Mayfly Thirteen
Tethered to nothing ~ Energy usage: bitcoin vs banking ~ Creeping darkness ~ How to win the internet ~ Income mobility ~ Unpopulism ~ Amusement arcade
Tethered to nothing
The Tether ‘scandal’ is another slice of apparent cryptocraziness which in fact reveals something else about our world.
Tether is a company with a ‘stable coin’ pegged to traditional currencies. That means you can buy a Tether dollar for a dollar, and sell it back for a dollar. The value is maintained because each Tether dollar is supposedly backed by this real dollar.
Tether is used by traders who want to keep their cryptocurrency proceeds somewhere less volatile. They don’t use real dollars because they are harder to access on crypto exchanges and they have more regulatory baggage (anti-money laundering etc.). While bitcoin is priced in dollars, it is actually traded in Tethers. As a result Tether is by far the most traded cryprocurrency by volume.
Tether has allegedly issued $59bn virtual dollars. We all know that banks lend more than they have in deposits, that’s how fractional reserve banking works, and it explains why a run on a bank is so dangerous. But Tether is not a bank. It does not follow the same rules or make the same disclosures.
The mini scandal was Tether’s proud announcement that a mere 2.9% of its treasury is held as real dollars in cash. It does not have $59bn real dollars to back up its $59bn virtual dollars. For cryptobears this means…
Today Tether issued a self defence, suggesting concerns raised by this revelation are just because “ideas that change the world are frightening to those who benefit from the status quo” and that “fear…is motivating some to attack and try to mislead the crypto community”. Detractors are seeking to deny “choice and autonomy”. Frankly, it’s the language of a cult.
I was shocked Tether appears so under capitalised. But then I thought I’d do the right thing and compare them to banking. What is the reserve percentage for ‘real’ banks?
Somehow I’d missed it, but in response to the pandemic, the Federal Reserve reduced reserve requirements to 0% (it had been 3% for small banks, and 10% for larger).
“Until further clarification or notice, banks need not hold any reserve against their assets. This means that banks could theoretically continue making loans to infinity”. — Bob Haber in Forbes.
So now it’s not the crypto Ponzi that’s upmost in my mind, it’s the global financial Ponzi.
I’m reminded how little I understand it. I’m reminded how meaningless the value of money really is. I’m reminded how insane it is that people exchange their time and work for an arbitrary amount of it, and yet how hard life is if you don’t have any of this fictitious thing. And I’m reminded that if pecuniary wealth is your goal, you need to play the bent casino from the inside, you need to shift money and power around, rather than slaving for a salary.
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Which consumes more power: bitcoin or banking?
Staying with cryptocurrencies, I can’t leave this energy handbrake thing alone. It just seems such an obvious restriction, and yet the explanations I’ve seen simply don’t add up. There is still a belief that crypto in its current form has massive growth ahead, at least in usage if not in price.
Refresh: how does bitcoin work?
Every time a financial transaction happens, it is written down in a ledger. Some money gets added to one account and subtracted from another. In the normal world, a centralised institution like a bank writes the ledger and makes sure the money doesn’t end up in two places at once. In the crypto world, Satoshi Nakamoto devised a system to safely log a transaction on a distributed ledger shared across a network with no single centralised institution in control. To do this:
A transaction happens and a competition is announced.
Nodes on the network do a piece of work (completing a mathematical task).
The node that gets the answer first wins the right to write the transaction in the ledger (add the block to the chain).
As a reward the winner receives some cryptocurrency, which is created from nothing specifically for the purpose (mining).
The difficulty of the piece of work is altered automatically to control how much new cryptocurrency is created.
What is the handbrake?
Cryptocurrencies have a handbrake:
Whoever wins the competition has to spend a lot of energy on processing power to win the competition.
Whoever doesn’t win the competition HAS ALSO spent a lot of energy on processing power.
The more valuable the reward of currency is (if for example bitcoin has gone up and up), the more people will compete to win it, and so the more the winner will have to spend on energy to win, and, of course, the more energy will have been wasted by those who don’t win.
The more transactions there are, the more such competitions will occur.
So in sum, the more valuable the currency becomes and the more it is used, the more energetically expensive it becomes.
(If you’re so inclined there’s more detail from Amy Castor on how bitcoin works, and Noah Smith on how energy use changes with price).
The cryptobull’s response
If you present this problem to a cryptobull they respond with two points:
“Yeah it takes a lot of energy, but the global banking system uses even more, you’ve got to compare it to what it’s replacing”.
“Actually it’s a pretty good way of finding the most efficient energy. You know they build farms next to hydroelectric dams to use energy that would otherwise be wasted”.
I thought maybe they were right, perhaps I was missing something. So I looked into the arguments a bit more. I’m afraid neither stands up to scrutiny.
They say bitcoin’s energy usage doesn’t look bad compared to banking
I found a few articles discussing this point, all from a cryptobull perspective.
Ark Invest say bitcoin consumes less than 10% of traditional banking.
Most other discussions point to this 2018 article by an ‘energy efficiency startup’ called Zodhya, which seems suspiciously similar to an earlier article in Hackernoon. It sums branch, server and ATM energy estimates to get a figure of 140 TWh per year for banks. They estimate Bitcoin consumes 32 TWh per year, so less than 25% of banks.
Then this Galaxydigitalmining article from few days ago says 240 or 263 TWh per year for banks (including card network data centres), 240 TWh for the gold industry, and 114 TWh per year for Bitcoin, so approaching 50% of an expanded definition for banking.
Are the comparisons reasonable?
Bitcoin.com shows there were around 15k transactions per day in 2018 (it’s about 200k per now). In contrast, Statista shows the top five brands of payment cards process 1.2bn transactions per day in 2019 (which probably wasn’t that different from 2018).
In other words, very roughly, there were 80,000 times more payment card transactions than bitcoin transactions every day (1.2bn / 15k). And this is just consumer payments with cards. This is before we add in the huge numbers of bank transfers, B2B transfers, international trade remittances etc.
So whatever the real number is, we can be confident that there are MANY TENS of THOUSANDS more transactions each day for traditional banking than for bitcoin. For the sake of argument lets use a conservative estimate of 100,000.
So if bitcoin were to successfully replace the banking system as the cryptobulls hope, and energy usage increase was linear, our new system would take 32 TWh * 100,000 = 3.2m TWh per year (using the Zodhya number).
This is a huge and totally unrealistic unfeasible number. To put it in context, it’s nearly 1000 times greater than the total energy consumption of the USA.
This is to replace something currently estimated to use 140 TWh, i.e., it’s over 20,000 times more energetically expensive than the current system. Further that 140 TWh is not a fair comparison because it includes things that bitcoin can’t do, like issuing physical cash in machines, and running the systems to approve loans, and all the stuff banks do that isn’t just transactions. As Amy Castor reminds us, “nobody actually uses bitcoin to buy anything, except for the occasional large oil company that needs to pay off extortionists taking over their computer systems”.
If we use the more recent Galaxydigitalmining numbers it looks even worse. A 5:1 energy ratio for banking, cards and gold production compared to bitcoin, when the ratio of what the former does compared to the latter is still going to be tens if not hundreds of thousands to one.
Also bear in mind, these numbers are just for bitcoin. Add in ethereum and the hundreds of other currencies and the picture gets even more ridiculous.
To leave nobody in any doubt about the conclusion: the energy usage of cryptocurrencies is INSANE compared to that of the banking system.
They say bitcoin uses energy efficiently
They say bitcoin can absorb structural surpluses of ‘stranded’, ‘nonrival’, or ‘curtailed’ energy. This is energy that is wasted at production, because it can’t be stored, or during transmission.
I’m not entirely certain why bitcoin mines can succeed when others haven’t, but if they can, fantastic.
Even so, the amount of stranded energy isn’t growing very fast. If crypto is going to become used in any way comparably to fiat currency, energy usage would quickly exceed the amount of ‘stranded’ energy available, rendering this defence invalid.
The handbrake cannot be removed
I’ve discussed this questions with a few people now. Nobody’s yet been able to explain it away for me. The attempts I’ve found online look like attempts to bamboozle the reader with excess information. They do not address the key point that:
Bitcoin and other currencies are massively energy expensive compared to their usefulness, and this will only get worse if they’re used more. They have a handbrake that cannot be removed.
Now obviously Musk is just trying to move the market, but even he’s saying Tesla won’t accept bitcoin payment any more because of the energy toll, and that he’s working with Dogecoin to improve transaction efficiency.
And this is the second key point.
The proof of work that is integral to maintaining the integrity of the distributed ledgers underpinning cryptocurrencies is the source of the handbrake. Decentralised digital currencies have incredible potential, but this potential cannot be released until some Nakamato 2.0 invents another protocol that doesn’t cost the earth.
While I’ve been banging on about this for a while, I’m glad to see some mainstream articles saying similar things now. Most closely this piece on Bloomberg. I don’t think this is going away.
Today, bitcoin is a third off its peak price.
Creeping darkness
I’ve written about The Darkenment mostly from the perspective of absolutist or dogmatic responses to difficult questions on touchy subjects.
Noah Smith also writes “There is a Darkness creeping over our world”.
It’s worth reading the article, but I’ll summarise with a few quotations:
“All of the world’s most powerful countries are trending toward illiberalism at the same time”.
Smith ascribes it to fear: “When the U.S. forfeited its moral hegemony [from second Iraq war onward] and lost its economic hegemony, every country in the world suddenly found themselves in a position of not knowing either whose power or which principles were in charge of the planet”.
“And when you’re afraid, you turn to someone to protect you. A strongman politician.”
“As Antonio Gramsci said, ‘The old world is dying, and the new world struggles to be born: now is the time of monsters’”.
Smith’s answer? “what America really needs to do is to rediscover the idea of democracy as an ideology, not just as an electoral system…democracy as an organizing principle of society basically emphasizes inclusion and participation in all social institutions — which in turn emphasizes society’s respect for the individual”.
While I’m guilty of it myself, I’m suspicious of this everpresent idea that we’re going to hell in a handcart. Not least because there is a danger it becomes self-fulling, creating a sense of inevitability that disarms those who would fight against that kind of future.
I must also point out that it takes a particular kind of myopic naiviety to think the US had any kind of moral hegemony before Iraq II.
Regardless of these quibbles the emphasis on inclusive democracy and respect for the individual is something we can surely all get behind?
How to win the internet
This article from notboring was entertaining. The premise is that living online is a game.
“The Great Online Game is free to play, and it starts simply: by realizing that you’re playing a game…You can choose how to play given your resources and skills at the current moment. You can level up fast. Financial and social capital are no longer tied so tightly to where you went, who you know, or what your boss thinks of you. This game has different physics and wormholes through which to jump. It’s exponential instead of linear.”
And, tying it into this week’s crypto discussion:
“People in crypto seem to understand better than anyone that this is all a game. The right meme can send a random coin to the moon and make people legitimately rich. But beyond that, crypto is in-game money for the internet. It rewards participation directly. Early users, supporters, builders, stakers, validators, and community members get tokens. Until now, I didn’t fully understand social tokens. They seemed like another way for influencers to monetize with no clear value. But in the context of the Great Online Game, they’re points that reward good gameplay across the internet, and give followers an incentive to join and support a team anywhere it goes. It’s like a Super Follow for the whole internet, with financial rewards.”
Even while presenting life as a game like this looks like a good engine of meritocracy for the Very Online, I continue to flag the dangers of the Agency Trap.
Shorts & followups
Income mobility
This old link in the New York Times is a very pleasing bit of data viz following 20 million children. The animations show income mobility by household income, race, gender, and immigration status. You can select your own inputs and programme your own animated chart.
Here’s a fascinating conclusion. A similar proportion of poor white and black women end up rich if measured by individual income. But many many more poor white women end up rich if measured by household income.
Why? Is it because they ‘marry well’?
Stop! Hold that thought. As tempting as it may be, it is very risky to draw any grand conclusions about reasons from these numbers. They tell us nothing about the why?
Plus, all these results should be taken with a pinch of salt. How are they measured and what do the measurements mean?
Even so, they show more mobility than I might have expected.
A ‘regressive’ coalition
Following on from the electoral dogfight…rather than Labout forming a ‘progressive coalition’, instead the Conservatives, Lib Dems and Greens have come together in an attempt to manage Labour in London.
Unpopulism
And this survey (from the Mail, natch) indicates Labour is associated with ideas that are not popular, at least in the imagination of the sample.
How much of this is down to Labour’s policies? How much to their messaging? And how much to messaging against them?
Amusement arcade
Food
This week I commit to faire chabròl: An Occitan custom of adding wine to the end of a stock soup.
Audio
Greatest hits of Bobby Darin on cassette.
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