🌴⛓ Chainletter - Issue #11
🌴⛓ Chainletter
Our weekly newsletter covers Chainforest - a recap of our latest happenings, our members’ accomplishments, the conversations in our Discord, and an in-depth dive on a project or issue our community is focused on.
TL:DR;
Luna Bitcoin Forex Reserve, Yearn, and Randi Zuckerberg Speaks Out
Chainforest Fills Out Community Roles
Bitcoin, Through the Lenses of Game Theoretical Artificial Intelligence: the Knifefight Interview
In the past week, 7 new Rainmakers have joined the forest.
The top three channels were: 🎨│ nfts-general, 💸│defi, and 🌎│terra.
From the Mouth of the Forest
Luna Foundation Guard’s (LFG) Forex Reserve:
The Luna Foundation Guard (LFG) has closed a $1 billion private token sale to establish a decentralized $UST Forex reserve denominated in $BTC. With funding led by several big players in the crypto sphere including Jump Crypto and Three Arrows Capital, the reserve aims to reduce the volatility of $UST by pegging the reserve to assets less correlated to the Terra ecosystem ($BTC). The official release from The Block can be found here.
Chainforest member Ed - @wengzilla thinks this diversification is important for the Terra ecosystem given the unproven record of algorithmic stable coins, but questions if $1 billion dollars is truly enough to stop a bank run. $LUNA has a market cap of approximately $31 billion, so a $1 billion reserve would likely not be enough to stop a bank run. With that said, Ed mentions that the incentive for other chains to integrate with $UST is a bullish sign.
David C R Feld || @dchrisrf made the case that as Terra adds Bitcoin to its reserves, it very much mirrors the stockpiling of gold by a nation-state during a war. This, alongside other portfolio diversification by L1s, lends itself to the thinking that they are similar to nation states in the sense that they run their own economies, produce value internally, and transact their tokens with other protocols/DAOs (similar to foreign relations).
Since this release, $LUNA is up almost 70% and is sitting at #7 on the market cap, ahead of $SOL, $ADA, and $AVAX.
Randi Zuckerberg’s Call for more Women in Web3
Did you know Mark Zuckerberg had a sister? Randi Zuckerberg is a founder of @thehugexyz, a Web3 creator platform & growth incubator. Randi also has another hobby; as noted by Amit - @AmitMukherjee, Randi Zuckerberg makes cringe and cheesy parody videos including #WAGMI and Hello - it’s me.
Despite being difficult to watch in full, Chainforest member Steve - @AFZ0478 makes a good point in saying the target audience of these videos is likely 30-50 year old moms with very little to no crypto experience. Her videos serve an important role for onboarding new members into Web3.
Randi’s videos are nowhere near as bad as Heather Morgan’s aka “Razzlehan”, the “entrepreneur” who conspired to launder $4.5 billion in stolen Bitcoin from the 2016 Bitfinex hack.
Yearn Finance
Yearn Finance (YFI) and other crypto projects were sent into a downward spiral on Sunday, March 6th, after Anton Nell announced via twitter that he and Andre Cronje are leaving the crypto/DeFi space. While this does not mean that Yearn Finance is shutting down, Cronje was the one who came up with the protocol.
@thedefiedge on twitter shares their thoughts on Cronje leaving crypto via this twitter thread. Chainforest member Ed - @wengzilla echoes this thread by highlighting that the Solidly launch was filled with issues. These issues caused criticism, leading to Andre getting fed up and deactivating his twitter.
What happens to Yearn Finance, Solidly, and the other projects Andre was involved in? The general consensus is the projects will fight on, as Yearn has hundreds of other contributors and Andre’s role in the project may have been overstated. Solidex has also pledged to maintain the Solidly UI going forward.
Community Updates
From the Town Hall
Discussion of the roles at ChainForest continued in the weekly community meeting, with a list of open roles posted here. Those interested in filling one of these roles should reach out to Amit.
Tomas, Head of Tokenomics, posed the question to the community: if ChainForest were to launch a token, what would be the desired utility of that token? Anyone with ideas should reach out to Tomas.
Emphasis was put onto how we amplify awareness of the ChainForest brand? Ideas floated to raise awareness included Twitter spaces and collaborations with other DAOs.
Notes (courtesy of Sloan - @Sloan0_0): March 6th, 2021 Community Meeting Notes
Sovereignty, Irish Optimism, and Some Interesting Things: on Bitcoin w/ Knifefight
Recently, the sharp (and temporary) climb in Bitcoin’s price can definitely be attributed to whispers of a post dollar world brought on by the War in Ukraine. Whether or not this is the case, Chainforest has circled back examining digital gold and the promises it holds.
This week, I sat down with our dearly beloved, Knifefight. Author, father, and former industry man and aged authority on Bitcoin, he shared a series of ways he’d recommend thinking about both the opportunities Bitcoin has and the challenges it faces.
David: How did you first get into Bitcoin?
Knifefight: It took me a long time to even take Bitcoin seriously enough to go read the white paper. I was so confident it couldn’t work. At the time I heard about Bitcoin, I was a student of mechanism design. Bitcoin to a student of mechanical design was as a perpetual motion machine would be to a student of physics, I initially thought it was impossible. And once I became convinced it was possible, I was endlessly fascinated by it. The reason I went from being a skeptic to a believer was because Bitcoin didn’t die after the fall of Mount Gox and the bust of the Silk Road. The death of the largest exchange, and the death of the largest sort of nominal use case for cryptocurrency at the time within a few months of each other should have killed the network. If an irrational bubble, it would have had to collapse and, when it didn’t die, that needed explanation.
David: What are ideas/theories/concepts you’d recommend for those beginning to learn about Bitcoin use? For example, you mention the Lindy effect. I would mention Lyn Alden’s article on the Fraying of the U.S. Global Currency Reserve System.
Knifefight: At my newsletter — somethinginteresting.news — I have a reading list of the things that I think are worth reading. To call out one in particular, the essay, Shelling Out by Nick Szabo, is incredibly useful for understanding what money really is, which I think we as a society have a tendency to talk about money in very incorrect ways. There’s people who believe money is a shared fiction, which is total nonsense. There’s a lot of people who believe that money is debt, which is more sophisticated nonsense, but it’s still nonsense. Shelling Out, which was written before Bitcoin, is, in my mind, one of the strongest arguments for Bitcoin. The human urge to save collectibles, it argues, derives from a raw instinct based on an understanding of how truly practical real money is. It’s not a luxury. It’s not a product of civilization. It’s a base level human instinct because it’s a survival trait to be able to transact across inheritance, dowries, and ransoms. I really recommend it. It’s full of very specific historical examples. It’s not an abstract speculation about what things might have been. He lays a really concrete case out for how we initially gathered scarce objects as a way to trade at critical moments with people that we didn’t necessarily have trust with, such as when we were ransoming people in time of war. From this, over time, the market consolidated on the collectibles that were the hardest to reproduce, and had other useful monetary properties. And that’s the path we went from: from gathering shells and putting them on necklaces to treating gold as the base currency of the world.
There’s a difference between doing that with capital and doing that with money. Capital, for example, could take a lot of time to build a really nice tool, and then you can inherit my tool for me, and it will still be useful for you. That’s capital. Money is only useful as an object of transfer. It has no intrinsic utility. It is strictly for the purpose of making trades happen. That’s the argument Szabo makes. It’s not just the human desire to save, give, and trade. It’s an evolutionary impulse to value objects which have no purpose other than to be traded in dire circumstances. It is this fundamental human urge to collect scarce objects, to collect seemingly valuable things. Nick Szabo would argue it is the same thing that makes people covet Honus Wagner cards and enormous jewels — this kind of fundamental human instinct to gather something which is hard to gather, so that later if you need something from someone, you can trade them something that they know is actually scarce. Over time, he argues, that scarcity is most valuable when everybody’s going to the same marketplace. And that’s how one money comes to dominate. It’s similar to the phenomenon where we keep evolving crabs: the idea that the crab body structure is so useful that you could wipe every crab off the earth, and it would be 50 years before there were crabs. Crabs are just such a natural product of how to solve for being alive on earth, they’re inevitable. It is the same with money. Money will naturally happen. Every memory that gold is money could be eradicated and we would eventually come back to using money, and to specifically using gold as money.
David: So there is the perspective that Bitcoin may actually be beneficial for the environment since it is a system whose energy capacities create a vacuum for waste energy and thus drive the innovation and harnessing of renewable energy sources. Can you speak to this?
Knifefight: A lot of people paint very simplistic pictures about bitcoin’s energy use. A good rule of thumb is that economic systems aren’t generally simple so, if someone’s telling you a simple story, they’re probably not telling you the real story. Simplistic stories get clicks, get concern, and it’s sort of a useful, frankly, propagandistic tool. It’s a little disappointing. That’s not to say that there are costs to Bitcoin or crypto in general. There certainly are, but such a complex issue requires a nuanced conversation in order to have a meaningful conversation.
So Bitcoin is a large user of energy, but the way I always try to characterize it to people is that bitcoin is not an energy predator. Bitcoin is an energy scavenger. It looks for cheap energy, and will generally drift towards the least expensive energy, and least expensive is another way of saying least useful. If it was more useful energy, people would pay more for it. So a good example of that is what you alluded to earlier, that idea of all the energy that’s in a volcano, that energy is essentially free. It’s being generated all the time, and anyone can just go gather it, there’s no limitation on that. What’s expensive about it is transportation. The battery technology isn’t good enough to store that energy efficiently and transportation technology is very expensive and lossy for a variety of reasons. So that energy is free to use, but it’s not free to use anywhere. Similarly, solar energy is cheap to use, cheap to produce, but it’s not easy to use at night. You can only use Solar energy during the day when it’s plentiful, that’s challenging for renewable energy producers. It means they’re producing the most energy at the time when they’re competing the most with each other and driving the price down. When the sun is the brightest, there’s the most solar energy, but there’s also the least value in selling that solar energy. But you can’t save it because battery technology is so expensive.
Bitcoin provides a sort of baseline purchaser that says your energy is always at least x valuable, which isn’t very valuable, but it’s not zero. That purchaser is infinitely deep. In other words, Bitcoin will consume all of the energy that it can consume below a certain price point. If you’re a solar energy producer, that’s really good news. In the middle of the day, when you’re producing tons of otherwise worthless energy, you can dump that otherwise worthless energy into the Bitcoin network. And then you can, during the times when more ordinary uses are driving demand, sell that to the network at a higher price. When the power network needs power, you can sell it to the power network. When it doesn’t, you can sell it to the Bitcoin network. This isn’t just a weird hypothetical. ERCOT, which is the power people down in Texas and the area around Texas, have a cool map that shows what percentage of the time the power grid in any particular region is at negative prices. And you can actually see in northern Texas, and in most of Oklahoma, the power grid is actually at negative prices around 20+% of the time. The reason for that is the supply of wind energy outstrips the demand usually and, because the turbines can’t just store energy or easily be shut off and one, they end up paying people to consume the energy so that it doesn’t overwhelm various parts of the grid. So literally 20% of the time producers have power in Oklahoma and are paying instead of getting paid. Bitcoin would be a godsend, right. They can dump all of that energy into the Bitcoin network. And when wind energy gets more profitable, more wind energy will be produced. That means more wind energy available for the rest of us when we go to turn on our toasters or run our electricity or whatever. So like, the fact that Bitcoin is subsidizing renewable energy, ultimately benefits the infrastructure that produces renewable energy on a long enough timeline. In a short term timeline, obviously, that doesn’t have that effect. Because you can’t build power. You can’t build power plants on a dime. But renewable power companies like the example I tend to reach for is CT, which is a, I believe Norwegian solar energy company has started investing in Bitcoin miners explicitly because they believe it makes their business model more efficient.
I find it really fascinating that we’ve built a technology that makes solar energy more profitable, makes wind energy more profitable, and makes any renewable energy more profitable. And somehow people are painting that as bad. From a renewable energy perspective, it takes such a strange perspective on the market to come to that conclusion.
David: A core theory of the Bitcoin narrative is that it will one day take the dollar’s place as the world’s reserve currency. How do you think the War in Ukraine, and all subsequent events have impacted the dollar’s standing?
Knifefight: It’s a very potent threat to the dollar as the reserve currency. I think that’s beyond dispute. Powell actually said in testimony to the House of Representatives, that it was possible, we might find ourselves in a world where there was more than one reserve currency, which is an extraordinary thing for the Fed chair to be saying. That being said, I personally think it’s easy to predict the death of the dollar and it’s hard to achieve. The dollar has a very powerful network effect and a lot of the things that drive that network effect are still 100%. If you sit down and you say to yourself, I’m gonna put my money somewhere I believe I will have the best chance of accessing it when I want it, and you are choosing between a Russian bank, a US Bank and a Chinese bank, you’re still gonna probably prefer the US Bank. Even with this Asterix on the system, I still think they’re unambiguously the best place to be trusting your wealth and your purchasing power. This could be the crack that starts the trend in the other direction. That’s certainly possible. Russia has already agreed to move all of their credit cards over to the Chinese system since they got blacklisted by MasterCard and Visa. So there is this kind of consolidation that’s happening in a sort of Eastern Bloc. That being said, I still think that Eastern bloc is a pretty small part of the world economy relative to the part that remains. So I still think the dollar’s network effect stands. I don’t see Bitcoin becoming the thing that unseats the dollar yet. I think there’s still a long term horizon threat there. But in the short term, the people who are the most motivated to oppose the dollar have no interest in Bitcoin, and are huge owners of dollar debt. So the dollar stays king. But I do think that this is a significant moment of realization about what that power really means, in practice. A lot of countries are looking around and saying, wow, okay, I need to change my balance of foreign reserves. Gold is more valuable, dollars are less valuable. Maybe renminbi is more valuable. Certainly, I think there’s going to be a shift in how people position themselves, but I still think when the dust settles, the dollar remains.
David: It maybe be a little wishful thinking but, similar to how the dollar retained its power in the 70s through the establishment of the “petrodollar,” do you think there is an opportunity for Bitcoin to rise to power through tying itself to cheap energy markets?
Knifefight: Ultimately, I do think energy markets are some of the most important markets and, if bBitcoin becomes a critical pillar of the energy market, it will naturally have an advantage of being the currency of that market. If every single renewable energy producer is going to have to handle Bitcoin anyway, because they’re all Bitcoin miners, they’re probably going to just have more receptiveness to using Bitcoin as their main currency. So I think in a somewhat literal sense, I think that’s true. I don’t think the path that Bitcoin adoption takes though will look similar to the path that dollar adoption took. It will look fairly distinct. I do think one thing that you might be interested in, if you enjoyed that perspective on the petrodollar, is the work of Jason Lowery. Lowery is an officer in the US Space Force writing a thesis that argues that Bitcoin is a military technology, and that it is a way to project power in a non kinetic war.
His perspective is all war in some sense derives from a competition over wealth. Maybe it’s a strategic resource, maybe it’s a population center, or maybe it’s literally gold, but in some sense war is always about control of some wealth. Thus, the more wealth moved into the Bitcoin network, the more that kinetic war will be useless at trying to capture that wealth. And so you can basically think of preserving national access to the Bitcoin network as a matter of national security. For example, maybe both the US and China maintain strategic Bitcoin mining forces so that they can never be excluded from the Bitcoin network. Thus their attempts to acquire more hash rate becomes a way of doing an arms race where nobody ever gets shot.
Another example is, to the extent that Ukraine’s wealth is in Bitcoin, it can’t be seized, even if Russia wins the war. There’s no way to seize anything that’s stored on the Bitcoin network. There’s no way to destroy anything that’s stored on the Bitcoin network. You can go in and destroy infrastructure but you can’t destroy Bitcoin. There’s things about it that are abstracted away from war.
David: What do you think about the threat of centralization of the Hash Rate?
Knifefight: So, the predicate security of Bitcoin is based on the idea that at least half of the miners at any given time are, quote unquote, honest. You could also think of it as being selfish. They’re working strictly on this notion of earning from the system, according to the rules of the system. If more than half of the miners are cheating, dishonest, or attempting to do something other than maximize their own profits, things go wrong in the system. When enough mining power gets concentrated in a single source, that it looks like they might be able to overwhelm the network, there’s a couple of reasons you don’t necessarily have to be directly worried about that. One is, you mentioned mining pools. So mining pools operate on the premise that it’s so rare to find Bitcoin these days that if you mined by yourself, you would probably never make any money from it. You’ll probably do the whole lifetime of your rig and never actually make any bitcoin. To compensate for that, people form mining teams and then, when anyone on the team finds Bitcoin, they distribute that Bitcoin in proportion to how much people contributed to hash rate — whether or not they were the one that scratched off the winning law. Mining pools are what you see graphs of when you see graphs of concentration on the Bitcoin mining network. In the same way that exchanges represent lots of users with a small number of addresses, mining pools represent lots of miners with a small number of control points. The reason that matters is if one of those mining pools starts to misbehave, individual miners can easily move their hash rate to a different mining pool. There’s nothing that ties them to that mining pool. It’s a temporary allegiance, not a lock in of control. The vision people have of a large warehouse that a person is in charge of is not necessarily the case. It may be a global network of individuals that happen to be working together. It’s hard to say. Conversely, a large warehouse of miners may be split up among three different mining pools to mitigate worry. If you have 51% of the network, everyone’s gonna panic so you may form three separate teams, because all of these mining pool graphs are self-reported.
The concentration here is kind of not interesting, both that if we could know it wouldn’t tell us much and that we can’t even really know it. Like, we neither know mining pool concentration, nor do we know what mining pool concentration would mean. And if you want to talk about concentration in the network, the place I would worry about is in the manufacture of new mining machinery. There’s only two or three companies in the world that make Bitcoin mining equipment. So if you’re like an evildoer that wants to harm the network, I think what you probably do is you capture those companies. And then you either redirect a significant amount of production to yourself, or you somehow backdoor the equipment that you’re making, and then use that as the attack vector on the network, not the mining pools. And so there is actually significant centralization there. There’s a real reason to worry there, especially because, you know, people often talk about, well, if the miners misbehave, we’ll just change the algorithm. Yeah, you can do that. But that’s not easy to do. Because you need to find a way to convince everyone under the sun to adopt the same algorithm. And then you need to adopt that algorithm fast enough that attackers can’t just buy up resources to outcompete your now tiny network and overwhelm it again. And both of those things are basically impossible to do in my opinion. So I kind of think we’re actually stuck with the mighty network we have and if that goes wrong, then it will be the end of Bitcoin.
David: Another threat posed to Bitcoin is what will happen when the block rewards run out. What will secure the network and stop it from being compromised?
Knifefight: In my opinion, this is the most legitimate reason to think Bitcoin will fail. It’s one that I don’t hear very often, but it’s the only one that I really don’t have a firm answer for. The optimistic answer is, when the Bitcoin rewards run out, there will be enough people using Bitcoin to generate enough transactions competing for block space and pay for security necessary to secure the network and generate the same amount of bitcoin. Or, thanks to adoption, the value of Bitcoin may go up enough that a smaller number of Bitcoin actually equals a larger purchasing power — in terms of security. Because ultimately, miners are priced in electricity, not in Bitcoin. So if you can increase the value of Bitcoin, you can still pay them with a smaller amount of bitcoin. That’s the optimistic answer.
The pessimistic answer is that we haven’t seen a lot of that level of activity yet. The Bitcoin network has mostly been unclogged. When it’s been clogged, it’s been at times of market bull crazy or crash — people rampaging to exchanges to sell or to buy or whatever. It’s not generally crowded. If you were to just naively look at the history of the network, you would be a little worried about whether transaction fees will pick up and cover that difference. We also don’t necessarily have much testing about what possible attack patterns look like in a world where the majority of the value comes from fees.
That’s actually a really significant problem in some of the more complicated networks. In Ethereum, there’s often discussion of a thing called minor extractable value, or MEV. There’s a bunch of reasons why MEV is problematic. The reason I think it is is because the more that miners are paid by something other than transaction fees, the less loyal they are to the network. For example, imagine a world where there was one NFT. There was an auction for it, and that NFT was more valuable than all the transaction fees on Ethereum for that day. This is obviously very contrived, but gives you a sense about how this can overbalance the network and make it so all of the miners, rather than building on top of the most recent block, would go back in history and try and build a future where they won the big expensive NFT. You would end up stuck in this space until the situation around the NFT had resolved itself. In summary, the larger the value of things outside of the transaction fees, the more the risk that value topples the incentives protecting the network, and then the miners are suddenly more incentivized to attack the network in order to capture that bounty, then they are to defend the network in order to capture the block reward slash transaction fees.
David: A lot of people have a lot of different strategies for buying Bitcoin. What’s yours?
Knifefight: I believe sincerely that for basically everyone they should be dollar cost averaging in and not paying attention to market movements at all. People should buy and sell Bitcoin on the basis of when they want to save, and when they want to spend — not on the basis of whether Bitcoin will go up or down.
What I would say to everyone is you should pick an amount of bitcoin to get to, a time to get to it by, and then buy on a regular basis. Obviously, I think Bitcoin will go up over time, so I think it’s generally good to buy sooner rather than later. There’s no requirement that you get in early, it’s just a matter of to what extent do you feel like you want this as part of your portfolio? I have an article called, everyone should have a Bitcoin insurance policy. And it’s basically the argument that every adult that’s managing their own portfolio should own whatever amount of Bitcoin makes you indifferent to the world where Bitcoin takes over and the world where it collapses. If you worry about Bitcoin collapsing, you should sell until you stop worrying. If you worry about Bitcoin taking over, you should buy until you stop worrying. And if you aren’t worried about either possibility, you own the right amount of bitcoin. So that to me, is how I recommend people think about. Buy slowly, buy over time, and buy whatever amount is necessary for it to stop being a thing you think about.
In terms of on-chain metrics I trust some, but it’s good to recognize that you’re probably just doing astrology in some sense. The number of factors which determine price are so much more than could possibly be captured in those numbers. For example, probably the single most important piece of information you could have about the price of Bitcoin in the next 12 months is what the fuck is going on in Putin’s mind. If you understood what Putin was thinking that would be by far more valuable than any line drawn on the chart. That’s going to be the most dominant thing that impacts bitcoin’s price in the next 12 months.
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