Omid Malekan, who teaches crypto finance at Columbia business school, writes:
I came across your blog post and obviously disagree, I work professionally in crypto, have been following it for close to a decade, written a few books, advise various Columbia student groups, etc.
Instead of trying to refute your claims about crypto being a scam, I thought it would be more fun to demonstrate its value. So I took the text of your blog post and embedded it inside the Bitcoin blockchain. You can see it here. I included a hash of the text as well for easier verification.
What does this mean?
It means this text now sits inside an append-only ledger, copies of which are kept by thousands of distributed computers all over the world. Unlike your original blog post, this data cannot be changed or deleted, because unlike the server that hosts your blog, it now lives inside one of the most secure networks on earth. It would cost someone tens of millions of dollars to even try to change it, and they’d likely fail. This ability to secure and preserve the integrity of information–be it blog posts or transaction data in a payment system–is a unique value prop of Bitcoin. No other digital service provides anything close to it.
But wait, that’s not a financial application!
True, but this “proof of existence” feature would not be possible without Bitcoin also having a native currency. Before the publication of the original Bitcoin paper in 2008, it was believed that securing an open and permissionless distributed system (where participants are free to come and go) was impossible, despite decades of work in the sophisticated field of distributed systems. Nakamoto Consensus was a novel solution that introduced financial incentives to help secure such a system, incentives that need to be paid in the platforms own currency. I had to pay the miner that processed this inscription around $8 for them to do it.
The ability for a distributed group of participants all over the world to reach consensus on anything (like the existence of your blog post) in an open, transparent and permissionless way is a pretty big deal, one that has major implications for the academy. I happen to run my own Bitcoin node (using about $300 worth of hardware). That means I have my own copy of all the data inside the ledger and get the latest updates as they happen. We are in the process of setting up Bitcoin and Ethereum nodes up at the B school to aid professors and students interested in research. Unlike traditional finance, where all the data is hoarded by private entities that charge an arm and a leg for access (at best) or just hide the important details (at worst) in crypto everyone gets to see everything.
And of course as you know all too well, payment systems are nothing more than than a series of records (of debits and credits). And while people paying each other in various cryptocurrencies remains the primary use, the open, decentralized and censorship-resistant architecture has since been expanded to countless other activities, from the movement of dollars (recently embraced by PayPal) to the issuance of consumer rewards (recently embraced by Lufthansa) to digital art (recently embraced by both Christie’s and Sotheby’s).
I’m skeptical about the digital art thing; then again, I’m skeptical about bogus social science on beauty and sex ratios, ovulation and voting, himmicanes, ages ending in 9, etc.—and lots of people who do these things have stable jobs and I guess will continue doing so. It’s a big world out there.
I don’t have any other comments on the specifics of Malekan’s note; I just wanted to share it with you, as he’s offering a different perspective than mine. Paying $8 to save one of my blog posts doesn’t sound quite scalable to me, given how much is out there on the internet; on the other hand, the foolish claim has been made by a celebrity scientist that each scientific citation is worth $100,000. I don’t know what all this means, except that valuations of intangibles can be controversial. In any case, I appreciate Malekan giving us the above background.
Regarding the “scam” thing, I received the following email from Gur Huberman, also at Columbia business school. Gur asked:
1. Do you need a scammer to initiate or support a scam? Would you call Satoshi a scammer? Ditto for Vitalic Butterin (Ethereum)?
2. Is gold a scam?
3. What exactly assigns value to money as we know it?
I replied that a scam builds off some existing institution. Ponzi’s scam was based on certain postage products. The stamps were real. Theranos was based on a real institution of blood testing. Etc. “Crypto” can be a scam even while based on real computer programs. For that matter, gold is not a scam—I have some in my teeth!—but the people who try to sell you gold on TV are scammers. In my post on Dan Davies’s book, I characterized frauds as being linear or exponential.
The point of my earlier post
My post that started this particular discussion was called “Crypto scam social science thoughts: The role of the elite news media and academia.” What was and is most interesting to me, and the point of the post, was the role of media elites in keeping bubbles afloat. So if you disagree with me regarding some benefits of crypto, you can just think about the media fluffing given to FTX etc. in recent years.
“It means this text now sits inside an append-only ledger, copies of which are kept by thousands of distributed computers all over the world. Unlike your original blog post, this data cannot be changed or deleted, because unlike the server that hosts your blog, it now lives inside one of the most secure networks on earth.”
And that only cost you US$8.00. Wow! I’m impressed!
But, wait. What happened to the comments on the post? That post isn’t much use without them; that’s the intellectual value that this blog provides. And the comments get added over time. Often over the first few days, but sometimes weeks, months, even years later. A static store isn’t an acceptable modality for blog posts. It’s simply the wrong model. So blockchain doesn’t do blogs without adding a new block every time a response is added. At great inconvenience, since you also need a display system that will chase down all the pieces of the post plus responses and display them nicely. At far greater cost every year for commenting on old posts.
Oh, yes. And “only US$8.00”. But there’s a problem. This blog has one or more new posts every day. For the last 20 years or so. Inadequately storing 400 times 20 years times the average number of comments times 8 bucks is getting into some serious money. For an inconvenient model of blog post storage. (Hmm. I wonder how much data you can put in such a ledger entry? Presumably that’s limited?)
In response to a cheap shot at crypto someone said on the previous post: “a strikinly narrow view on such an achievement encompassing cryptography, mathematics, game theory and social science.”
Sure. Crypto is cool and neat to a computer nerd*. Until you try to find something to do with it, and then all you get are scams. So “crypto is a scam” is technically incorrect. “Crypto is a technology with which the vast majority of things done are scams.” would be a technically correct statement.
*: Well, as a certified computer nerd, this statement is insulting to computer nerds**. But, whatever.
**: That is, folks who like the blockchain technology don’t understand how good modern database technology is, in terms of the amount of data handled, the speed of handling, and that security and reliability are quite good. A while ago, I watched a YouTube video on Github, and my socks were blown off. It’s seriously amazing. Blockchain is an inane joke by comparison.
Malekan seems to have been seduced by the illusion of permanence. Somebody introduce him to Buddhism. I did have a good laugh at the argument fhough.
Also, what choice does Malekan have but to defend crypto? He works in the area. This is an instance of the common problem in academia whereby once one has taken a position, they feel obliged to defend it. Malekan could have said: I work in crypto but yeah it’s a scam, or yeah there is a scammy aspect to it. But no. One has to always hold one’s ground, and come up with ridiculous arguments, like “permanence” in this case, to justify one’s position. We see this insecurity in people again and again, especially in academia but not just.
Speaking of digital art, I just noticed this:
https://www.reuters.com/legal/litigation/us-copyright-office-denies-protection-another-ai-created-image-2023-09-06/
As a long-time photographer, I’m aware of the argument that it’s the camera not the photographer that makes a photograph. But that’s quite wrong as folks like Edward Weston, Minor White, and Ansel Adams so beautifully proved time and time again. (Of course, back in their day, they actually made the prints themselve (something I’ve also done, although I’m no Maplethorpe) so their prints were very much hand made original art works.)
So, anyway, while I love the copyright office’s decision, since it makes fools of and irritates silly AI types, I think they are wrong artistically. It sounds as though Kris Kashtanova really did do the work that an artist is supposed to, namely creating something that expressed what they wanted to express using available tools. Kris Kashtanova did the work, wants credit for that work, and deserves the credit.
The underlying problem, of course, is that the idea that the AI software created the art work and should be given credit for artistic creation is silly, stupid, inane, and wrong. It’s the bloke that ran the program, decided what data to use, and decided which of the myriad images the program produced to present as art who created the art. (Bad art is fine by me; that’s a decision society makes.)
But the Copyright Office seems to think that even a fairly small amount of processing done by AI software invalidates the work. I disagree. AI software is just software; how you use it is wherein the art lies.
“Is gold a scam?” No. But it’s an awfully bad investment. If crypto is something like gold minus the practical applications, that’s ample reason to stay away from it.
I also had to raise my eyebrows at the claim “people paying each other in various cryptocurrencies remains the primary use.” It really looks to me like the primary use has always been for speculation.
> No other digital service provides anything close to it
The professor might benefit from reviewing torrents, or ipfs, or any of the other distributed storage we’ve been using for the past few decades. Checking the MD5 of a file you just downloaded is pretty straightforward.
I’m not thrilled to learn that Columbia pays a group of scammers in the business school to try and launder the reputation of cryptocurrency. Until they succeed at finding an actual use case that doesn’t involve sanctions violations or drug smuggling, I’m going to keep calling them scammers.
> 3. What exactly assigns value to money as we know it?
Ultimately, the fact that you can pay your taxes with it.
Well, I confess to having begun with a prejudice against crypto currency. I was unable to see either (1) how an expensive transaction system could generate real value and (2) how speculators would drive up the price beyond all belief. (I also find in hard to believe that the real value of Tesla is twice that of Toyota and GM combined. But that’s what finance.yahoo.com shows right now.)
There appear to be instances in which crypto currencies provide advantages in cost and risk to conventional tools in some cross-border transactions. Crypto currencies also help to evade restrictions on moving money out of a country.
MarshMac says “Bitcoin accounts for approximately 98% of ransomware payments. Whether an organization pays the ransom or attempts to recover the data independently, a clear understanding of bitcoin is essential for cyber incident response planning.”
It is easy to see how Bitcoin is superior to Amex for ransomware payments.
I am still skeptical of crypto currencies but I will admit that many individuals gain value from the difficulty of tracking crypto transactions.
They also provide value to academics as a subject of study. For example a Harvard Business School professor was one of the designers of the not-so-stablecoin Terra:
https://medium.com/terra-money/have-you-met-marco-216ca2a8b944
Malekan’s post reads like word salad to me. We are storing data and we are helping research and we are improving financial data flow and… somehow the best example is putting a blog post in a blockchain? Wut?
From the linked blockchain page:
“Each Bitcoin is made up of small units called satoshis, much like how cents make up dollars. As introduced by the Ordinal Theory Handbook, individual satoshis can be inscribed with content, such as images or text, to create unique Bitcoin-native digital artifacts that can be held in Bitcoin wallets and transferred using Bitcoin transactions. Inscriptions are as durable, immutable, secure, and decentralized as Bitcoin itself.”
So a digital baseball card?
There is a recent book that is quite funny according to the reviews: “Number Go Up: Inside Crypto’s Wild Rise and Staggering Fall” by Zeke Faux.
https://www.bloomberg.com/news/features/2023-08-17/my-crypto-hell-journey-started-with-a-wrong-number-scam-text
I’ve only read a excerpt that looks more like horror than comedy (“The Crypto Hell on the Other Side of a Spam Text”) but it’s quite interesting:
https://www.bloomberg.com/news/features/2023-08-17/my-crypto-hell-journey-started-with-a-wrong-number-scam-text
I don’t know if it’s related to “numbers go up”, but there’s an excellent video called “Line Goes Up” (https://www.youtube.com/watch?v=YQ_xWvX1n9g) that gives a very clear explanation of everything that’s wrong with cryptocurrencies.
> the open, decentralized and censorship-resistant architecture has since been expanded to countless other activities [like] the issuance of consumer rewards (recently embraced by Lufthansa)
I can’t wait to see what the next 15 years bring. In case you want to know more about this thrilling collecting experience:
https://www.miles-and-more.com/ch/en/program/news/nft-trading-card-app-goes-live-news-2023.html
Would you like an NFT to go with your flight? This scenario has become a reality thanks to Uptrip, a collaboration between the Lufthansa Innovation Hub and Miles & More. Now, Lufthansa Group Airlines passengers can scan their boarding pass in the app and exchange it for NFT trading cards. At the heart of Uptrip is the integration of Web3 technologies into the loyalty program, while gamification and entertainment elements make collecting cards a thrilling experience. Customers can store the NFTs in their very own crypto wallets. To provide the NFTs, Uptrip will utilize the Polygon proof-of-stake blockchain protocol.
The collectible cards complement existing Miles & More services and can be combined into different collections. Complete collections can be redeemed for rewards such as airport lounge access, flight upgrades, or for status and award miles. In this way, the app combines fun and attractive rewards with testing new, innovative technologies.
Thank you for posting my reply Andrew, I tip my hat to your openness to dissenting views.
I have a sneaky suspicion that most of the skeptics on here have never experienced crypto first hand. I am happy to facilitate changing this for anyone interested. That way they can become an informed skeptics.
Well, the killer argument you came up with was that Andrew’s blog post can be permanently and unerasably stored in/on the blockchain. Because that achievement leaves me totally unimpressed, I can’t motivate myself to read up on it and become an informed skeptic. You’ll have to come up with a better motivating use case first than showing that Andrew’s words are now permanently on the blockchain.
I’ve also never experienced meth, but feel pretty confident in my ability to assess its value based on its impacts to others and the world around me!
You don’t need to go to meth to point out the beyond words wrongness of Malekan’s advice: just Terra (which my reading of his comments thereon after the crash thereof indicates that he had no clue it was about to crash) and FTX.
The bottom line is that even if the underlying technology isn’t a scam, the vast majority of the applications of that technology are scams and the vast majority of the people pushing it are scammers.
So my advice to our friend here would be that he find another schtick: this one’s broken and pretty much everyone has figured that out.
> Terra (which my reading of his comments thereon after the crash thereof indicates that he had no clue it was about to crash)
He published the following three weeks before Terra’s collapse:
https://omid-malekan.medium.com/how-decentralized-is-your-stablecoin-f1a794dfae5a
“It’s still early, and Do Kwon and the rest of the Terra team — assuming there is one, it’s hard to tell given the cult of personality — have done an admirable job of executing so far. I disagree with those who still believe UST is vulnerable to a sudden death spiral, as it is now backed by both a major coin in terms of market cap and powerful off-chain interests who will step in to defend it. The critics who think a death spiral is likely tend to focus on the rapidly depleting yield subsidy in Anchor. What they don’t understand is that Terraform Labs has an unlimited budget.“
Carlos: It seems the Internet remembers things pretty well even without blockchain.