Economic security in the Bitcoin game

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The biggest issue with crypto these days is the lack of general understanding of where crypto systems derive its security from. Cypherpunks would (incorrectly) claim that it is from cryptography that the system derives its security, but that is just bunk. The truth of the matter is that no system is secure when the one thing that makes a legal transaction different from an illegal one is the signature from the appropriate keys. Keys can be stolen. Keys can be coerced from unwilling victims. Simply signing with a valid key does not a legal transaction make.

Everyone misunderstands this. And this widespread misunderstanding is so rife within the crypto circles, that it will take the better part of a decade before it is widely understood among the public. That is, without a very public, very visible meltdown to show the contrary.

All security systems are economic in basis

The truth is that the security of crypto systems are all economic in basis. In fact, ALL security systems are economic in basis, but I’ll leave that discussion for another time.

One question which illustrates how the mindset of most people is incorrect, is that they often ask the proponents in a project how many coins that they personally control. This is of course tantamount to asking some stranger how much money is in their bank account. But, crypto denizens have a good reason to ask this (as rude a question as it is). It is because in the world of crypto many projects start with the founders creating a token, and then allocating a good share to themselves and their friends in order to ‘buy loyalty and support.’ That loyalty and support can be later used to (in a self-referential way) to keep the project afloat and successful. These tokens can also be used to buy labour in the form of development resources and time in order to meet project milestones. In this way the token acts very much the same as company stock given out to founders.

BSV vs other crypto projects

The difference between all crypto projects and BSV, is simply this: The proponents of BSV actually paid a huge cost to work on and promote the project. CoinGeek, the largest miner and proponent of BSV, mines its own coins. They, like Satoshi, did not grant themselves any ‘founders stock’ before they went public. They simply mined the coins themselves and competed with anyone else who wanted to earn coins. NO other crypto project did this. None. 

Not Ethereum, (they issued themselves ETH for BTC), not LTC (they had a premine), not Ripple (they created all XRP from nothing and granted all to themselves), not any of the private blockchains like Hyperledger, (they raised funds from VC firms, taking fiat), not countless other coins who raised money via pre-mined allocations, or took stock in their own companies. BSV stands alone as the only crypto project in which the primary drivers of the project, didn’t take any unearned stake, or share in the enterprise without taking on the risk of that stake. They did NOT grant themselves any stock or equity. They just earned the coins, by investing in infrastructure for the platform, and mining to support the system.

Think about it. With BSV, the coins that miners own were earned, by way of their own mining operations. This action is the only undisputed ‘pure’ way of acquiring ‘stake’ that doesn’t make you responsible and beholden to your users/shareholders. What do I mean by this? Simply that any skin-in-the-game that say, ETH founders have, are inconsequential compared to the cost that they had to pay to acquire that stake. Their stake is equity based funded. When ETH was issued, it was sold to its founders at less than $1 per ETH. Most of them paid for it with BTC. BTC which they themselves had purchased, many of them for less than US$1 per BTC years before. It is entirely possible then, that the now multi-millionaire founders of many present day crypto projects didn’t invest any more than a avg minimum wage yearly salary into their project. Yes, a minimum wage earner put more investment into their job than most crypto project founders. Yet they may own more than the lion’s share of the bubble economy that they helped create. Imagine if you were lucky enough to have been in the inside circles of the crypto luminaries back in 2011. A simply investment of US$20k would have likely meant that you would be sitting on a more than US$200m of wealth right now. Now imagine if you actually did that, would that make you an equivalent stakeholder to another investor with US$200m of fresh investment in the project today?

Hell No. It wouldn’t.

People who don’t know finance and computer science types would be quick to say “Yes! Of course it does!, $200m today is worth $200m no matter how you slice it!” 

— Wrong.

People who don’t know finance, listen up. There is a concept in finance called “cost of funding.” Basically it is the COST of the capital deployed. $200m worth of value today may be equivalent in what it can buy today (though I’m ignoring for a moment that $200m in crypto is not the same as the equivalent amount in fiat in terms of liquidity), but it is very different coming from someone who had to pay $200m to raise $200m, vs someone who had to pay $20k to raise the same $200m!

Cost of funding, explained

Here in lies the issue with most projects in crypto today. They are run by founders who had a very low cost of funding. How much personal capital did they put into the project? $10k? $20k? This is why smart buyers and users must ask the founders how much personal stake they have in the platform, normally expressed in how much of the platform’s coins they currently hold. And if the founders have a disproportionate amount of the platforms native coins, then it is normally a sign that they are excessively ingratiating themselves via the project that they are promoting. Effectively paying themselves for their own promotional efforts. Yes, this has a lot of similarities in how Ponzi scheme incentives work as well. Funny that.

So if the founder of ETH, EOS, Ripple, LTC or TRON own a lot of their own tokens, they are ingratiating themselves, because the cost of those assets was likely very low compared to others. Like founders of a new company, they ‘bought in’ to the blockchain project before anyone else could. Very much like company stocks (Hello SEC! *nudge* ) the founders bought in first cheaply, so that they can exit later by selling their stakes in the company when others want to buy it, presumably when the company has produced something valuable. That is why knowing how many shares a founder controls, is a FAIR QUESTION to ask, before you invest in the company itself! So it is not an unreasonable question to ask of the founders of crypto projects as well!

BUT BSV, and ONLY BSV is different.

Why? Because every coin that the founders and the proponents of the platform own have been earned. Whether it be Satoshi mining back in the original days just like everyone else, or whether it be CoinGeek today every BSV coin they own, they mined. Which means, they paid more than a fair market price for those assets! Why is it more? Because someone who just buys a coin is the same as someone who just buys a stock. You may have bought a stock when it was cheap or maybe when it was rich, but it was always at the market price of the stock.

Mined coins are different, the cost to acquire them isn’t subject to the market in the coin, the cost to acquire them is the cost to mine them! That cost is based on electricity rates, capital investments, sunk costs of operations of a mining data centre, etc. That revenue in coins, are relatively unaffected by the performance of the project. It is revenue paid for, taxed, and saved with a much higher cost of acquisition, cost of funding than any equity stock.

BSV players earn their stakes

This is why when you ask BSV proponents about how many BSV coins they hold, this is an insulting question, akin to asking Mark Zuckerburg how much money he has in his bank account when you are interested in investing in Facebook the company. Totally irrelevant. Every coin was earned. Not paid for. So if you want to know which players have the most skin in the game next time, look to the ones that had to earn their stakes in the system that they are peddling. The others that just paid for their stake, will never be as committed as those who had to earn their stake with all the downside risks that accompany that venture. 

But what about BTC? Surely it doesn’t suffer from the same flaw?

Sorry, it does. Why? Because those who promote BTC and build on BTC (such as Blockstream, Lighting Network, and their entire affiliated ecosystem,) do not mine BTC. They get funded by their venture capital stakeholders. Their investors. They are traditional companies trying to earn revenues in the traditional way. Sure they have skin in the game, but not as much as a company that mines its own coins. They have only as much stake as an owner of a farming conglomerate, while a company that mines its own coins has as much stake in a farm as the farmer who works the land in order to feed his family. Very different. One is at liberty to sell his stake if the going gets tough. The other isn’t.

Unlike equity investors whose only costs are lost opportunity costs and potential loss of investment, which are one-time costs, miners and farmers in addition to the previous bear the cost of daily mining operations and ongoing maintenance costs. That is indeed the true secret to the security model of Bitcoin, and why Proof of Work, and only Proof of Work, is secure enough for a global financial system. Anything less, is just the security model of the equity markets. And as the last 100 years have shown us, equity markets have a nasty habit of growth and deleveraging every decade or so. If anyone can easily liquidate their stake, then how stable can a system built upon stake be? Would you model the entire financial system of the world after the volatile equity markets? The answer is known to financial players already—it’s called the bubble economy. How long will it take the geeks in crypto to realize it?