This post will take a deep dive into the background and value proposition of Ethereum, how it differs from Bitcoin’s value proposition and where I believe that Ethereum is developing innovative and future mainstream applications… I will discuss the debacle of the DAO and the current ICO mania, and how the radical experimentation we are currently seeing on Ethereum will in time be seen as the beginnings of the dis-intermediation of traditional banking and finance in funding technology, and the divorce between Silicone Valley (tech sector) and Wall Street (finance) that will redefine how ideas and projects will raise funding in the future, which has not only profound implications for finance but more importantly in redefining law, especially securities law… I will then briefly discuss the coming developments in drive-chains and side-chains that is now significantly closer to fruition on Bitcoin due to SegWit activation, and how smart contract layers and applications built on top of Bitcoin could lead to the usurping of Ethereum as legal blockchain… Everything everywhere is in flux, in the legacy world of finance and governance and in the new world of finance and governance, this is the most interesting time to be alive in history in a transitionary age of financial and legal sovereignty…

Bitcoin And Ethereum – Money And Law

A few months ago I did my first podcast interview and the first obvious question I was asked was what is the difference between Bitcoin and Ethereum? A simple enough question to which my answer was mumbling and fumbling to find a half decent description before finally working my way to the difference between money and law… Since that interview I have thought a lot more about this obvious question where before I have to admit that I hadn’t given it enough…

Bitcoin I would define at this point in its development as a ledger and currency system, the bitcoin currency being the first application of blockchain technology and the software released by Satoshi Nakamoto in 2009, however as I will discuss later on in this post currency is only the first application of Bitcoin onto which increasingly complex smart contract applications can be layered as we are currently seeing with the development of Lightning Networks, the first application of smart contract technology working on top of Bitcoin, that of payment processing and micro transactions to facilitate peer to peer trade and enhance medium of exchange properties… As we are only nine years into this monetary experiment and have since day one been in uncharted waters, and due to the diverse user, developer, miner and corporate base of Bitcoin clean debate and consensus is very hard to obtain, and so the history of Bitcoin is a conservative evolution as a monetary standard and sovereign asset, at least up until now…

So if Bitcoin for the moment is concentrating on money (store of value, unit of account, medium of exchange), what is different and where is the value proposition of Ethereum? I don’t think I would be doing Ethereum a dis-service if I described it as a smart contract platform and asset ledger, with its native currency Ether functioning as legal currency and lifeblood for the transacting and exchange of private and public contracts… If you think about it logically then you can definitely see the promise and future test cases for Ethereum, and whereas money (Bitcoin) is a more pressing and fundamentally important requirement than law and contracts (Ethereum), from the natural exchange of money will develop a need for private exchange of contracts and implicitly property, whether digital or physical… As the current centralized, financialized and increasingly obsolete debt based central banking system implodes worldwide increasing the value and scale of Bitcoin as a monetary asset, then it should logically follow that with the implosion of bankrupt and corrupt governments dependent on central bank debt redistribution and subsidization, in the wake of financial crisis there will be increasing value and scale in private and decentralized contracting and smart contracting platforms of which Ethereum is currently the world leader…

Ethereum – Decentralizing Law

Whereas Bitcoin is intent on disrupting the legacy banking and monetary systems, Ethereum I would contend is intent on disrupting and decentralizing law, to the infernal screaming of the Western (And Eastern) technocratic bureaucracy that is the hand maiden and leather clad gimp of the banking system… As Bitcoin is taking on bankers and economists Ethereum is taking on the centralized legal system, threatening the cuts and kickbacks of a vast regulatory apparatus of parasitism in the fields of legal contracts, national asset registries (land, housing, autos, property, etc) and securities… As money and banking over the last five centuries has been centralized and corrupted so law has been centralized and enshrined in government legislation and coke snorting fat-cat barristers and lawyers to corrupt legal ownership and justice, and this is where Ethereum shows promise and value, in decentralizing law…

Ethereum – From The Beginning

Ethereum is the brainchild of Russian born prodigy Vitalik Buterin who along with others launched Ethereum live in 2015, and somewhat of a novelty in a crypto ecosystem of first generation Bitcoin forks and spinoffs in the alternative (altcoin) currency space… As a blockchain based distributed computing platform featuring smart contract functionability (as per wikipedia description) Ethereum offered something different from the Bitcoin clones trying in vain to disrupt the peer to peer currency space, Ethereum had (and still does have) designs on enhancing peer to peer exchange past currency and toward property ownership and exchange, and in the design and execution of a decentralized legal system, so what I consider to be Ethereum’s most promising and far reaching applications were (and are) smart contract applications of which in its two and a half year history thus far, the DAO and Initial Coin Offerings (ICO’s) really stand out… I will get into describing in detail both of these applications and what lessons they can teach us in the long term whether Ethereum survives or not, as they are glimpses of the future of contracting and crowdfunding, but first I will discuss the contrast in blockchains and governance structures between Bitcoin and Ethereum which is needed to give further context…

Ethereum – Flexibility For Insecurity

As previously described whereas Bitcoin is concentrated on money and currency, Ethereum has been designed for legal and contractual applications, both differ and lie at different poles of a spectrum, that of the security versus flexibility spectrum… Bitcoin was the first blockchain and as far as I am concerned the greatest invention in human history, however Satoshi created this system from scratch and it has inherited numerous weaknesses and flaws and the last nine years have been the process of ironing out these flaws as best as possible, but as the first blockchain it was designed to be a severely limited but very secure protocol… Bitcoin is simply a distributed digital ledger with a predetermined currency rate of issue that is powered and secured by Proof of Work, the enormous amount of mining (electrical) power that runs the ledger and issues (by mining) the currency… While being a very secure network in and of itself (and outside of exchanges and companies that are built on top of which many have been compromised) this comes at a price and disadvantage of being inflexible and resistant to change, which is enhanced by Bitcoin’s leaderless governance structure in the wake of Satoshi’s purposeful disappearance that left the project to the community to fight it out, Bitcoin is rather unique in a competing world of top down centrally planned blockchains (of which Ethereum is a prime example)… The bottom up fight for control of Bitcoin’s destiny makes it a highly conservative and fractious and noisy governance structure model with very little consensus agreement and more than enough trolling, larping and disagreement, and this is by design… Security and inflexibility in short make for an anchoring store of value and blockchain base for the crypto ecosystem, from which competing blockchains can leverage and experiment in more flexible and complex applications…

Ethereum can be viewed as either a competitor or a compliment to Bitcoin, and I take the view that Ethereum is more a compliment than it can ever be a competitor (as triggering as that may be for ETH evangelists), because Ethereum lies at the other extreme end of the security and flexibility spectrum… Ethereum has been proven since its inception and birth in 2015 to be on the one hand a highly flexible and innovative network onto which a limited number of test cases and applications have been and are currently being built, and on the other hand a chronically insecure network and embarrassing to Ethereum’s lead developers and hard core supporters… The DAO was the first indication of the severe insecurity of Ethereum that would have cost DAO investors $50 million (it would be billions in $ today) had not Vitalik Buterin as the creator and visible face of Ethereum reversed the hack by rolling back the blockchain, ending the immutability of Ethereum and forking off a new blockchain while trying to kill the legacy and still immutable chain, now of course called Ethereum Classic… This point I need to make crystal clear, Ethereum Classic is the original and unbroken chain while Ethereum is the mutable fork of it, and why in my opinion if the Ethereum project ever wishes to be valued upon immutability (or in other words longevity), then Ethereum Classic would be my bet…

To elaborate further on what I feel is a very important point, if you would just imagine for a minute that Bitcoin were ever to be hacked DAO style then there would not be a Vitalik like figure to declare and decree a rollback of the chain, any rollback or bailout of the hack would be shot down and Bitcoin would likely be ruled dying and soon dead, because what exactly would be the value proposition of Bitcoin if it were ever hacked or compromised? If Bitcoin were ever really compromised then surely its store of value status would evaporate nearly overnight? This has already happened to Ethereum and its market cap and currency value has only rocketed up since, so in my opinion Ethereum’s value proposition cannot be immutability because it has long since lost that, another reason why I consider Ethereum as compliment rather than seriuous competitor to Bitcoin, the value proposition is based upon Vitalik Buterin himself and the promising deployment of many world changing applications, that may be pioneered by Ethereum in the short term but established in the long run by more secure and long lived blockchains or sidechains…

Vitalik Buterin – Ethereum’s Biggest Strength Or Ethereum’s Biggest Weakness?

It would be remiss of me to discuss the security and flexibility tradeoffs of Ethereum without talking some about the governance structure of Ethereum as opposed to Bitcoin, and why this is also crucial to appreciate… In a recent post I think I condensed it rather well in saying that a contentious Bitcoin hard fork would be nigh on impossible because of its governance structure (most recently demonstrated with the collapse of SegWit2X), while Ethereum hard forked (The DAO) at the first sign of trouble because of its governance structure, so blockchain development not only lies in code and the underlying protocol but also in governance structures… What Satoshi purposefully did in my opinion was to remove himself from the Bitcoin project and so add another layer of security and immutability to its governance, for the one lesson of history is this, centralized top down rule and absolutism ends in corruption, delusions of grandeur and megelomania… By removing himself as ultimate decision maker and creative vision and disappearing virtually without trace he removed a key security flaw, from the CIA, the CFTC, SEC, and from lobbyists and manipulators that advise Kings on expanding Empires… As a leaderless community with rival and competing factions or fiefdoms reminiscent of European medieval feudalism, any decision that requires either a soft or hard fork within Bitcoin is rigorously debated as we have seen most recently with the fight for SegWit that took nearly two years, in maintaining Bitcoin’s conservative roots and building for the future…

Contrast this arduous long suffering fight for a conservative soft fork upgrade with Ethereum’s near overnight hard fork following the debacle of the DAO, which was near solely down to Vitalik himself as Caesar and evokes in me the old saying “living by the sword, dying by the sword”… At near completely the different end to Bitcoin’s leaderless governance is Ethereum’s leadered governance and unlike the long disappeared Satoshi (that will only add to his credit and legend as Blockchain governance structure becomes an economic science in and of itself), Vitalik has been the all too public face of Ethereum from inception, to development, to pre-mined funded launch, to the articles, social media presence especially on Twitter, the slick marketing and on-boarding onto the Ethereum Enterprise Alliance a good portion of the legacy banking and corporatocracy, in short Ethereum’s unified and monarchical governance structure sure seems a lot more attractive to the curious newcomer and budding manipulator than Bitcoin’s foul mouthed, aggressive, shambolic and uncompromising public relations team… To the crypto newbs and the establishment banks and corporations that are currently riding Ethereum’s coat tails, a centralized and absolute ruler is a familiar governance structure and far more promising than the Wild West of Bitcoin, as having the ear of a recognizable and arguably world famous ruler is far more promising than having no ear at all to whisper in… Here again is demonstrated the trade off on the spectrum between security and flexibility, with Ethereum’s monarchical governance structure giving it an additional layer of flexibility while simultaneously removing a layer of security, and Bitcoin’s anarcho-feudalist style of government sacrificing a layer of flexibility, for an all important additional layer of security…

Living By The Sword, Dying By The Sword

While the going is good, the weather is fine and the ships are still sailing out of port then any ruler is a genius, however hoping or believing in perpetual fair weather sets up the uninitiated and naive for a perfect storm and banquet of consequences down the line… We have already seen how flexible and insecure Ethereum’s monarchical governance is when it came to the DAO, and just again a month ago when another Ethereum application developed by a senior Ethereum developer was compromised and has resulted in another roughly $280 million in lost funds, there is again talk and discussion about rolling back the chain, further enhancing the flexibility of Ethereum’s immutability and further painfully emphasizing its insecurity… If there is pushback to this latest proposed hard fork (as there should be by principled Ethereum devs) then there is the possibility of Ethereum, that is a fork of Ethereum Classic, again spawning another legacy chain in defiance of the latest security breach… A fork of a fork… We are barely out to sea, and Ethereum is threatening to dilute itself over and over before we even hit rough seas… All the while Vitalik keeps talking on Twitter and getting himself needlessly involved in altercations with Bitcoiners while pumping up Ethereum, or lately Bitcoin Cash, coming out with ill thought and naive tweets that further inflame and rile up sections of social media, and again this is all in good humour and entertaining to follow, however talking too much and being relentlessly subject to the spotlight that he does not shy away from, sets you up for an epic fall from grace when the tide turns and the storm begins…

Satoshi Versus Vitalik

We know all about Vitalik but we know virtually zero about Satoshi Nakamoto, and probably to most people that would mean they would intrinsically trust the public face of Vitalik over pseudonymous and C.I.A. N.S.A shady Keyser Soze ripoff Satoshi, so I will take the other side of the argument and look at it from Satoshi’s point of view… You have created an internet protocol and network that has the potential for peer to peer adoption on a global scale, to disrupt and potentially destroy the central banking and governmental matrix that is currently consuming the world’s populations on all five continents; all this you have already thought through, considered, and deliberated, demonstrating remarkable mental skills in the fields of finance, economics, geopolitics, game theory, decentralized governance structures, computer science, everything that Bitcoin has since become… If you knew what Satoshi must have envisioned over ten years ago, then you would know that your creation has tremendous powers of disruption and destruction of a highly dangerous beast with numerous and far reaching tentacles, and as this upstart network increases in adoption the status quo threatened by this decentralized disruption will naturally seek a way to co-opt it and/or destroy it, then the first place they would look is who created it, and who is its driving force? Even a so-called decentralized blockchain with an easily recognizable and therefore arrestable ruling force de-facto ruler, is a very real weak point for exploitation by those threatened by the power of the blockchain, and is a weak point for every blockchain that scales large enough for the banking and regulatory crackdown that inevitably will come, save one, Bitcoin… Bitcoin is the only blockchain that does not have a visible ruler and central weak point, and is unique amongst the competition that has followed it… So when considering the above, who is the smart one, the one that is the life and soul and mouth of his blockchain, or the one that disappeared and nobody knows who he is? Who demonstrates humility and foresight, and who demonstrates pride and naivety of the way the real world operates?

Disruptive Technology – How The Empire Strikes Back

Bitcoin and Ethereum as the most visible blockchains in the crypto space are the biggest threats to the status quo, the current banking and corporate oligarchy that control the world’s central banks (and currency supplies) that control the world’s national governments and legal monopolies systems, and so the bigger Bitcoin and Ethereum grow the bigger a threat they are to the financial and legal systems that extract and abuse the world’s labour and resources… If you think that BIG (Banking, Industry, Government) will give up this unbelievable privilege and criminal racketeering apparatus lightly, you are among the naivest of people alive today… While the banking and corporate oligarchy are currently pumping Ethereum through The Enterprise Alliance are they interested in just ripping off their own blockchains or are they seeking the ear of the king in lobbying and manipulating the future? Either way if you think the ancient, hopelessly inbred and utterly insane kleptocratic elites that monopolize finance, law, media and education will give up this mind matrix it took them centuries to construct without a fight, then you might be high on hopium… The storm is unleashed when the threat posed by the blockchain and crypto-currencies forces the hand of banking and corporate elites, and the notion that crypto-currencies will not be subject to different degrees of censorship and regulation in my opinion is fanciful… Make no mistake that fundamentally changing the monetary and legal systems over the world will be anything but comfortable, so buckle up for far stormier seas that what we have had up until now… And if/when the time comes, where are the attack vectors on these blockchains that allow governments to crack down or even attempt to shut down? It is here that Bitcoin demonstrates its relative strength against Ethereum weakness in that although both blockchains are decentralized and exist distributed over thousands or hundreds of thousands of computers so the takedown of the blockchains themselves would be nigh on impossible, but this is not true of the governance structures or development teams… While authorities could attempt to arrest Bitcoin core developers there are over a hundred, many of whom are pseudonymous and not easily identifiable and even then there are thousands or tens of thousands of other contributors that would also need to be removed, so to be clear this is quite difficult if not unfeasible as Bitcoin’s biggest layer of security is its leaderless structure, there is no central figure or ruler so to speak to corrupt, or manipulate or discredit or destroy or assassinate… This is the not the case for Ethereum (or Bitcoin Cash, or any high profile altcoin) as altcoins are the centrally planned projects of rivals and the experiment of blockchain technology governed by absolutist monarchy, of which there is no doubt applies to Vitalik… Vitalik is the brains behind Ethereum, it is Vitalik that declared and decreed the rollback of the DAO (to bailout investors and spare himself possible SEC investigation and possible prison no doubt), it is Vitalik that is promising to solve all the scaling problems Bitcoin cannot due to its inflexible governance, the future is bright with Proof of Stake technology to reduce energy and environmental destruction, sharding to solve scaling walls and leverage layer 2 scaling solutions and medium of exchange status, Vitalik has all the answers and solutions reminiscent of another pied piper in Tesla’s Elon Musk, a visionary playing fifth dimension chess that is only critiqued and criticized out of ignorance and envy… What would Tesla be worth without Elon is the same question in my opinion as what would Ethereum be worth without Vitalik? Think hard about that…

The DAO – Redefining Law

So after a detailed dissection of what I feel are Ethereum’s numerous flaws and even terminal compromise in the long run, in the short run it is the second largest blockchain by market cap and is undoubtedly more interesting and innovative than the morass of bitcoin clones and pump and dump scams in the altcoin space which grows by the day… As a relative newcomer Ethereum’s early value and marketing was as a smart contract platform as opposed to a currency platform, and the development of the DAO in conjunction with the security hack served to define a cathartic first year…

The DAO stands for Decentralized Autonomous Organization and I will defer to Wikipedia, and quote,

“The DAO was a digital decentralized autonomous organization and a form of investor-directed venture capital fund.^[5]

The DAO had an objective to provide a new decentralized business model for organizing both commercial and non-profitenterprises.^[6][7] It was instantiated on the Ethereum blockchain, and had no conventional management structure or board of directors.^[6]The code of the DAO is open-source.^[8]

The DAO was stateless, and not tied to any particular nation state. As a result, many questions of how government regulators would deal with a stateless fund were yet to be dealt with.^[9]

The DAO was crowdfunded via a token sale in May 2016. It set the record for the largest crowdfunding campaign in history.^[5]

In June 2016, users exploited a vulnerability in the DAO code to enable them to siphon off one third of The DAO’s funds to a subsidiary account. On 20 July 2016, the Ethereum community decided to hard-fork the Ethereum blockchain to restore virtually all funds to the original contract.^[10] This was controversial, and led to a fork in Ethereum, where the original unforked blockchain was maintained as Ethereum Classic, thus breaking Ethereum into two separate active blockchains, each with its own cryptocurrency.”^[11][12]

To give my take on the potential of DAO (Decentralized Autonomous Organizations) is that taken to its furthest extent in the case of mass adoption, to a redefining of law and adoption of a decentralized legal system based on private property, which I have touched on in previous posts, my Distributed Technology And The End Of Counter-Parties (Banking And Law) post, and my The Blockchain, Law And Property – From Public Property To Private Law Society post, so I’m keenly aware of property, legality and monopoly, and how blockchain technology can effect upon the twin pillars of social order, money and property… As I explained in my Economics Of Local Banking post in times of yore prior to the utter corruption of money and law, the banker and the lawyer were among the most honest and upstanding members of any community or society precisely because they were trustees and guardians of the public’s property, the lawyer administrating the title deeds for property (home, land, assets), the banker administrating the title deeds for money (paper money/credit/banknotes for gold/silver)… As private property is individual liberty, then the lawyer and banker were meant to be the trusted guardians of liberty, however over the last five hundred years and the gradual centralization of money (banking) and government (absolutist and constitutional monarchies, democracy) legislation and law, the twin institutions in protecting private property rights have been corrupted irreparably and turned into institutions to pillage and rob private property, private rights have become public rights, justice has become injustice, police and law courts are no longer defenders of rights but abusers of rights, and most perniciously of all, criminals and offenders against property rights have steadily been transformed into victims while the victims of crime have steadily been transformed into the criminals…

As Bitcoin through the conduit of the internet disintermediates and will eventually destroy the ultimate pillar of this parasitic and evil system, the banking system that extracts its loot from printing money to spawn inflation, taxation and regulation that keeps this system funded and ever increasing, the second pillar to fall will be the governmental and legal system that sucks at the teats of banking, as I briefly encapsulated in my post The Collapse Of Socialism – Collapse Of The Banking And Accounting Bureaucracy… And just to ram this point home, even though in theory it is Law that has legislated centralized finance (Central Banking) into existence, it is finance that is used to corrupt law and it is finance that funds the debasement of money, law, morality, ethics, knowledge, and human voluntary relationships, individual, family, community… For this very reason Bitcoin must be considered a more important project than Ethereum as Bitcoin is concentrated on demolishing the first and most crucial financial pillar, while Ethereum is concentrated on demolishing the second legal pillar which is why I consider Ethereum an important project and experimentation test bed and will provide pioneering test cases for the future whether the mass adoption of these test cases happens on Ethereum, or others… The DAO was merely the first iteration of the vision of dis-intermediating the entire established and perniciously extracting legal architecture of democratic socialism, and replacing it with a capitalistic system of immutable private contracts between peers, ironically the immutability Ethereum sacrificed to remedy the DAO hack, demonstrating the socialistic nature of Ethereum’s governance compared to Bitcoin’s capitalistic governance… Going forward into the future do you think businesses and corporations will be more likely to trust an immutable blockchain (Bitcoin, Ethereum Classic) or a mutable blockchain (Ethereum)?

The DAO in conclusion is a long term killer app for blockchain technology and can be implemented on numerous blockchains (which I will discuss further later) and taken to its furthest extent is the destruction of the current nationalist and internationalist legal system and order, and by by-passing this legal matrix as the existing legal systems melt down, law comes back to the local and the local lawyer, as administrator of physical title deeds and property contracts, they can also be immutably stored on a worldwide digital distributed tamper proof ledger, that in itself has profound implications for personal liberty and private property…

Initial Coin Offerings – Redefining Securities

If the DAO could be considered as redefining law as I have argued above, then the most recent test case of Ethereum has come in ICO’s or Initial Coin Offerings, which again has massive implications for and is currently heavily disrupting securities law, again highlighting why investors see value in Ethereum, but also why it could be fragile to censor and clampdown by securities watchdogs… Unlike the DAO which blew up on the launchpad ICO’s have been proven to be a far longer lived experiment, has contributed to the increasing promise, hype and market cap and currency value of Ethereum, and again allows us to observe a new test case for blockchain technology in crowdfunding and crowd sourcing the public directly in the issuing of digital assets, tokens and securities, by-passing traditional regulators and gatekeepers, and really the facilitators of the early stage divorce proceedings between Wall Street and Silicone Valley… Indeed Ethereum’s ICO mania is disruptive on many levels and why later on in this post I will compare Ethereum with Napster which caught flames and was destroyed in the course of disrupting and fundamentally changing the music industry in the early years of the digital era of the internet, so I will cover the ICO phenomenon from a few different angles…

ICO – Definition

As with the DAO, I will defer to wikipedia, and quote,

“An initial coin offering (ICO) is a means of crowdfunding centered around cryptocurrency,^[1][2] which can be a source of capital for startup companies.^[3] In an ICO, some quantity of the crowdfunded cryptocurrency is preallocated to investors in the form of “tokens,” in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ethereum. These tokens become functional units of currency if or when the ICO’s funding goal is met and the project launches.

ICOs provide a means by which start-up companies can avoid burdensome costs of regulatory compliance and intermediary financial organizations, while increasing risk for investors.^[4] ICOs may fall outside existing regulations or may need to be regulated^[5][6] depending on the nature of the project, or banned altogether in some jurisdictions, such as China and South Korea.^[7][8]“

ICO Mania – Dot Com Bubble Redux

I have seen many social media analysts describe Ethereum’s ICO mania as a return of the late nineties and early two thousands when the early promise of the nascent public internet in conjunction with the low interest rate and easy money policy of the Greenspan Fed, blew an immense bubble in early internet companies such as the infamous Pets.com where mere internet domains and websites were trading in the millions and tens of millions in dollars in value, before coming down to earth with the stock market crash of two thousand and one and beyond… I do subscribe quite a bit toward this view because looking at face value at the ICO bubble that is helping to pump up Ethereum and clog up its blockchain simultaneously where projects with vague and jargonistic whitepapers describing projects that are unworkable and/or have no working product to speak of, raises tens of millions, hundreds of millions, even BILLIONS of dollars worth in ICO tokens tied to and backed by Ether, in short billions are flowing into a space filled with get rich quick merchants and outright scammers that will sooner or later bring governmental crackdown, severely exposing the weakness in Ethereum’s monarchical governance structure, and which I will discuss later on… However as scammy and incredibly bubbly this ICO space is, money is not flowing into it for no reason just as the late nineties dot com bubble, the money is flowing in because of promise just as the money flowed into the promise of domain names and websites from the mid nineties onwards, let us also not forget here that tulip bubbles, stock bubbles, and crypto bubbles are only blown up by money printing central banks, currently creating usurious new electrons on computers to the tune of hundreds of BILLIONS PER MONTH, it is of no wonder that this highly speculative space has become so batshit crazy… So what does this wave of blind money and greed of dupes, hucksters and high octane traders see what the rest of us boring Bitcoiners cannot, and what is the promise blowing the bubble?

ICO’s – Crowd Funding Investment

The special interest that I find in the ICO mania is the redefining of securities and how these securities are funded and traded, and the fundamental disruption that Wall Street is facing at the hands of public blockchains and crowdfunding platforms that completely bypass banking and the law, the securities regulators and pornhub addicts in the extractive legislative bureaucracy… What I have found extremely interesting in witnessing this ICO mania is the concentration of companies and coin offerings out of Silicon Valley, whose traditional method of development and growth would be to go public and launch an IPO (Initial Public Offering), strictly regulated by the Securities And Exchange Commission (S.E.C) and underwritten by Wall Street banks to be released for institutional and public consumption, which gave both securities regulators and wall street banks and bankers a vice like grip on the flows of funding to Venture Capitalists and Silicone Valley in particular, neither Microsoft nor Apple nor Google nor Facebook nor Amazon would have got anywhere close to where they have got in the world without Wall Street’s banking and legislative apparatus (and this is true for all of the economy around us), so banks and lawyers control which projects and companies succeed, and more importantly which projects and companies fail to succeed, so financial and regulatory control of the economy develops in the bankers best interests while stifling any potential or perceived disruption to the status quo…

In this context the recent ICO mania and concentrated in technology startups starts to look a lot more like the start of the divorce between Silicone Valley and Wall Street, and this has profound implications for the future of project and company financing if it hasn’t already become clear, Initial Coin Offerings are at the polar opposite of the traditional Initial Public Offering, do not build up a prospectus, are not securely vetted by Securities and Exchange Commissions, they build up vague whitepapers and second rate websites, are for the most part completely unregulated and perhaps most intriguingly and importantly of all, they are not funded by the banks of Wall Street, they are crowdfunded by the public, whale and newb, bagpumpers and bagholders, in what is a crazy and intrinsically volatile wild west of scams, clowns, charlatans, and a small number of success cases… Because we are in the process of disrupting traditional funding flows and conduits to entrepreneurs and startups, directly by-passing regulation and banking, this money is flowing blind into a space that is bound to end badly for many just like the Dot Com Bubble ended badly for those who piled in feet first into “regulated” securities and tokens that they did not understand, but this is just the first innings and the first real demonstration in blockchain technology of how decentralized securities and crowdfunding can and no doubt will work going forward, because if this can be applied to the tech set in California in building the first generation of mostly useless applications for the crypto sector and the Internet Of Things, ICO’s could also be used to fund DAO’s, crowdfunded decentralized autonomous organizations that could be used to fund all manner of different projects for different means and ends, in any sector and future sectors of a global economy… The possibilities are literally endless…

ICO’s – Collapse And Coming Regulatory Crackdown

If you have read this far and started to grasp the disruption that Initial Coin Offerings can create within a bloated and corrupt financial and legal black hole that sucks in ridonculous amounts of money and wealth in controlling both finance and law, if you then think that these same banks and regulators will just let this ICO mania go on ad infinitum then I’m not sure you understand the real nature of banking or regulation, it is about control and extraction and decentralized funded crowd tokens by-passing the banks and regulators also by-passes their controls and their fees for running the rackets, so do you really think they are going to let this happen? The shadow of regulatory crackdown lies heavy over the crypto sector in most of the world currently as bankers and regulators frantically try to assess and analyze the trade offs of these disruptive but potentially highly profitable applications of blockchain technology, and as I extensively discussed in my Bitcoin Kills Banking Revisited post in June, the biggest trend of 2017 and 2018 is the regulation of Bitcoin (and crypto currencies and assets in general) by bankers and regulators, either clamping down and/or banning it, or embrace it with light touch regulation and benefit from its profitability when traditional banking has become increasingly unprofitable, while crypto sucks the legacy system dry of wealth… The shadow of regulatory crackdown weighs most heavily in my opinion on Ethereum, both because of governance structure and of the past… There is little doubt in my mind that Vitalik compromised the immutability of Ethereum in order to bail out users who lost had lost roughly fifty million dollars in the DAO and who otherwise might have launched class action lawsuits or even approached and appealed to securities regulators to intervene on their behalf, and co-incidentally the Securities and Exchange Commission just in the last six months designated the DAO as a security, which lets those who are paying attention know how regulators will approach similar investments in the future… I have not much doubt that the same will be true of many of these Initial Coin Offerings when boom turns to bust and when investors who have lost money go crying to big daddy government to bailout their own profligacy and high time preference in chasing shitcoins, and to be clear regulators have stood and watched on this long because they are mostly clueless and ignorant of blockchain capabilities but they fear manias and are especially fearful of manias that by-pass their protection racket entirely… The crypto space in general is a Faustian deal with the devil for regulators and their banker puppetmasters as the crypto space offers enormous efficiencies and profits (taxation) in regulating the gray area between two distinct ecosystems, and on the other hand is starting to be appreciated by the status quo as threats and disruption to traditional funding models, controls and regulation that the crypto space is sprouting… I think they will allow some activities and lend “legitimacy” to some aspects of the crypto space but they will also mercilessly crackdown in other areas, so we will have to wait and see what happens in the next months and years…

Stress Testing Ethereum – How It Performs Under Regulatory Crackdown

I have previously explained how Bitcoin’s leaderless governance structure adds a layer of security under regulatory crackdown as there is no central point to attack or compromise, and why Vitalik as the life and soul of Ethereum loses a layer of security under regulatory crackdown… While Ethereum defenders will counter that Ethereum is a decentralized blockchain and network of nodes and this is true, the governance structure is entirely centralized and authoritarian, the law of Vitalik… So if securities regulators did ever decide to go after either the ICO’s (the vast majority of which are built on top of Ethereum) or Ethereum itself as the main facilitator of this ICO mania, then it is not rocket science to theorize how they would go about this, they would simply go after Vitalik… Suppose they decided to arrest Vitalik on some trumped up charge of securities violations and disperse this to the world through mainstream media mouthpieces, the heart and soul of Ethereum would suddenly be decapitated, which I would assume would be bearish for the market cap and currency value, would you not agree? The ICO’s and Ethereum would suffer mightily while the collapsing values and increasing calls and shouts of ponzi schemes and digital tulips would further reinforce the self fulfilling prophecy… When you understand and come to appreciate how governance structures inherently determine the fragility or antifragility of blockchain technology, then you can better assess which blockchains will succeed in the future, and for your investments to succeed…

In Defence Of Ethereum’s Long Term Prospects – Preferred Blockchain Of The Corporate Oligarchy?

While legacy institutions have been loathe to embrace Bitcoin in the past preferring to consider it as a haven for criminals and degenerates, they have seemed to fully embrace Ethereum’s blockchain potential, have set up the Ethereum Enterprise Alliance that is a who’s who of the big hitters and illuminati kingpins of the traditional corporatist economy, from British Petroleum to BNY Mellon, Credit Suisse to Deloitte (big 4 global accounting racket), Intel, J P Morgan, Microsoft, Thomson Reuters, Santander, Toyota, UBS, and well you get the picture… All these legacy controllers of the fiat world in finance and industry have jumped on board the Ethereum train and so this must immunize Ethereum from regulatory crackdown if the same banks and corporations that control the regulators are also invested in Ethereum’s future? Well, yes and no… While the legacy corporatocracy has been deeply involved in Ethereum in looking at the many applications of blockchain technology in relation to their own corporations, I do not believe it beyond consideration that they would be using Ethereum for now as a stop gap and testing ground for developing their own individual or collective blockchains, and to be clear they could fork off a new copy of Ethereum for their own ends at any time, so Ethereum ultimately I think is a hostage of fortune and of fickle and duplicitous legacy corporations of the old corrupt and dying world…

Final Analysis – Ethereum Is Napster

I think in the final analysis of the potential and disruption that Ethereum has already engendered that its rise and fall will mirror the rise and fall of Napster that disrupted and fundamentally altered the music industry forever and in my opinion for the better… While it was eventually BitTorrent and decentralized file sharing that brought down the post WWII and heavily controlled Western Intelligence music industry and recording company cartels, Napster pissed off so many people and suffering the fatal weakness of being a centralized file sharing entity, it was relatively easy to shutdown… Ethereum reminds me a lot of Napster, a highly flexible and disruptive internet protocol that has stepped on a lot of feet in its short history and has pioneered and paved the way for future and far more decentralized and secure applications of redefining law, securities, contracts, and the decentralizing of the whole legal industry in time… We shall have to see…

Ethereum Classic – Ethereum With Bitcoin’s Governance Structure

Vitalik’s hard forking of Ethereum to salvage DAO losses was resisted by a small sub-set of Ethereum’s developers which negated the possibility of a clean and consensus hard fork, and which ended with a new chain and a legacy chain… I have great sympathy for this small group that resisted and resented Vitalik’s authoritarian compromise and bailout of the DAO, and to be clear the only Ethereum with a clean history is the legacy chain, Classic is the unforked and immutable blockchain and in my opinion will prove the chain with the longest legs… Since the fork Classic has stabilized, is seeking to cap its currency at between 210 and 230 million coins (ten times the inflation and coin issue of Bitcoin), and in general has a more libertarian and decentralized governance structure than it’s authoritarian twin…

The Ethereum split following the DAO gives us the perfect live and real time experiment on the strengths and weaknesses of the rival governance structures, if you believe that authoritarian monarchy is the future of Ethereum then you have Vitalik’s fork, if you believe that libertarian governance is the key to Ethereum’s future, then you have Classic… As the analysis and understanding of game theory of governance develops then I believe Classic can gain from all the disruptive applications that Ethereum have developed, if/when they are adopted on Classic’s more libertarian and conservative blockchain…

Plot Twist – Smart Contracts Coming To Bitcoin

As I have already discussed Bitcoin trades any semblance of flexibility for the immense security of the blockchain and the whole of the crypto space and altcoins it undepins, so it is unlikely that Bitcoin will develop much on chain going on, as the painfully slow fight for SegWit amply demonstrates how difficult it is to obtain consensus for any on chain scaling solutions, so it is therefore logical that to maintain dynamism and ward off stagnation, that Bitcoin scales off chain in second layer network effects… Indeed, I have dedicated the whole of my writing in the year of 2017 to the Bitcoin Scaling Debate that was at its essence a clash over big blocker on chain scaling solutions (finally birthing Bitcoin Cash, or BCash if you prefer) and the Bitcoin developer and hard core user base who realize that to truly scale Bitcoin, we build layers on top… While Jihan and Roger forked off to the inherent limitations of on chain block size increases and centralization, after much game theory and bluffing and folding, UASF Libertarians Won Bitcoin’s Scaling War, and with the activating of Segregated Witness (SegWit for short), we are increasingly able to build layers off chain… SegWit and a permanent solution for Transaction Malleability now allows for the far more efficient and effective development of smart contracting and promissory layers that leverage the underlying security of Bitcoin’s blockchain, with enhanced flexibility in myriad different applications, from micropayments, to payment processing (lightning networks) to Drive-chains and side-chains which can develop all the applications that Ethereum is working on…

Second Layer Solutions – Another Tale Of Tradeoffs

The advantages of Bitcoin’s Second Layer Solutions must be judged against its disadvantages, and as ever and inherent within blockchain technology is the trade off between security and flexibility… Second layer solutions being off chain therefore they do not exist on the chain and at first glance must appear as some sort of ponzi rabbit hole or black magic in that how can they exist if they are not longer even visible on Bitcoin’s immutable ledger? This is obviously a security red flag in the trade off for mind exploding flexibility… So how can this be done?

There are three main technologies within Bitcoin’s blockchain that allows these second layers to be fully securitized, which are multisignature (multisig) that distributes trust and risk over multiple decentralized parties as opposed to one centralized counter-party (e.g a bank), CheckLockTimeVerify, CheckSequenceVerify and HashLockTimeContracts which allows temporal promissory or smart contracts (based in time)… So between anchoring to time on Bitcoin’s blockchain and utilizing distributed risk models in multi-signature technology, off chain scaling solutions are given near on chain security while weaponizing absolutely mind bending off chain flexibility… For example the first companies developing second layer tech are working on the Lightning Protocol that leverages off chain anonymous, instantaneous, virtually zero cost transactions, when Bitcoin goes completely dark (to snoopers) and in essence becomes a large off chain coin mixer and money laundering and tax evasion vehicle, as it is the lightning network (and off chain anonymity) that allows users to decide what activities remain public and subject to surveillance on Bitcoin’s blockchain, and which activities are done off chain and free from surveillance, taxation and regulation…

To try an give a vision of the user experience imagine holding your bitcoins on the main chain, a one megabyte block, limited mempool, ten minute block confirmations, 2 or three confirmations required for transactions to complete, and increasing fees (in fiat toilet paper money), it should be increasingly clear that Bitcoin currently is a terrible payment network and medium of exchange and is what the these last two years of scaling debate and stagnation has been all about, but it is a tremendously secure store of value and scarce digital currency and commodity in a world of unlimited central bank credit creation, so store of value status (Hodling) is more important to Bitcoin right now than payment processing, but again the only reason we hodl is in order to eventually consume, so payment processing will be a necessary upgrade going forward… So imagine Bitcoin as your saving layer where you either produce directly (accept Bitcoin) or indirectly (accept fiat to buy Bitcoin) and you take bitcoins out of circulation, you secure them offline with a hardware wallet to make sure they are safe from the world, and you sit and wait and watch yourself getting wealthier… At some point in the future (and dependent upon individual time preference) you decide to consume, and let’s say by this time lightning networks are widespread, so you send one bitcoin into a fully secure lightning wallet… Once inside this wallet you then decide to open a lightning channel that connects you with the rest of the network, and the one bitcoin that remains locked on the main chain is opened off chain… This one bitcoin is transmuted up one layer can now move peer to peer, instantly, anonymously on onion routed Tor like networks, for fractionally small fees… Imagine you complete a hundred anonymous off chain near zero cost transactions, you are left with half a bitcoin, and you decide to withdraw it back to the main chain to hodl, once that lightning channel is closed all record of what you ever did using that channel vanishes with it, leaving you half the bitcoin you started with, which you can then withdraw back on the chain to cold storage… If Bitcoin is being your own bank (security) lightning networks is being your own payment processor (flexibility), different applications of money working on different layers…

RSK (Rootstock) – Building Ethereum On Bitcoin

As we draw toward the conclusion of this months long mentally draining post for me, let us consider the tremendous flexibility of an Ethereum like smart contract platform but secured by the immutability and security of Bitcoin’s underlying blockchain, then this is what Rootstock promises! And Rootstock is only one of many projects and development in second layer networks, and to extend my earlier thought experiment, holding a bitcoin on the base layer and instead of opening a payment channel you open a smart contract channel which allowed you to register all your property deeds and transference peer to peer, Decentralized Autonomous Organizations and business contracts, crowdfunding Initial Coin Offerings to fund decentralized development of open source projects on a global scale, by layering protocols and networks on Bitcoin’s base network you can stream money and in the coming years you will be able to stream law…

If you are studying and investing in this space then you need to come to understand the off chain scaling layers and the possibilities this creates, these possibilities altcoin shills and religionists tell you are impossible and you can understand why they want to believe this, they will call second layer smart contract applications on Bitcoin fraudulent vaporware while pumping smart contracts on their own blockchain as innovative and cutting edge smart contract technology! They do not want to believe that their own coin and project could be obsolete and worthless in the near future, which I have particularly noticed among Ethereum’s more evangelical and defensive supporters… They wanted Bitcoin to fork like Ethereum did, they were campaigning against SegWit calling it a core developer perversion of “Satoshi’s Original Vision” while pumping the hell out of BCash and its toxic mining and corporate backers, but for what reason exactly? If you understand the SegWit upgrade and what it makes possible in terms of building additional layers on top, then it becomes clearer to me at least that the immense FUD and pushback from outside (and inside) Bitcoin against SegWit, is because it is threatening… It is threatening to miners by moving applications off chain starving them of fees while spamming the network with low transactions for the humans to pay more in fees for the miners to capture the profit while blaming core developers for congestion problems, it threatens some Bitcoin corporations by reducing their power and control of Bitcoin by building off chain applications, and most critically of all, it allows Bitcoin to build and implement any and every innovative altcoin and altchain application on top, and can marginalize and indeed render most of these altcoins redundant and obsolete in the long run (for example, if Bitcoin gains anonymity from second layer effects, what now is the value proposition of Monero or Z-Cash?)…

As I extensively discussed in my last post on Bitcoin’s SegWit battle and as I have also touched upon in previous posts the crypto ecosystem is a game of thrones, with Bitcoin as the rock, anchor, and established whale in the space, new altcoins and chains being the smaller fish that swim in the enormous wake of Bitcoin’s network effect and security… If Bitcoin and its additional inbuilt security layer of leaderless governance were to fail, then these pretenders would be fully exposed to the light and eventual regulatory clampdown of government regulators, with these altcoins being mostly highly authoritarian and monarchical top down governance being an inherent weak spot to strike… The Bitcoin whale takes most of the limelight currently and allows these far less liquid and less scalable coins to develop their own innovations which they can then proclaim will make Bitcoin obsolete in the long run… However, by protecting and shielding all these inferior altcoin projects during development so that they can innovate in relative peace and obscurity, and also considering the capabilities that Bitcoin will soon develop in off chain scaling layers, then Bitcoin developers are free to watch the most innovative developments in altcoin land and then build them on top of Bitcoin, giving security, censorship resistance and most importantly of all, scale, to projects that currently by definition have no scale… So this is the symbiosis between Bitcoin and all its “competitors”, Bitcoin gives security and scale to its minnows and offshoots, a space that is riddled with junk and scammers but which also contain nuggets of innovation and promise, while the open source nature of the competition and the scale of Bitcoin’s network effect and developer pool being able to pick and choose the best innovations of other projects and ape and copy and build it on Bitcoin’s blockchain…

Conclusion

Ethereum has many obvious flaws, from its rapidly increasing blockchain bloat which makes running an individual node more costly and uneconomic for the average user which will lead over time to centralization of user nodes hurting security and censorship resistance, its chronic insecurities that were first exposed with the hacking of the DAO and has been compromized on a few occasions since, but in my opinion the real weakness at the heart of Ethereum’s (and 99% of other altcoins) is an authoritarian and therefore chronically insecure governance structure, that Vitalik hard forked at the first sign of trouble compromized Ethereum’s immutability for life, and will continue to bailout security breaches and roll back the chain because this is the precedent he has set… In fact watching Bitcoin vs Ethereum the next few months and/or years is watching a contrast in governance, between Authoritarian Monarchy and Libertarian Feudalism, where you can back your ideological or philosophical leanings with your rapidly depreciating national fiat currencies… Do you trust a king and pre-ordained ruler and hierarchist in name only (this is a stab for the rabid and blind monarchists who deify Hereditary Monarchism) or do you trust in real hierarchy and the meritocratic aristocracy, with no recognized ruler or king, and where the best and brightest compete and fight and code for the right to work on Bitcoin, the project that started it all, the only project that really matters, and the project all other altcoin monarchies love to hate… There are numerous developers who have failed to make the grade and be good enough to become a core contributor in Bitcoin’s meritocratic and open source peer review process, a process that seeks to maintain Bitcoin’s decentralization and censorship resistance by maintaining a limited but highly secure base for which future applications can be leveraged on top… Those who fail to grasp this concept or have ideological contempt for this meritocratic structure of governance (after they have been rejected of course), will decry Bitcoin as a fossil of governance, as centralized backward and inflexible development, completely unworkable and the world will come to realize this sooner or later, so you launch your own shitcoin… This coin is the REAL Bitcoin, but stripped of the dogma and religious theology of the medieval core developer monks, a far more flexible and agile network with a single vision, an authoritarian rule in line with what you see as Bitcoin’s inherent failing, their rejection of your contribution…

Well now the heat is starting to come on, and shit’s about to get real… These altcoins that rejected Bitcoin’s governance structure and created or forked off their own blockchain and governance structure, are now increasing in value and interest and at a rapid clip… The creators and rulers of the most promising and successful of the altcoin and ICO bubbles are now probably multi-billionaires and should be increasingly sweating as the reality of their new found wealth, status, media personalty and responsibility brings increasing pressure on the governance structure and future of the project, as their coin starts scaling bringing in more investment, more investment wanting more influence and control over a centralized leadership team, and becomes an obvious red flag and easy to attack vector that is the disadvantage that every altcoin has, an easily corruptible and recognized ruler when the tide does turn and there is regulatory crackdown… This centralized governance that all altcoins have to some extent or other also becomes similar in my mind to the structure of a classical ponzi scheme, in that these creators may be working for the good of the world, are not engaged in a pre mined pump and dump scheme and may also develop true innovation, but if national and international regulators deem this altcoin a fraud or a ponzi scheme, the development team then becomes Charles Ponzi, such as happened to Bernie Madoff who was busted running a 65 Billion dollar ponzi scheme and got 150 years in jail (Ethereum is currently at 100 Billion dollar market cap)... The more these altcoins pump the more worried state regulators in governments all around the world are likely to become, and by standing by and for the most part not regulating so far will only encourage the audacity of some of these highly illiquid shitcoin pumps, in a spiraling bluff and double bluff between regulation and no regulation… 2017 was the year of crypto-currency explosion (and bull market), 2018 may well be the year of crypto-currency regulation (and bear market?), and when the men are separated from the boys… Everything in flux everywhere… A chaotic 2018 awaits…

Bitcoin Donations Gratefully Received:

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Postscript: Audio podcast for this post.