Dec 302013

A Proof-of-Snark (POS) protocol deters denial of service attacks and other service abuses such as spam on a network by requiring some original snark from the service requester, usually meaning a sardonic summary of the request, typically in the form of dry or biting understatement.

POS was developed by an individual or group of individuals using the pseudonym Frito Pendejo, who developed SnarkCoin, the premier, best-in-class, end-to-end proprietary, turnkey cryptocurrency solution.  Rather than lose first-mover advantage by taking time out to draft a white paper, Frito set up an invitation-only portal on the dark web, so that insightful and forward-thinking SnarkCoin early adopters could get in on the ground floor and access the distributed P2P parallel financial system that is used by high net worth Family Office hedge fund managers to finance high-yield, midterm debentures used to securitize sovereign debt.  (Those who have not received invitations can buy their way in with bitcoins, and those who cannot afford the initialization fee can pool their resources with others’.)

A key feature of POS schemes is their asymmetry; the snark must be appropriately difficult for the requester to formulate but easy for service providers to verify as original. This idea is also known as a Smartarse Comeback Function (SCF) and in academic research as a Non-Repeating Sardonic Rejoinder Protocol (NRSRP).

The benefit of a POS system over a Proof-of-Work (POW) system is twofold: i) the difficulty of POS validations becomes more difficult organically, and ii) POW is already integrated into the Bitcoin protocol, and developers of so-called altcoins are running low on buzzword-compliant distinguishing characteristics to differentiate technically clever, though commercially pointless or ethically dubious, alternatives.

Granted, Proof-of-Stake (PoS) fulfills the requirement of being different merely for the sake of being different from POW, as does the discovery of new prime numbers, but these are already taken, and promoters must refresh their channel so that their downstream can use innovative terminology with increasingly sophisticated investors.

As with a POW system, a POS system avoids the double-spending problem by collecting transactions into blocks and adding a reference to the current final block in the database (blockchain). The verification nodes (straightmen) then verify that each transaction is permissible against the current database and then generate a sardonic summary of the block of transactions (snark) with the caveat that the snark must be unique.

sidebar: It is imperative that the snark be sardonic and not sarcastic.

Sarcasm is any statement that is the exact opposite of what one means, e.g., “SnarkCoin and Proof-of-Snark are great ideas!” whereas sardonicism is a true statement that conveys irony, e.g., “It was only a matter of time, before someone came up with something like SnarkCoin.”

Also, understatement must be strictly enforced, as overstatement is inherently untrue, e.g., “SnarkCoin is the worst idea in all of human history!”  Much better would be, “SnarkCoin, eh? Probably from Florida.”

It is critical that the summaries be true, otherwise they do not summarize the blocks with which they are associated, placing the system at risk.

To accomplish this, the POS protocol has an additional layer—the snarkchain—that collects embedded hashes of the snark associated with each block, using the Supernumerary Meta-Hash Embedding Protocol (SMHEP) that calculates the SHA512 fingerprint of the original snark, then calculates the MD5 hash of the first hash, then the TIGER192,4 hash of the meta-hash, followed by HAVAL256,5, RIPEMD320, FNV164, GOST, and finally ROT13, for no point other than to satisfy Frito’s paranoia and desire to show off.

As snarkcoins are not mined like bitcoins, but instead manifested, a straightman can be rewarded for being the first to issue original snark, with transferable warrants that are redeemable for snarkcoins or can be exchanged OTC for altcoins or even bitcoins.  In this way, straightmen have an incentive to validate transactions and to invest in increasingly powerful AI hardware and software to issue snark that is not already memorialized in the snarkchain.

By issuing warrants, which convey the right but not the obligation to acquire snarkcoins, straightmen avoid the fate of Bitcoin miners, who receive actual bitcoins for their efforts and have been declared to be money transmitters in many jurisdictions.  SnarkCoin straightmen’s warrants represent unrealized conditional value, and thus are non-taxable off-balance-sheet transactions, notwithstanding the income tax is voluntary.

POS provides an incentive for early adopters to become straightmen, as the snarkchain will contain only the Genesis Snark initially: “I am my first transaction.”  From there, low-hanging fruit can be added, like “One would expect this kind of thing,” “I’ve never seen /this/ before,” or “This block is valid.”  However, over time, it will become very difficult to issue summaries that both are recognized as snark by the underlying protocol and do not repeat previous snark.

In this way POS is superior to POW, in that the difficulty adjusts organically, whereas with POW the difficulty of the computation must be adjusted by some arbitrary rule as the amount of computing power available grows.

Dec 292013

Paul Krugman, who won the 2008 Nobel Memorial Prize in Economic Sciences for his work in Economic Geography, was at it again in December 2013, in yet another of his anti-Bitcoin rants in the Opinion pages of the New York Times: “Bits and Barbarism” (22 December 2013).  It is unclear why something with a total value of about 5% of Carlos Slim’s personal portfolio so upsets him, but Bitcoin has a hold on his imagination that borders on obsessive.

Normally, I prefer not to create any incentive to drive traffic to the trolling of attention-princesses, but this one is so rich with absurdity that it calls for point-by-point rebuttal.

Krugman begins by conflating goldbugs with bitcoiners, and then mocking them, as a neoprog welfare statist might conflate collectivist neocons with individualist libertarians as ‘right-wingers’.  Specifically, he sees anyone who is concerned with the prospect of inflation in the foreseeable future as an environment-destroying throwback to the days of swashbucklers and buccaneers.

“But gold prices, while down from their recent peak, are still three times what they were a decade ago…” in very large measure due to the inflationary policies that Krugman has cheered on.  On the one hand, he ridicules the notion that inflation is a problem, and on the other he provides evidence of 11.6% annual inflation, using the USD price of gold as a proxy.  For both to be true, he must believe that 10-15% inflation is nothing to worry about; pity the pensioner on a fixed income.

“Bitcoin is a digital currency that has value because… well, it’s hard [for me] to say exactly why [without directly addressing what it is that gives it value]…”

Like government fiat and gold, bitcoins are fungible, durable, portable, and divisible.  Like gold and unlike government fiat, bitcoins are scarce.  Unlike both government fiat and gold, bitcoins are transmittable from any computer or smartphone with Internet access, and one can digitally sign documents with a bitcoin wallet and embed a hash of the signed document into the bitcoin blockchain.

Unlike gold, which has very little intrinsic value beyond jewelry—The Bling Theory of Value—Bitcoin provides a decentralized financial infrastructure that is immune from the kinds of political manipulation that have led to housing bubbles, hyperinflations, and other asset bubbles since government fiat replaced gold-backed national currencies in the early 1970s.

“…but for the time being at least people are willing to buy it because they believe other people will be willing to buy it.” This, of course, being the defining characteristic of an asset, as opposed to a consumption good.  With this statement, Krugman tacitly dismisses all financial markets along with global wholesale trade and distribution.  After all, my local grocers are willing to stock their bins with fruits and vegetables because they believe other people will be willing to buy them.

“It is, by design, a kind of virtual gold.”

The passage in Satoshi’s paper to which this assertion refers reads:

The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.” (p.4 §6)

The operative phrase here is “is analogous to“.  It is a metaphor; a model, as it were.  As an economist, Krugman should understand that models are simplified extractions of reality used to render the salient points of a complex concept rhetorically more palatable.  One might as well dismiss the entire body of Krugman’s work on economic geography because he did not possess the huge tracts of land that so occupied his imagination, but only brooded over from afar.

“And like gold, it can be mined: you can create new bitcoins, but only by solving very complex mathematical problems that require both a lot of computing power and a lot of electricity to run the computers.”

That is not how gold is mined.  One mines gold with shovels, pickaxes, and other sundry bits of base metal.  As for Bitcoin ‘mining’, the new bitcoins are rewards for being the first to solve a fiendishly difficult mathematical puzzle after confirming a batch of recent transactions. It is a game of skill, and not a scavenger hunt.

As for his mental excursion to Iceland, it is very difficult for the Icelanders to export the abundant hydrothermal energy with which that land has been blessed and cursed.  Unlike oil, it is not easy to transport steam by supertanker.  Better to convert it to electricity in place and use it to produce aluminum and bitcoins for export.  Far from being a waste of energy, it is an ideal use of a resource that otherwise might lie fallow.  Krugman’s argument screams in favor of concentrating bitcoin transaction confirmation—aka, ‘mining’—in Iceland!

“The third money pit is hypothetical.”  Here, ‘hypothetical’ is a polysyllabic term that means something akin to ‘cherry-picked’.

“[Keynes] went on to point out that the real-life activity of gold mining was a lot like his thought experiment. Gold miners were, after all, going to great lengths to dig cash out of the ground, even though unlimited amounts of cash could be created at essentially no cost with the printing press.”

By this logic, why bother with the printing press?  Why not simply adopt sand or seawater as money, both of which can be had in the seemingly limitless quantities of government fiat?  If Krugman truly does not see the difference between a good that is durable, portable, divisible, fungible, and scarce from one that can be produced in seemingly unlimited supply, then it is very difficult to see how he managed to pass undergraduate Economics 101.

“Keynes would, I think, have been sardonically amused to learn how little has changed in the past three generations.”

Keynesianism prevails predominantly in the USA and the UK, and it is not very influential elsewhere in the world.  Krugman’s lament is provincial and suggests that he believes that the USA’s 4% of the world’s population is representative of the great mass of humanity.

With regard to his swipes at gold, he seems to operate under the misconception that national currencies are still backed by gold.  Otherwise, why obsess about it so, in a discussion of money in general and bitcoins in particular?  (Never mind that bitcoins have no connection, other than occasionally metaphorical, with gold.)

Whether Keynes would be amused to learn how little has changed since the severing of national currencies’ ties to gold in the early 1970s is a matter of speculation.  However, Krugman is right that modern inflation rates would have been unthinkable a half-century ago.

In 1971, Pres. Nixon initiated a 90-day price freeze in the USA, in response to inflation rates that had risen to a high of 6% per year, and seemed to be stuck at a devastatingly high rate of 4% per year!

“So why are we tearing up the highlands of Papua New Guinea to add to our dead stock of gold…”

If Krugman disapproves of gold mining, then he should not join with others to tear up the highlands of Papua New Guinea to add to his and their dead stock of gold.  As to why, the answer is so simple that even an economist should understand it: expected benefits exceed expected costs.

“…even more bizarrely, running powerful computers 24/7 to add to a dead stock of digits?”

The answer is so simple that even an economist should understand it: expected benefits exceed expected costs.  More to the point, though, why does this bother him so?  One similarly could argue against collecting comic books, listening to what passes for popular music these days, or spending one’s days writing attacks on Bitcoin. Aside from traffic to his New York Times Opinions, what does Krugman gain from misrepresentations? Alternatively, what does Bitcoin threaten that is precious to him?

“[I]nflation in advanced countries is clearly too low, not too high.”

Apparently, Krugman does not live on a fixed income, and he does not have to deal with the erosion of the currency’s value.  Four decades ago, an inflation rate of 4% per year was justification for a price freeze in the world’s presumptive bastion of capitalism.  Today, Krugman brushes off 10-15% per year as clearly too low.

If Bitcoin succeeds as the foundation of a global financial system that is accessible to anyone in the world with a smartphone, even with its tendency to increase in value over the long run, it will repudiate the foundation of Krugman’s Keynesian faith, and that is what all his trolling and ranting seems to be about. Otherwise, just let us run our little experiment in peace.

Invest accordingly.

Prof. Evans

Dec 112013

In response to my earlier “The Miami Century,” a reader asks:

I would appreciate your view on Bitcoin / cryptocurrencies and the US regulatory framework and law makers. Most innovation in finance during this decade most likely takes place in virtual currencies and related areas. Do you see any major hurdles for Miami coming from the regulators and law makers?”

The short answer is that the future is unknowable, but it is not unimaginable. No one knows what the future holds, but it would be odd for US regulators to let Bitcoin develop further, if their plan were to shut it down.

If Bitcoin really is the Next Big Thing, as I called publicly 19 March 2013, American regulators and legislators are going to be loath to see this market migrate to Panama, Singapore, and—Heaven help us all!—China.

The USA is home to the New York Stock Exchange, Space X and Virgin Galactic, Microsoft and Apple, Facebook, Google, Amazon, Linus Torvalds, and Silicon Valley; and the Americans like it that way.

They’ll want Bitcoin and crowdfunding to be centered here, as well.

US officials’ three main concerns in this context are tax evasion, money laundering, and terrorism financing.

  • Tax evasion could be put to rest by changing the focus of taxation from things that are easy to hide—e.g., income, virtual assets, offshore trusts, etc.—to things that are hard to hide, like cars, gasoline stations, ports, wholesale consumer goods, buildings, and land.
  • Money laundering similarly could be put to rest by ending the War on Drugs, and the pendulum seems to be swinging in this direction.
  • If one believes the actual statistics on this, terrorism is less of a real-world concern than lightning strike, slipping while bathing, or texting while driving. Considering that the vast majority of successful home-grown terrorists in the USA have been white guys, people in the USA are growing weary of jumping at every brown shadow.

For this reason, I am watching the 2014 Congressional elections and the 2016 general election in the USA very closely. I expect that the news will be either very, very good or very, very bad for Bitcoin. That I remain in my native South Florida after having lived all over the USA, in Western Europe, and in the Caribbean over the past embarrassingly many decades, is evidence of my cautious optimism.

With regard to Miami specifically, for good or ill, we South Floridians have a well deserved reputation for having a healthy disdain for Anglo-Saxon formalisms. If Bitcoin is going to flourish anywhere, this is one of the most likely regions in the world. We are not great engineers, but you should see us move people, cargo, and money around!

We already have a strong and growing Bitcoin market between here and Argentina, Brazil, and Venezuela, which have currency controls. It is increasingly common for Latin American programmers, graphic designers, and website developers to ask foreign clients to pay them in Bitcoin, so that they can carry their savings with them, when they come up here to visit friends and family and to go shopping.

TL;DR: Invest in South Florida Bitcoin startups that focus on international trade, and make sure that the principals speak Spanish, update their passports, and have filled their vaccination cards, in case you want to relocate them in a hurry.

Invest accordingly.

Prof. Evans

Dec 102013

In many ways, a US resident could see the 19th Century as the New York Century with its transcontinental railroad terminals and Ellis Island, the 20th Century as the California Century with Hollywood and Silicon Valley, and the 21st Century as the South Florida Century with its transcultural population and strategic location.


Miami is closer to dozens of foreign capitals than it is to Washington DC, geographically and metaphorically. No other region of the USA is as tightly woven into the fabric of the integrated global economy. Even the Home Depot stores in South Florida have export departments!

Only five major languages are spoken natively in the Western Hemisphere—English, Spanish, Portuguese, French, and Haitian/Antillean Creole—all of which are spoken wildely in Miami, often in the same sentence.

South Florida has no majority ethnicity or majority native language.

Metropolitan Miami is the seventh largest metropolitan area in the United States, and the fourth largest urbanized area in the USA, behind Los Angeles, New York, and Chicago.

Florida has no personal state income tax.

Miami is home to NAP of the Americas, one of the largest Internet landing points in the world, and it is one of the top five best-interconnected cities in the world, ahead of San Francisco, Chicago, and Washington DC.

For passengers, cargo, and money, South Florida is one of the world’s premier logistics hubs.

Miami’s financial district is home to the offices of more than 100 international banks.

The second-largest tourist attraction in the state of Florida, after Disney World, is Sawgrass Mills: a shopping mall west of Ft. Lauderdale that attracts shoppers from Latin America, the Caribbean, and Europe.

Of all the port complexes in the USA, only Miami/Ft.Lauderdale is a net exporter in terms of value. South Florida imports goods for local consumption, for both residents and the millions of tourists who pass through every year, and exports cars, machine parts, electronics, tools, and other high-value-added goods and services. All other ports in the USA are net importers.

Port Everglades in Ft. Lauderdale is home of the second-largest free trade zone in the USA and the largest exporter.

Port Everglades and Port of Miami vie annually for the top two positions as the world’s first- and second-busiest cruise ports.

Miami is home to EarlyShares, the equity crowdfunding portal, and it has a very active Bitcoin user base. Bitcoin startups in South Florida include Bitcoin Intel, Bitcountant, Coingig, and Conscious Trader. Companies based in South Florida that are embracing Bitcoin include SoftTouch and Tiger Direct.

Bitcoin’s highest and best use is in small-scale international trade. South Florida firms tend to be small and medium-size enterprises (SMEs). For every Silicon Valley / Wall Street Ten-Bagger with 10 million customers and countless broken hearts strewn about its feet, one will find 10 thousand South Florida SMEs with 1,000 customers each. This environment is ideal for Bitcoin entrepreneurs.

Added to this, Miami is at the interface of a region with more than a half-billion individuals in Latin America and the Caribbean who do not have easy access to capital markets, credit, or efficient banking services, and of the eight-million-pound gorilla of capital markets in the USA.

Already, Wall Street bankers have begun relocating in such large numbers that the Palm Beach County government has an office with full-time staff dedicated to helping them find neighborhoods with good schools. If Bitcoin and crowdfunding entrepreneurs follow them, South Florida could become the ‘Silicon Valley / Wall Street’ of transnational entrepreneurship.

Invest accordingly.

Prof. Evans