it’s processing relatively few transactions, it cannot possibly be a viable candidate as a global currency (as some have suggested) where billions of individual transactions are conducted each day, with tens of trillions of dollars of notional value being transmitted.

Bitcoin only conducts around 400,000 transactions each day worth roughly $3.5 billion. For Bitcoin to become the world currency, it would require more energy than exists on the planet today. And the world would fry itself in the resultant waste heat trying to get there. So that clearly won’t happen.

The Bitcoin Value Proposition

So now that we understand how Bitcoin functions I am ready to make this claim: Bitcoin itself does not hold any value. The value in bitcoin is provided by the miners. No miners = no Bitcoin value.

The army of Bitcoin miners require a huge amount of electricity and computing capital investment to run. As long as the costs of running the Bitcoin miners is lower than the value received, then it should persist. But as soon as the puzzle-solving becomes too hard, meaning too few Bitcoin rewards are granted per solved block (currently at 12.5 Bitcoin per block) to justify the expense, then the miners will start shutting down. It's simple cost/benefit math.

If/once that happens, we’ll begin to see blocks take longer and longer to solve. This will extend and stretch out the time to process a transaction and reduce the attractiveness of Bitcoin to merchants and holders alike.

The only thing that will keep this all working is if Bitcoin keeps increasing in value and if electricity costs do not rise faster than the returns from Bitcoin mining.

So my conclusion here is that a Bitcoin itself has no value. A Bitcoin and an intact and functioning mining operation has value. So to invest in Bitcoin, you should really be familiar with the state of Bitcoin mining, and what sorts of challenges and risks it might face.

A Gigantic Rip(ple)-Off

For anyone interested in getting better grounded in this exciting and transformative world of digital assets such as Bitcoin, Ethereum, and SelfKey, Peak Prosperity is hosting a webinar on the topic with our resident digital assets expert, Mark Rees, this coming Sunday January 7th at Noon EST.

In addition to the promise of this new ecosystem, we'll also warn folks of its risks -- and we see a big one with of the recent crypto darlings: Ripple (coin trade symbol = XRP).

XRP is on an epic bull run. It's up over 1,000% in just the last month alone, and 30,000% in 2017. It now has a market capitalization of over $120 billion and is now the #2 coin after Bitcoin in market cap. It’s fair to say that practically nobody who is speculating in XRP has the slightest clue about what it is, what problems it is solving, or even how many there are in circulation.

Complicating the story is that Ripple is a company offering a new payment platform to banks and financial services companies, while XRP is a coin they’ve also offered. The platform is called xCurrent and it’s really a glorified messaging platform.

Here’s how that’s doing:

In terms of interbank payments, many people mention Ripple as a promising way to transfer money between banks.

Over the last 30 days it processed two billion dollars (as of this writing) worth of interbank and interpersonal transactions — about 40 seconds’ worth of volume on the SWIFT interbank network — after three years of being available to banks to trade 90% of the world’s high-volume currencies.

This is like the proportion of US GDP comprised by toothpick sales.

Why haven’t banks preferred this new technology? The answer is thatsetting up a Ripple Gateway isn’t actually much different than using the existing corresponding-account system — except that a lost password or security token can lead to much larger and more instant actual losses — which, as a reminder, has happened to more leading bitcoin exchanges than have managed to avoid it.

The same features that make the banking system attractive to end users also make it attractive to banks. They already have ledgers, and don’t need to distribute them, anonymize them, encrypt them, publish them, and make them irreversible.

(Source)

The associated coin, XRP, has no relationship to the platform. Unlike Bitcoin, XRP does not come into being as a valuable mining operation is performed, they were simply coded into existence by Ripple. How many and where are they?

Many investors new to the cryptocurrency space might not be aware of where all the XRP actually exist. Unlike bitcoin and many other cryptocurrencies, XRP isn't created on a particular timeline through mining – or the act of securing decentralized networks.

Instead, the 100 billion XRPs (the cryptocurrency's coded limit) are already available, with most under the control of Ripple itself. Ripple currently controls about 61 billion XRP, although in May (where the price ranged from 5 cents to 41 cents) the company announced it would move to lock up 55 billion XRP in escrow, to be released at a rate of 1 billion a month for at least four and a half years.

(Source)

So there are 49 billion (with a “b”) XRP coins out there, with another 5 billion for ready use by the company and another 1 billion per month ready to hit the streets. Contrast that with around 16.5 million (with an “m”) Bitcoin out there, and a coded maximum of 21 million once they are all mined.

In other words, there are 3,000 times as many XRP coins out there as Bitcoin, and XRP coins have no mining function attached to them! It’s entirely unclear what their value proposition is here.

But people are afraid of missing out (FOMO) and so they are piling into XRP without any clear understanding of the value proposition. They see XRP going up in price and they want in. In other words, it’s bubble time.

According to people familiar with the space, including the digital asset expert who will be providing the insights at our cryptocurrency webinar, XRP is a useless and therefore worthless coin.

Conclusion

Digital assets are exploding. And they promise to transform the way the world works.

Of course, there will be many twists and turns along the way. There will be big winners and big losers. If you're interested in potentially putting some of your investment capital into this space, you deserve to be as well educated as you can be.

So consider seriously registering for Sunday's webinar if you haven't already. (Even if you can't participate live, a replay video of the full event will be sent to everyone who registers):

Given the massive wall of liquidity that the central banks have unleashed, and the increasingly cumbersome and intrusive banking regulations nations have passed, it’s entirely appropriate for people to seek ways to store their wealth outside of today's grotesquely-mismanaged fiat money system.

However, these new digital technologies are not easy to understand. Remember: the essence of being a good investor is understanding your investments intimately.

It might indeed make sense to simply put a portion, say 5%, of your investable wealth into digital assets. Just make sure whatever amount you invest goes into a carefully selected portfolio -- don't just select willy-nilly from the exploding variety that are out there.

As with any exciting new technology, what we currently have is a rush into the space by hordes of entrants, many of them unsophisticated and simply hoping for a quick buck. That works for a precious few; most simply get burned.

Such is the way of bubbles. People rush in; most get trapped.

But that shouldn’t dissuade anyone who is willing to do the work, develop an understanding of the space and its key players, and determine for themselves the answer to these questions: What problem(s) is (are) being solved?, and, Does this new technology solve things faster, better and/or cheaper?

Click here to register for PeakProsperity.com's Bitcoin/Cryptocurrency webinar on Sunday Jan 7th at noon EST.

~ Chris Martenson

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37 Comments

tbh524's picture
tbh524
Status: Member (Offline)
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Posts: 10
Quoted:As Charles Hugh Smith

Quoted:

As Charles Hugh Smith wrote for us back in June 2017 (when Bitcoin was trading at a paltry $600):

.(Source)

That was a very bold call to make. But, just six months later, Bitcoin is now currently trading at Charles' projected $17,000 target.

 

The Charles Hugh Smith article was 2016 so it's 18 months later that it's made that climb from $600...(still impressive!)

[We were referring to an article Charles wrote in January 2017 (not June). Typo has been fixed]

sand_puppy's picture
sand_puppy
Status: Diamond Member (Online)
Joined: Apr 13 2011
Posts: 1960
Excellent explanation

Excellent explanation, Chris.  You have a gift of explaining a complex topic well, even to a beginner. 

I find you very good at making an "on ramp" so that a person moving at 0 mph can get moving with foundational knowledge so as to be ready to merge into full speed traffic in the future.

Thank you.

mrees999's picture
mrees999
Status: Gold Member (Offline)
Joined: Aug 16 2013
Posts: 430
Just a couple of corrections in an excellent piece

Great article overall. There were a couple of places that need some clarification.

 

On the economics of power needed by the bitcoin network to process transactions.  The difficulty and work to operate a mining node has NOTHING to do with how many transactions it processes. 

If you were designing a network that couldn't be shut down - how would you do it?  If a combatant wanted to shut down the network, he would simply destroy the machine that is processing it. If they knew which machine.  How would you design it so that the 'enemy' could not predict which machine would process the block of transactions?  You have to hold a 'lottery'. 

So, how do you hold a lottery for computers? You come up with a very hard to complete a puzzle of sorts so that computers have to brute force several attempts to solve it. Like a Sudoku puzzle, it is very difficult to solve, and you can't use a pattern or key to solve it - it's trial and error. So the power consumption lies ONLY in the attempts to win the lottery for the right to process the transactions. The actual number of transactions doesn't affect the lottery where the energy is being spent at all.

So does the difficulty and energy always go up?  No. The program was written to evaluate the hashing power of the entire network and throttle itself as needed. The target time is 10 minutes to solve these complex puzzle lottery attempts. The program records the time it takes to solve each block. Sometimes the puzzle gets solved very early, say 1 minute. Sometimes the luck of the problem works the other way and it might take 30 minutes. The average just needs to be 10 minutes.  About every 2 weeks, the program takes stock of the average time it has been taking and then adjusts itself. It simply makes the puzzle harder (to increase the time - if the network has been growing too fast). Or it makes the puzzle easier (If it is taking longer than 10 minutes- some miners might have left because electricity was too expensive). 

When it was first started nine years ago - it ran fine on just a handful of computers - and would still only technically require one computer to run. New technology is being folded into the program called 'lighting network' that uses a different channel that allows thousands, or hundreds of thousands of transactions per second on a second layer rooted into the main layer for clearing. This is done with little additional power requirements.

When comparing costs with Visa, as bitcoin doesn't require buildings, HR, Security firms, buildings, maintainers, crooked banksters, corruption fines etc - bitcoin handles all of that internally. How much electricty is required to keep all the lights on, the data warehouses, the fraud departments, chargebacks, collections departments etc.,  Bitcoin makes all of the other aspects of visa\banks obsolete in many ways. When comparing the costs of the complete picture - bitcoin wins. Bitcoin (cryptocurrencies) seems to me to be the natural evolution of money. 

Government printed fiat lasts on average 27 years each. bitcoin is the oldest crypto at barely 9 years old. It's still a child. It's going through growing pains and likely will for years. It's still pretty early to guess what it will look like when it grows up.

 

tourcarve's picture
tourcarve
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Hashgraph

“What problem(s) are they solving?, and, Are their solutions faster, better, and/or cheaper?”

 

I feel like a talking parrot here, because I know nothing about this subject, but…

 

On Dec. 18, Mike Maloney (MM) (goldsilver.com) published  Episode 8 of his Hidden Secrets of Money series - “The Crypto Revolution: From Bitcoin to Hashgraph.” 

 

 

 

Many reasons to watch it. MM gives a good explanation of block chain technology, and a frame for appreciating Bitcoin from an historical point of view. He explains what the underlying problem is that block chain (or, more generally, full consensus distributed ledger technology) attempts to solve: reaching 100% reliable consensus. And he talks about his concerns re Bitcoin as a deflationary currency - it’s currently functioning as something speculative. MM sees all of this as a turning point in history.

 

In Part 2 of the video (38:30), MM introduces a new alternative to block chain technology, Hashgraph, developed by Leemon Baird. Hashgraph is based on two long-time standards, Gossip Protocol and Voting Protocol (with a twist). Hashgraph is light years faster (calculated for visual interest to be the difference between a snail's pace and a jet going Mach 2), and because, unlike block chain, it does not rely on solving increasingly difficult math problems, it takes very little energy to run. A node of interactions can be run on your cell phone. Also, unlike block chain, consensus is 100%, not just increasingly close over time, so it is fairer.

 

So, according to MM’s sources, Hashgraph is faster, better, and cheaper.

 

And hashgraph may not be the final solution in this quickly evolving field. And MM (who has been totally in precious metals) is going to invest in this area, too.

 

The real message is that we are at the beginning of something really big, and it is still in the experimental state, so we need to learn.

 

Comments re hashgraph?

 

Your faithful parrot

Mots's picture
Mots
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Posts: 196
Hashgraph

Thank you Tourcarve for the link.  This is the best video I have seen in a long time and makes a very good case for Hashgraph while pointing out fatal flaws with Bitcoin. 
Hashgraph was criticized by an expert as being limited to private computer networks and not really applicable to a public setting between unknown users.  see: https://hackernoon.com/demystifying-hashgraph-benefits-and-challenges-d605e5c0cee5

Accordingly, the presence of multiple malicious computers in the random gossip chain could cause problems.  However, given that hashgraph is extremely broad as a tool to change the internet itself (think of adding a trust layer on top of the internet layer, based on a. gossip communications between known users and b. containing the gossip and timestamps of hashgraph), I remain a new and firm believer in the promise of hashgraph particularly since it seems that non net neutrality will force us to make our own private closed networks eventually anyway and hashtag will work great on such networks for everything and not just finances................ 
Things are evolving much and it is a pleasure to become informed via the PP website.................................

Lightning's picture
Lightning
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This is why I subscribe

Thank you Chris Martenson and team for ALWAYS having such timely and informative articles.  Data-driven, and educationally outstanding.  And with perspective.

You seem to always know what I don't understand, and need to.

 

Thank you

thc0655's picture
thc0655
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No shoe shine boys?

So... in the past week, I’ve been asked for advice on Bitcoin by my brother-in-law, my local realtor, and close friends from as far away as Texas.

So none of these people were shoe shine boys?  I guess we haven't reached the top yet.

https://straightlinelogic.com/2018/01/05/straight-line-logics-new-cryptocurrency/

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Here’s a chance for you to exchange all your legacy moneys, currencies, and debt instruments—precious metals, credit cards, debit cards, money orders, checks, traveler’s checks, cashiers’ checks, second mortgages, euros, pounds, yen, yuan, rubles or good old fashioned Federal Reserve notes—for the exciting, innovative, liberating Cryptocurrency of the future, the Bobcoin. Count on it, the Bobcoin will be the next Cryptocurrency they’re talking about at cocktail parties and bongathons.

Space on the Straight Line Logic server is limited. We’ll only be able to issue 1,000,000,000,000,000,000,000,000,000 Bobcoins before we run out. The pace of issuance is controlled by an algorithm written by a group of bright eighth graders in Mrs. Mendies’ math class at Baltimore’s Ivar Kreuger Middle School. Act now! The initial price of $1000 per Bobcoin can only be held open for a short time. Our astrologers project that once these treasures are free to trade in the Cryptocurrency market, they’ll rocket to $100,000, a 9,900 % return. Not bad for the first half-hour!

And don’t forget, Bobcoins are a Cryptocurrency that uses Blockchain Technology!

Yes, I want to get fabulously wealthy by owning a computer entry!

Name:

Home address:

Email Addres:

Asylum address:

Credit card number (Straight Line Logic encrypts nothing and has no security policy):

IQ:

Act today and we’ll discount your first Bobcoin to $999!

So, my first question is, "What is 'a greater fool?'"

My second question is, "What is an MTV?"

Robinson's picture
Robinson
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Posts: 39
Chris is right, the value of bitcoin come from the miners.

The value of bitcoin come from be the first and from the miners.

The following article also come to the same conclusion, but in other words: When the technology of BFT (bizantine fault tolerant) consensus be fully developed, the miners and high electric power will be irrelevant, then, “the platforms will be irrelevant and easily cloned”.

https://blog.coinfund.io/platform-currencies-may-soon-be-obsolete-78d9b2...

Related to the video of Mike and HashGraph : 

We agree with Mike, this is a change from vertical systems of power to flat systems, its a revolution. But today there is no working distributed ledger, (not blockchain based) like iota, hashgraph, etc. , that work with anonymous nodes, they work with trusted nodes, they could work in the future could be.   

Very important also hashgraph is not open source. But bitcoin, ether and many others crypto can change part of their consensus protocol, (the PoW part) to another that have the same promises of the hashgraph, like fast transactions and store of digital assets. Also any crypto can use a new complementary protocol to make millions of transactions with full privacy, just search in internet "Lighting Network".

www.mutualwelfare.com

https://www.facebook.com/unitycoin/

 

Uncletommy's picture
Uncletommy
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Posts: 601
But, in the long run. . .

Unfortunately, I keep getting lost in the minutia of this subject. Speed, platforms, nodes, etc., leave me on the outside in this discussion and force me to focus on firewood and canned goods as a way to strive for resilience and wealth protection. And, I agree that Chris does an excellent job in bringing these issues forward for examination and debate. 

However, I can't help but think about a couple of philosophical points that tickle my PP leanings. Is it something to factor in:

Amara's law:

We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.

And Jevon's paradox:

when technological progress increases the efficiency with which a resource is used (reducing the amount necessary for any one use), but the rate of consumption of that resource rises because of increasing demand.

 

Pipyman's picture
Pipyman
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Posts: 63
Thanks Chris

Just wanted to thank you for both your excellent content and your generous nature. The fact that youve made this and other articles free for those of us currently “belt tightening”, is greatly appreciated. Let’s face it, a potentially richer but difficult future is your message. And you’re true to it..... Thanks!

RoseHip's picture
RoseHip
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Posts: 150
a few ??

I have a few wonderings.

will the increase in crypto price result in more energy use? And the decrease in price the opposite? What impact and in what quantity, for society, will result from these miners consuming the cheapest of energy? Is the system self aware of its limitations? And if not what and how will this difficult realization find a physical reality inducing impact? 

what happens after bit coin has had all it's coins mined? Miners aren't needed and if that is where the value is then bit coin plummets? Does it recycle? Thanks

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_mongo
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tourcarve's picture
tourcarve
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Limitations on Hashgraph

Mots - Thank you very much for your comments about Hashgraph and for this reference:

https://hackernoon.com/demystifying-hashgraph-benefits-and-challenges-d6...

The information in it is a VITAL addition to Mike Maloney's video (Hidden Secrets of Money episode 8) to understand his presentation's strengths and holes. It is also a useful source of terms and concepts for a beginner.

One person Mike interviewed, Chris Ellis, said that one of his concerns is that most of the people in the Bitcoin space "are in communications and marketing - the business of persuading people" (and that what we need are more people who know how to encode a cryptocurrency). Parallel to what Chris wrote in The Crash Course, we need to trust ourselves - to be able to appropriately trust ourselves - if we are to engage with this new technology - a daunting task in the beginning. 

tourcarve's picture
tourcarve
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Vertical vs. Flat Systems

Robinson - Thank you for commenting on hashgraph and the lack of working non-blockchain based distributed ledgers. I will persue Lightnig Network and Unity Coin. (Can't seem to connect right now.)

A couple of questions about terminology:

When you write that this is a change from vertical systems of power to flat systems, what does that mean? Guess: Is the blockchain vertical? And is that because the blocks stack? 

What does PoW stand for?

Again, thanks for your comments and leads.

 

 

Erik T.'s picture
Erik T.
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Sorry, but I think this misses the point completely

Haven't been here in quite a while, but decided to drop in after reading this piece on ZH.

Great writing as always. Chris truly has a gift for explanation.

But there's just a lot that's plain wrong in this article. Chris, you allege that when the reward goes down, the miners will walk off the job and blocks will take too long to verify. Did you even read the bitcoin white paper? It doesn't work that way. It runs on a moving average algorithm. If the blocks take too long because of less miners, the complexity of the proof-of-work exercise is reduced by changing the number of requisite leading zeroes in the hash code.

But much more to the point, many statements in this article seem to reveal that you errantly think that the process of transaction validation is inherently difficult or compute-intensive. That simply isn't true. The proof-of-work algorithm demands insane amounts of computational capacity ARBITRARILY, for the purpose of creating work that never needed to occur in the first place.

To understand Blockchain requires putting it in context. They needed to solve a problem (how to avoid one guy or a small group of bad guys) from taking over the network. The solution that worked fine for a proof-of-concept prototype was to create completely unnecessary "busy work", and that busy work is what consumes all the electricity and computing capacity.

Blockshain is a mania. It's not suitable or scalable to the applications it is being engaged in, but plenty of people are working on more intelligent solutions.

I wrote up a detailed explanation debunking Blockchain here: www.macrovoices.com/blockchain-debunked.

Chris, my respect for your work is immense, and always will be. But honestly, I think this is  a rare example of a case where you need to do more homework.

All the best,

Erik

 

Nate's picture
Nate
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back to the basics

This website has spent lots of time on the 3 forms of wealth:  primary, secondary, and tertiary.  After I read this post, I wondered if we need a fourth.

tourcarve's picture
tourcarve
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Erik T - Thank you for your paper

Erik - Thank you for posting your paper here. Interesting and useful framing of the significance of Bitcoin/Blockchain and the state of the art, and the idea of being stuck. Also, appreciated a number of other topics, such as the technical matter of how a solution gets vetted, your view of what a government-issued cryptocurrency world would look like, and how we cannot know where this is all going. 

 

The idea of being stuck with re a particular design is important to contemplate - how and where it happens - because we can’t make good judgements from inside the wrong frame.

 

Again, thanks.

Mots's picture
Mots
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removed duplicate post

duplicate (web issue I think)

Mots's picture
Mots
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Erik T's paper

Erik, that was a great and eye-opening read, thanks for providing your paper.

It would be wonderful if CM could moderate a debate between Erik and Max Keiser (or another advocate if not expert) on the merits of Bitcoin.  

That would be a great dialectic.  Truth emerges from the dialectic. Many come to this website seeking truth.  This can be monetized......... Just saying.............. 

 

Afridev's picture
Afridev
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Framing...

Quick one before we have to leave for the afternoon. I understand the relative focus on bitcoin, however hope that the webinar this afternoon will more focus on the general evolution of the blockchain and what role it could play in society. Despite the Ford T (Bitcoin) puttering along, it seems that that are potentially already GM (ETH) and possibly Toyotas (ADA?) on the planning board.

I think there are a number of key issues that need to be understood when looking at this domain:

  • Technology and its possibilities/ limitations
  • Processes, interconnections and dependencies
  • Stakeholders, their attitudes, interests and clout
  • How these issues are likely to play out over time
  • Approaches on how to analyse these issues

I believe that blockchain is much larger then cryptocurrencies, so it needs to be looked at from a larger perspective.

Robinson's picture
Robinson
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The Vertical Government, is
The Vertical Government, is the political system that we know.
 
This video, give a very good understanding of the way of work of this vertical systems:
 
 
The relationship of political power to money is rule #2 "Control the Treasury" minute 2:12
 
The bitcoin, cryptocurrency ideology is to bypass central systems, central banks, by giving the power of money creation and administration to the people.  this can be checked when you read the text of genesis block that satoshi nakamoto put there "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks".
 
If government can not control the money, they are powerless.
 
Flat Government systems, is direct democracy, where the power is not delegated.  You can see the status of this systems here: https://medium.com/enspiral-tales/direct-democracy-in-the-digital-age-eaa48467b1ed
 
Flat Government systems, have two problems to be practical:
 
1- The current vertical systems (the Government) dont want to give the power.
 
2- The citizen are not educated, prepare to work in this new type of human relationships.
 
DLT and Cryptocurrencies are a tool that help to solve problem 1.
 
Summary: we are in a point in history where we are moving from vertical to flat systems.
 
--------------------------------------------------------------
 
PoW like Erik and Chris Write, is part of the consensus mechanism. The problem is how to work with anonymous people whitout need thrust.  Because Satoshi Nakamoto dont know that BFT algorithms exist. He decided to implement his own algorithm.  The Satoshi solution was include a PoW (proof of work) to slow the the amount of people (miners) that can give good solutions to a determinate mathematical problem, if few miners can give good solutions, then few miners can cheating.   This solution was very good when few transactions where processed, but now is a bad solution because slow the bitcoin network. bitcoin maximum transaction per second are 7, systems like paypal make hundreds and visa make thousands.
 
The second evolution in cryptocurrencies is the store in the blockchain of rules instead of fixed values,  this rules was given the name of "smart contracts".   with this "smart contracts" any crypto can implement a settlement channel, think of this like visa and mastercard, off chain payments, this is the return of privacy, low fees and super fast payment processing.  the original idea was named "lighting network".
 
The third evolution in cryptocurrencies is the implementation of BFT algorithms, this will speed up the blockchain, and in the process will eliminate the need of miners and the high electric power use. But all it not so rosy, many proposed BFT algorithms are sacrificing anonymity and creating new central powers, the coin hoarders. (this is contrary to the original ideology of crypto).
 
UnityCoin is my design of a crypto, with the best features, that really put the money creation and control in the hands of organized citizens, (not miners, not hoarders, no central government, no central team), with full transparency, in a flat open government, where if I (the founder) fail to my duties the community can replace me any time and put another more capable citizen in place.
 
Note 1:  We also agree that Ripple is a scam of the big banks and corporations, which does not mean you can not make money speculating with ripple.
 
Note 2: We believe that Chris really understand bitcoin, but the subject is so complex, extensive and new, that need some additional explanation like the write of Erik.
 
Note 3: We agree with Erik, https://www.macrovoices.com/macrovoices-content/list-research-roundup/1474-blockchain-debunked/file  Bitcoin is a very successful experiment, just that.  is not a fully developed alternative economic system.    Also Agree DLT is a very great Thing. 

Note 4: Erik, need to fix the writing in his article about the "lighting network", because give the impression that the lighting network will replace some part of the bitcoin protocol. This is a addition to bitcoin (or any crypto) that just need a very small changes in the code to support it, to support off chain settlement.

Note 5: Erik, correctly see the Orwel, as the cryptocurrency that all the governments of the world want and will create. I would add that, in addition, a new type of government will be developed, something totally new, that will accompany a new well developed crypto currency, (UnityCoin). I already have a first design of this government (e-nation), and I hope to present it to this great group.

davefairtex's picture
davefairtex
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bitcoin's value

I think it is more complex than "value comes from the miners."  They're necessary, but not sufficient.

As a long time client/server networking guy, it may sound really obvious, but you need both clients and servers for the bitcoin ecosystem to provide value.  Even though the BCH miners were operational, a certain friend-of-a-friend was unable to access his BCH because his client didn't support the new network.

So - both clients and server support are required for there to be "value".  Likewise, "the brand" is also key.  The chicken and egg problem - you can build the network, and supply the miners, but unless people care, there's also no value there at all.

The third element of bitcoin's value is the buy-in from the consumer end.  "People believe its valuable" and presto - it is.

So that's three pieces that must all be operational for the value to be provided.  Miss any one, and the value vanishes.

1) miners processing transactions

2) clients able to generate transactions

3) people that want to use the network - and have faith in the brand.  There's no point having miners and clients if there isn't anyone on the other side of your transaction.

So bitcoin's value: "the operational ecosystem" plus people who find it valuable.  That last self-referential part is really key, and why I say the original creators of bitcoin were marketing geniuses.  I really can't put enough emphasis on the marketing aspect of the whole thing in terms of creating value.

The "Mark" fellow we are listening to today was an early bitcoin marketeer - but I consider him (and those like him) an emergent property of the original genius.  Well, that's my belief anyway.

pinecarr's picture
pinecarr
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Technology Readiness Levels (TRLs)

In the research and development (R&D) world, the concept of Technology Readiness Levels (TRLs) helps clarify the distinct levels of maturity at which an R&D solution exists.  I think this concept relates to what  Erik alludes to in his white paper when he talks about Blockchain being a proof-of-concept similar to the Wright Flyer being a proof-of-concept for the more advanced airplanes we use today.  I am hoping this may be a useful tool in future discussions about how mature (or immature) various proposed crypto solutions are...

Here's a summary of NASA's TRLs.

Michael_Rudmin's picture
Michael_Rudmin
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Robinson, vert/hor is an approximation

Almost everything in nature, including government, is a mix of vertical and horizontal. Vertical government (the petty tyrant) still does not work well without lots of horizontal government (the family). When you say government is going from vertical to horizontal, I take it that you are seeing a collapse from tall shotr-tail bell curve to shorter, longer tail bell curve.

And though you are right that governments cannot well survive the loss of the control of money, then too governments do not take this lying down. Jesus triggered his death by overturning Ananias' money changing tables, theatening his control of the temple money flow.

Others who challenged the legality of the IRS actions (for example, the author of the probably correct and formerly verifiable, but now unsubstantiatable and also irrelevant "The Law that Never Was") have been put in prison, denied the opportunity for fair and legal trial with the admission of evidence, and held either until death (Peter Tenebaum's dad) or until the case was no longer provable (TLTNW).

So I expect a full war, with the full force and power of the governments involved, until the governments figure out how to control it.

But on a lighter side, the bell curve of collapse has implications for BC: there is definitely a place for a BC that has high certainty against cheaters, and few large transactions. But there is also a place for lower-certainty coins with a higher frequency of fraud, as long as there is a way to quantify the amount of fraud ongoing, and devalue the entire currency together, and thus limit the cost of fraud.

The coin that can handle the whole spectrum will be the one that the governments will support, so long as they can write their own expenditures in at some level.

Provided that the "certain" storage really is certain and cannot be devalued by fraud, the system will also have the support of the gentry.

Provided that the losses are limited, and a person can move themselves to fewer losses as they work their way up the ladder, it may also have popular support.

So the coin that takes care of all that is the one to invest in; It will also be the coin most likely to succeed in the end. BC as it currently is, is simply a flat currency; it doesn't sppport the needs of the most powerful game players well enough.

Luke Moffat's picture
Luke Moffat
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Erik T.

Erik T,

First of all, excellent analogy of using the Flyer of the Wright brothers to describe Bitcoin's Distributed Ledger Protocol. That helps me explain Bitcoin to others a lot better. (I also believe Dave F has been saying a similar thing for a while, i.e. Bitcoin is the first solution but it won't be the best implementation of the idea).

The following quotes from your paper pretty much align with what I see as Bitcoin's fundamental flaw - i.e. insane energy consumption;

What if I were to tell you that the central design principle of Bitcoin’s Blockchain is a giant network-wide competition to waste electricity and computing capacity, and that each time someone proves that he has just wasted more electricity and more computational capacity in less time than anyone else in the contest, he wins a prize paid in freshly-minted bitcoin? I know that sounds utterly ridiculous, and frankly it is. No sane person should ever think this is a good way to run a distributed ledger protocol that is meant to scale up to support a global payment network with tens of thousands of participants. But that’s exactly the essence of Blockchain. Seriously.

So they intentionally made the mining process much more compute-intensive than it actually needs to be, for the express and intentional purpose of slowing the network down dramatically. The whole idea is to make sure that mining wastes so much electricity and consumes so much computing capacity  that nobody could possibly ever buy enough computers to waste more electricity and computing power than the rest of the network combined is already wasting. Seriously – that’s the design goal. Read section 4 of the Bitcoin White Paper if you don’t believe me.

But here’s the problem: Only the winner of the math contest wins the prize. All the runners-up consume about the same amount of electricity in their failing efforts, only to lose the race by a tiny fraction. Once again, in a small proof-of-concept network, it’s not a big deal. But if tens of thousands of miners are competing to create the same block, and only one guy wins and gets paid for it, all the others still consumed all that electricity and no good came out of it! The severity of this problem grows exponentially with the size of the network. The global bitcoin network is already estimated to consume more electricity than some small nations. Let that sink in. More than entire nations.

Ultimately, I believe that the best implementation of the DLP will be the one which is most efficient - evolution works along the same principle.

All the best,

Luke

 

Uncletommy's picture
Uncletommy
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Luke Moffat's picture
Luke Moffat
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Narrative
davefairtex wrote:

So bitcoin's value: "the operational ecosystem" plus people who find it valuable.  That last self-referential part is really key, and why I say the original creators of bitcoin were marketing geniuses.  I really can't put enough emphasis on the marketing aspect of the whole thing in terms of creating value.

I'm coming to the opinion that in most cases the narrative is more important than the underlying product (I think Tesla will similarly come unstuck when the hype doesn't equate to delivery). Get the story right and it doesn't really matter what you sell - with super low interest rates the money will come. And then it will go elsewhere as the narrative changes...

Afridev's picture
Afridev
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Investing in cryptocurrencies

I think this link hasn't been shared yet; interesting reading under this heading:

https://hackernoon.com/all-you-need-to-know-about-cryptocurrencies-an-ov...

climber99's picture
climber99
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Posts: 188
energy production instead of consumption

My gut feeling (as I know virtually nothing about crypto currencies) is that it has to be backed by something physical.

The best physical asset is energy production. Bitcoin is the exact opposite, backed by energy consumption.

can imagine a crypto rouble for example backed by energy production in Russia traded between Nations that import energy from Russia.

Likewise, locally renewable energy production could issue a crypto currency to trade energy generated in exchange for local products. Created when energy is produced and destroyed when the energy is used.

KI_Time's picture
KI_Time
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Bitcoin is on track to consume 100% of the world’s electricity
<One estimate calculates that at its current trajectory Bitcoin is on track to consume 100% of the world’s electricity production by 2020.>
 
Recall that the 1st computers were the size of most living rooms and consumed much power too. Progress was made so that today a hand held tablet has more computing power and consumes roughly the same amount of energy as a CF light bulb.  If the truth matters to anyone, the modern ASIC Block Eruptors are very low power and run off of a very low power PI 3B computer which is about the size of a modern credit card. And heaven forbid we morph the discussion with the free energy from solar or wind or geothermal technologies. That would be so unfair.
 
Hmmm , , , credit/debit cards seem to be a nice segue into digital currencies don't they?  It seems prudent to mention the only big difference between credit/debit card digital currencies and Blockchain digital currencies . . . That bears repeating: the only big difference between credit/debit card digital currencies and Blockchain digital currencies . . . But 1st, consider M.A. Rothschild ; Quote: Give me control of a nation’s money supply, and I care not who makes its laws. 
 
Now, who has the ledger for keeping the  credit/debit card digital currencies honest ??? Well, going there is very hard going for sure while throwing mindless trash at Digital Ledger Technologies that we know next to nothing about is so very easy as their much smaller and easier targets than the purveyors of today's horrifically dishonest digital currencies. It reminds me of the pattern of assault on the internet way back when Al Gore 1st invented it. It certainly doesn't look like the efforts to squash the internet held much sway at all. Can't dismiss the notion that today's trash against what appears to be an effort towards honest currency will have the same success that the internet trashing did.
Michael_Rudmin's picture
Michael_Rudmin
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Posts: 879
You know, it MIGHT be possible for bitcoin to take it all

After all, our financial system is set to empower militarization and mobilization; and bitcoin could concievably bid up the price of electricity past the point that people's needs could compete. (How many BC do you bid for your electricity? You don't have enough? I thought not.)

Moreover, our governments can nationalize the peoples' stuff at will.

So while I think the scenario unlikely, I'll acknowledge that it's possible.

Let me propose a green alternative to BC. It'll still be blockchain technology, and it'll still use proof of work. But all calculations have to be done in pencil, and the miner's name and sigature has to be at the top corner of the page, along with date and page number.

When you said "proof of work", what did YOU mean by "work"? (Did you mean the kind of work I do? I thought not.) Kudos to climber99 for identifying the divergence. Yet the consumptive option is also the military option; and often the "take and consume" option when perfected can overrun the "produce" option when perfected.

If that is so, we may be in for a very bad time.

It's no coincidence that though there are mhny types of cultures, nowadays all nations are of the agrarian-warlike variety.

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parks6n580
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Likely nailed it; well done!

wow, thanks for taking the time to write and share this.  you did a masterful job of tackling this complex issue.  I believe you are write on many fronts.  I do actually hope you are wrong on The Orwell.  Humanity needs an honest, decentralized solution.  Problem is, humanity doesn't always get what it needs.  It often gets what it deserves.  I have followed the investment space for years now.  The level of ethical, good, moral behavior is appalling.  We are not in short supply of great ideas.  We are in short supply of ethical actors.  So many ventures turn out to be run by immoral sociopaths that are running ponzi's, mis-representing statements, not using segregated allocations, etc.  the challenge, it seems, is to figure out how to build a decentralized model that protects against the pool of humanity that wants to take advantage of others.  this should be an interesting story to watch unfold.  thanks again for the great write up.

KugsCheese's picture
KugsCheese
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Posts: 1461
I just invented the

I just invented the RealNewsLedger and its associated coin called NoBullshit.  Buy it up!

Afridev's picture
Afridev
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Posts: 144
Kugs

That seems to be what PressCoin (https://ico.presscoin.com/) tries to be.

*** No not him again with that PressCoin thing cheeky devil ***

 

mrees999's picture
mrees999
Status: Gold Member (Offline)
Joined: Aug 16 2013
Posts: 430
crypto energy production

Sounds good.  Here you go:

 

https://powerledger.io/media/Necker-Island-Blockchain-Summit-Power-Ledger-Snapshot.pdf

 

and here:

https://cleantechnica.com/2017/06/29/solarcoin-cryptocurrency-earned-generating-solar-electricity/

There are dozens of more efforts if you want to use a search engine.

cmartenson's picture
cmartenson
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Posts: 5781
The Great RIP(ple) off...

...oh what a difference a week makes!

Of course I can't say I'm surprised...except that XRP (the Ripple coin) still has a market cap of $65 billion.  

It should be closer to $0.

climber99's picture
climber99
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Posts: 188
Thanks mrees999. One key

Thanks mrees999.

One key feature omitted in solarcoin and other crypos (to my knowledge) is the ability to shrink the money supply. The major advantage of a debt backed currency that we have now, otherwise known a fiat currency, is that money gets taken out of circulation when debts or interest get paid or debt gets written off. Hence fiat currencies are self limiting and can cope when we enter our Net energy descent at the end of our fossil fuel era.

Interested in hearing the thoughts of the crypto community on this issue.

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