Among the various groups of people who would call themselves Bitcoiners, those utilizing Bitcoin SV (BSV) have the most expansive vision of how this database can be used. From among the BSV community, Planaria Corp’s founder and CEO, currently going by the pseudonym unwriter (not the first major bitcoiner to take this option), has one of the most innovative and expansive visions for how this database will transform the face of tech. Unlike many other Bitcoin entrepreneurs who fall in love with Bitcoin’s technology and then seek to build a business utilizing it, unwriter came to Bitcoin because he realized it was the best way to achieve his unique vision of the future, a world where applications are highly communicative and interoperable.

The Future of Applications

In today’s application environment, the most common business model is one that offers some sort of free service to the user in exchange for ownership of their personal data. This data is then sold, most likely to advertisers. Because the data is the product, there is a strong incentive to create a wall around the data and only share it in situations where it is absolutely necessary. For example, Facebook and Netflix are both collecting as much data as possible, but they share almost nothing with one another. A user’s Facebook and Netflix experiences are totally separate. Perhaps in a different application paradigm one could share a clip of a Netflix show on Facebook and any Facebook user with a Netflix account could watch.

This data-collection business model can make sense, but it is often done because there is no viable alternative. The lack of alternatives is in part a result of the current payments system and its inability to process small payments cheaply. On BSV, micropayments are possible because transaction fees are hundreths of cents and falling. Compare Twitter to Twetch for an example of how micropayments can change the dynamics of application development. Twetch today is like Twitter on BSV. The main differences are in where data is stored and how the app utilizes micropayments.

Twitter data is stored on Twitter controlled servers where Twetch data is stored on the BSV blockchain. If a Twitter user wants to quit and take their tweets with them, too bad. Twitter also reserves the right to ban users for reasons which can be opaque. On Twetch, a dissatisfied user can leave and still access their data.They could even use the same set of twetches on multiple UIs if they had a reason to do so. Twetch also uses micropayments to drive revenue and create a better user experience. Twetches cost 2c, follows cost 10c, likes 5c, and mentions 0.1c. Most of that revenue goes to the Twetcher meaning a Twetcher with many followers receiving many likes can earn a good amount of money. Introducing micropayments also reduces the incentive to create spam while increasing the incentive to create content that other users value. On Twitter, the incentive to spam is high. Follower counts, like counts, and other metrics are not reliable because of the prevalence and economic viability of utilizing bots and other fake accounts.

unwriter sees the writing on the wall for applications using the data-collection model to drive revenue. In a world where other payment methods are possible, more users will adopt paid versions of applications rather than part with extremely valuable data. This shift will see applications less incentivized to create intra-app network effects to grow a walled garden of data and instead will defer to the network effects an individual creates in their desire to have apps communicate effectively to improve user experience.

How Planaria Corp is Creating the Pipes for App Interoperability

In Planaria’s documentation, unwriter has described how blockchain data can flow like electricity flowing through a power grid. The blockchain is the powerplant, the source of all data. That data is then converted into a streamable format and sent through high speed power lines. Different types of data then get sent into local lines, and finally individual houses and buildings get the exact data they need.

This power grid analogy is the structure of the Planaria model. unwriter has built the tools — grid planaria, bitbus, neon planaria, and overpool among them — and many applications in the BSV ecosystem are utilizing them to great effects. These applications include Twetch, bitcoinblocks.live, TonicPow, Agora, and many others.

In our view, unwriter is approaching the right problem in the right way. We believe that the BSV blockchain will grow into the world’s largest database. Serving data effectively to applications is a new challenge and one that will affect almost any application seeking to use blockchain as a backend data-basing solution. Planaria is not only designed to be efficient and developer-friendly, but also to serve an increasingly interoperable application environment. We believe unwriter is truly ahead of the pack in anticipating and developing solutions for the problems that applications built on BSV will experience. We think that belief is shared by our co-investors including two of the leading BSV miners Coingeek and mempool. They are building the tools to process and store the world’s largest database, and they believe, as do we, that unwriter has the chops and wherewithal to serve that data to the masses.

Why We Invested in Planaria Corp was originally published in Unbounded Thoughts on Medium, where people are continuing the conversation by highlighting and responding to this story.

Why We Invested in Pngme

A big part of my motivation to start our fund was to support bold ideas of how to provide access to capital and financial services to those unbanked or underbanked through alternative digital credit scoring and underwriting. I can’t think of another company that fulfills this mission as directly as Pngme.

When initially doing diligence and seeing that the average interest on loans from micro finance institutions to small business owners in East Africa was in the high double digits, sometimes going as high as 200%, it was clear that a huge market opportunity exists. Even with high default rates, one could profitably underwrite at much lower than the market rate. I learned that one of the major reasons these markets haven’t become more competitive is a lack of good credit data. Without knowing anything meaningful about their customers, microfinance institutions were pricing in a huge risk premium, rendering loans usurious to those that take them and inaccessible to entrepreneurs with solid fundamentals that need a reasonable interest rate to have a shot at building their business. I saw how Pngme could create a strong digital credit score, arguably more accurate than FICO, simply with access to the mobile data of their users. As the network grew, that data would be augmented by valuable financial data. It was clear to me that this company would be a winner.

Pngme solves the challenging and expensive problem of underwriting a loan in emerging markets. Without accessible or open banking APIs, the process of collecting siloed, mobile-based income information, account balances, and credit records is burdensome for both the lender and the borrower. This problem financially constrains 1.7 billion individuals and businesses who are unable to access capital in order to scale and grow financially.

Pngme’s solution is a lending platform that captures and analyzes millions of data points from smartphones so lenders can underwrite loans in emerging markets.

I’m lucky enough to have known Cate Rung and Brendan Playford from before Pngme. I got to see how Pngme transformed from just an idea to use blockchain to build a marketplace for access to credit from those at the bottom of the financial period to the full-fledged company it is today with users, revenue, and a state-of-the-art product. I feel lucky to have been shown the idea early on as I’ve never been more sure about a team and idea that I wanted to back.

Pre-Seed Round Closed

Congratulations to the Pngme team on closing their pre-seed round in September that was led by Unshackled Ventures. Consensys Ventures also participated in the round through their Coven platform as co-investor. With investment, having booked over six figures in revenue for the year, and many more enterprise customers in the pipeline, I’m excited they’re able to continue to both improve their product as well as onboard many of the 1.7 billion individuals and businesses that are financially constrained.

Pngcoin Token

There has been no public or private sale of the Pngcoin token, instead users can acquire Pngcoin through incentives that are structured to promote adoption and responsible credit behavior on the Pngme platform. In addition to this, holders of the Pngme token will be entitled to discounted fees when using the platform and be able to redeem Pngcoin for services much like credit card or airline points. For those looking to use the platform, the Pngcoin token is being listed on Idex on Monday, November 24th — available for non-US purchasers.

Learn More

Podcast with Zach and Brendan — we dive into the mission of Pngme, the use of the Pngcoin token, the philosophy behind the Pngcoin token distribution. The technical decisions for building on Ethereum and the vision for the long-term governance and blockchain infrastructure of Pngcoin are also covered.

Why We Invested in Pngme was originally published in Unbounded Thoughts on Medium, where people are continuing the conversation by highlighting and responding to this story.

The Financial Action Task Force on Money Laundering, or FATF, is a G7 organized intergovernmental organization of 37 jurisdictions with the purpose of setting international standards and advisory to combat money laundering and terrorist financing. After learning more about the organization, its history, and its plans for the near future, I propose that if you are an investor with any significant investment in the crypto currency market you NEED to better understand FATF. The sooner the better.

What is the new FATF guidance?

This past June, FATF issued their recommendations to virtual asset service providers (VASPs) regarding their anti-money laundering, know-your-customer, and coutner terrorism financing (AML/KYC/CTF) guidelines. FATF defines VASPs as businesses that,

i) exchange between virtual assets and fiat currencies;

ii) exchange between one or more forms of virtual assets;

iii) transfer of virtual assets;

iv) safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and

v) participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.

Because this definition clearly, perhaps explicitly, covers crypto currency exchanges, we saw headlines like “All Global Crypto Exchanges Must Now Share Customer Data, FATF Rules”, which is likely what initially brought FATF into most crypto currency investors’ consciousness.

The guidance recommends that exchanges “obtain and hold required and accurate originator [sender] information and required beneficiary [recipient] information and submit the information to beneficiary institutions” on all transfers valued over $1,000 USD.

Outside of the previously lightly regulated crypto currency ecosystem, this guidance is nothing out of the ordinary and is essentially the application of FATF’s operative guidance called the “travel rule” for traditional financial institutions towards crypto currency businesses.

Now that we have a sense of what guidance was issued, let’s take a look at the common misconceptions stemming from it.

Misconception 1: FATF is only issuing guidance and recommendations, they are not legally binding. They aren’t part of any governmental body with teeth.

This seems to be the predominant takeaway within the crypto ecosystem after the FATF announcement last June. It’s a perfect example of when the facts are true but the news is fake. Yes, FATF is “issuing guidance and recommendations” and no, FATF itself doesn’t have legal jurisdiction for enforcement as an offshoot of the G7. BUT, this does not mean that what they issue is not important.

On the recommendation spectrum this isn’t an “I recommend you watch this movie on Netflix” from a friend, but instead is closer to an “I recommend you step out of the car sir” from a frustrated police officer. As with an upset driver ignoring the recommendation of the latter, when a nation is not compliant with FATF recommendations they face negative consequences. Without voluntary compliance, those in charge of enforcement will opt to “do it the hard way.” With FATF the “hard way” is adding non-compliant nations to a list of “non-cooperative nations”, also known as the FATF grey and black lists.

Once added, the subsequent economic consequences for these nations can be severe. For example, in 2018 Pakistan was grey listed over concerns surrounding its inability to properly address terrorist financing. Subsequent FATF discussions over whether Pakistan should be black listed threatened them with “downgrading…by multilateral lenders like IMF, World Bank, ADB, EU and also a reduction in risk rating by Moodys, S&P and Fitch.” Countries currently grey and black listed include Pakistan, Yemen, Syria, North Korea, and Iran (among others).

While FATF recommendations are not directly related to US or EU economic sanctions, they often coincide. FATF advises that additional couter-measures are implemented for routinely non-compliant countries such as Iran and North Korea with “serious, longstanding strategic deficiencies that have still failed to make progress after the FATF calls for enhanced due diligence”, stating that “counter-measures range from specific elements of enhanced due diligence and systematic reporting of transactions…to a limitation or prohibition of financial transactions with the jurisdiction.”

Okay, fine. Maybe being on FATF’s naughty list is bad after all. But North Korea? Isn’t that somewhat hyperbolic? It’s just crypto currency.

Misconception 2: Crypto currency represents a tiny fraction of the global financial system. We’re small fish. It won’t be a top priority.

To address this misconception you don’t need to rely on the speculation of a paranoid crypto holder or antagonistic no-coiner. FATF is very clear that crypto currency and virtual asset compliance is a top priority of the organization. Since FATF is an intergovernmental body, it has a rotating annual presidency between its member nations. The current (2019–2020) presiding nation is China which was preceded by the United States (2018–2019). At the onset of each leadership, the new president issues a short paper outlining their priorities and the objectives for FATF that year. Two of the four priorities outlined during the US presidency’s FATF objectives directly involved crypto currency and FinTech. The section titled “Virtual Currency” reads as follows,

The US Presidency will prioritise clarifying how the FATF standards apply to virtual currency providers and related businesses. Virtual currencies are increasingly being used to launder the proceeds of crime, but are not explicitly acknowledged in the FATF Recommendations. Most countries, including the majority of the FATF members, still do not regulate and supervise virtual currency providers for anti-money laundering/counter-financing of terrorism (AML/CFT). In light of emerging risks, there is an urgent need to explain how the FATF standards apply to virtual currency providers and related businesses…. During the US Presidency, the FATF will also embark on a new project that focuses on investigative best practices on virtual currency to support law enforcement. The project will identify relevant tools to support criminal investigations involving virtual currency payment products and services…

Likewise, China’s FATF objectives for the current year reiterate this priority in the section titled “Mitigating the Risks and Exploiting the Opportunities of New Technologies”. It reads,

The FATF has for many years acted to identify and mitigate the risks of technological developments in financial services…(including) setting the first global standards for the regulation of virtual assets, including crypto assets. Under the Chinese Presidency, the FATF will develop the methodology for countries to be assessed against the standard for virtual assets, and it will start assessing FATF members for effective compliance with it….

It’s worth mentioning that these documents outline only four priorities each, thus the respective virtual asset sections make up a significant portion of the FATF directives for that year. (If you read the extended quote from the original source you will note the optimistic tone of the potential benefits enabled via this new technology. We will expand on this optimism in part II.)

Add to this the emphasis from the United States Treasury Department (even including tweets from President Trump) again reiterating the high priority of regulating the crypto currency ecosystem. The Treasury’s Financial Crimes Enforcement Network, or FinCEN issued its own guidance this past May specifically pertaining to “business models involving convertible virtual currencies”. Shortly after its release, Sigal Mandelker, the U.S. Treasury’s Under Secretary for Terrorism and Financial Intelligence, issued remarks addressed crypto currency professionals at a conference stating,

…FinCEN issued guidance directly addressing areas of interest gleaned from ongoing industry engagement about how our regulations apply to different business models…I encourage you all to read it closely.

The gist of the FinCEN guidance mirrors much of what FATF issued later in June. Treasury Secretary Steve Mnuchin was quoted saying “This (FinCEN and FATF guidance) will enable the emerging FinTech sector to stay one-step ahead of rogue regimes and sympathizers of illicit causes searching for avenues to raise and transfer funds without detection. We will not allow cryptocurrency to become the equivalent of secret numbered accounts. We will allow for proper use, but we will not tolerate the continued use for illicit activities.”

Unless you think both of these organizations are bluffing, it is quite clear that regulating crypto currency businesses is a top priority for each. But how will this enforcement work in practice?

Misconception 3: Even if they wanted to enforce this stuff, they wouldn’t be able to. Crypto currency is decentralized.

And now we address perhaps the biggest crypto currency misconception of them all: “but it’s decentralized”. History has empirically demonstrated that decentralization isn’t the panacea many optimistic techno-utopians in crypto currency believe it to be. To explain why, we can briefly review one history (among several) of an intergovernmental take-down of an effectively decentralized virtual currency.

Liberty Reserve was a virtual currency in use from 2001 until it was shut down in 2013. It focused heavily on anonymity as it allowed users to send and receive funds with only names, email addresses, and birth dates, all of which could be blatantly faked without ever being cross checked. At its height, Liberty Reserve is estimated to have had over five million users worldwide conducting transactions worth more than $16 billion USD. Although it was technically centralized in that it had founders who were eventually sentenced to prison, its network was effectively decentralized across the world via its fiat on-ramp/off-ramp “exchangers”. A New Yorker article contemporaneous to Liberty Reserve’s closure describes exchangers as,

typically unlicensed moneymen in countries like Malaysia, Nigeria, and Vietnam, who bought Liberty Reserves in bulk from Liberty Reserve. You would pay them dollars (or whatever currency) for a certain sum of Liberty Reserves, which they would then deposit into your account. And when you wanted to withdraw money, the process worked in reverse, perhaps with an exchanger in a different country. (Liberty Reserve itself took a one-per-cent fee on transactions, while the exchangers typically charged five per cent or more.)

I don’t see much of a difference between the description of these unlicensed moneymen and the unlicensed KYC/AML-less crypto currency exchanges that exist today, except that the latter are far easier to locate via Google searches.

Because of its multinational and decentralized nature, Liberty Reserve was possibly more onerous to shut down than a centralized entity, but that did not stop it from happening. The United Nations’ SHERLOC database summarizes the methods by which the US Federal Executive and Judiciary branches used FinCEN authorities under Section 311 of the US Patriot Act to seize all known domains and assets of Liberty Reserve’s operators. Additional court documents (see: exhibit B, page 7) outline how the US worked in conjunction with several other nations and “obtained seizure warrants for 28 bank accounts controlled by the Defendants, located in eight countries” as well as “issued more than 30 (legal action) requests…to more than a dozen countries”.

The language regarding the threshold required for granting authority to the US Secretary of the Treasury under Section 311 of the US Patriot Act would seemingly already be met by the crypto currency industry given both FinCEN and FATF’s recent statements. Section 311 “grants the Director of FinCEN the authority, upon finding that reasonable grounds exist for concluding that a foreign jurisdiction, foreign financial institution, class of transactions, or type of account is of ‘primary money laundering concern’, to require domestic financial institutions and financial agencies to take certain ‘special measures’ to address the primary money laundering concern”. These special measures include imposing “additional recordkeeping, information collection, and information reporting requirements on covered U.S. financial institutions,” similar to those outlined by FATF’s travel rule.

The United States’ FinCEN isn’t alone on explicitly confirming and extending FATF’s guidelines enforceable within their own jurisdiction. In famously banking friendly Switzerland, the Swiss Financial Market Supervisory Authority (FINMA) has issued similar guidance. FINMA’s August 2019 report, explicitly referencing FATF’s guidance, lays out how the Swiss government will be regulating crypto currency businesses within their borders to comply with new international standards. They write,

FINMA recognises the innovative potential of new technologies for the financial markets…However, blockchain-based business models cannot be allowed to circumvent the existing regulatory framework. This applies particularly to the rules for combating money laundering and terrorist financing, where the inherent anonymity of the blockchain presents increased risks.

Concurrent with this guidance, FINMA also announced the issuance of banking and securities licenses to two blockchain service providers, the first in Switzerland. While excitement stemming from the announcement of “institutional” blockchain players entering the Swiss market made headlines on various crypto currency publications, the key disclaimer that they would be held compliant to FATF’s and FINMA’s standards as part of this licensing was often underplayed.

The severe negative consequences faced by the operators of Liberty Reserve are the same types of “do it the hard way” consequences major crypto currency exchanges will want to avoid going forward by opting to be compliant with all the recent national and international guidance. Although the technical architecture of blockchain makes it arguably more robust than a series of registered domain names and grassroots exchangers, currently profitable and compliant businesses will not rely on that suggestion for peace of mind. Leaving the likelihood that virtually all major existing exchanges will aim to remain legally compliant with international standards like those recommended by FATF aside, how many crypto currency investors would want to deal with these potential legal ramifications? If a strong majority of the market is spooked, what will happen to the value of the assets?

Misconception 4: This won’t even take effect for years to come and it will be implemented in each individual country differently. Not very time sensitive.

The legal reality of the precedent of successful enforcement stemming from the guidance of organizations like FATF and the US Executive branch virtually ensures that companies operating within compliant jurisdictions (all non black/grey listed) will want to stay ahead of the law. To imagine that a company within a FATF compliant nation will ignore the provided guidance is woefully naive. To do so would recklessly open their business up to the threat of crippling exclusion from all existing major financial institutions as well as jail time for the individuals who operate the business. Individuals are not decentralized. Furthermore, to imagine that an otherwise compliant jurisdiction would ignore enforcement of the FATF recommendations in order to allow non-compliant crypto currency businesses to operate within their borders is even more naive. This would open up the entire country to the threat of nation state level sanctions as well as the aforementioned exclusion from existing financial institutions. This is not remotely realistic.

FATF’s June 2019 guidance stated that “the threat of criminal and terrorist misuse of virtual assets is serious and urgent, and the FATF expects all countries to take prompt action to implement the FATF Recommendations in the context of virtual asset activities and service providers.” Accordingly, they will “monitor implementation of the new requirements by countries and service providers and conduct a 12-month review in June 2020.”

Given this time sensitivity, it’s not surprising that several crypto currency exchanges have already responded with changes. A few weeks after the FATF guidance was released Korean exchange OKEx announced they were dropping five anonymity focused “privacy coins” within 30 days. A few days later, Korean exchange Upbit followed suit, also delisting privacy coins. Upbit cited the “decision to end trading support for the crypto-asset was also made to block the possibility of money laundering and inflow from external networks.” Continuing, “Upbit will continue to consider crypto-assets that represent anonymity functions as candidates for designation of ‘investment warning crypto-assets.’”

Preempting the most recent FATF updates, in May 2018 the Japanese cryptocurrency exchange industry group “Japan Virtual Currency Exchange Association” voluntarily agreed to delist popular privacy coins. This impacted exchanges like Coincheck which opted to comply and removed their privacy coins. Coinbase UK also announced this past August that they were delisting privacy focused “ZCash” for UK customer, though without publicly citing their reason. Surprisingly Coinbase maintained Zcash service in other jurisdictions.

While anonymity focused privacy coins are the obvious low hanging fruit, it’s a worthwhile exercise to think through how the broader industry will respond. Likewise, it’s worth deeply exploring which crypto currency’s technical roadmaps are heavily invested into the feature of anonymity. What about market dominance leader BTC and their layer two lightning network?

What does this mean?

From my vantage point, the apparent legal naivety of the broader crypto currency market is a cognitive bubble that must pop. The integration of this relevant legal guidance and its consequences into any crypto currency investor’s landscape analysis is essential, no matter how unsettling it may be at first glance. That being said, I encourage investors to refrain from interpreting the presence of robust legal regulation as a negative signal. All of the aforementioned guidance explicitly leaves room for what regulators see as the positive consequences of a compliant market. In part II, I will argue for the attractiveness of these positive consequences for both regulators and end users alike, with BitCoin (BSV) as the original design envisioned by Satoshi Nakamoto, positioned as the perfect tool for this compliance. BitCoin’s inherent legal compliance is not an accident. But more on that later.

Stay tuned for part II.

Why You Must Rethink FATF Now was originally published in Unbounded Thoughts on Medium, where people are continuing the conversation by highlighting and responding to this story.

Disclosures: Unbounded Capital is an investor in Pngme.

The author of this essay series is not a financial advisor and this is not financial advice. Do not invest in speculative assets with money you cannot afford to lose.

Introduction

I recently had the pleasure of sitting down with Brendan Playford, one of the most inspiring human beings and founders that I’m lucky enough to know. We dive into the mission of Pngme, the use of the Pngcoin token, the philosophy behind the Pngcoin token distribution. The technical decisions for building on Ethereum and the vision for the long term governance of Pngcoin are also covered.

If you’d like to watch the video interview, you can find that on our youtube channel

Podcast Interview Transcript

Zach: Hello

Brendan: Great to see you Zach. How are you?

Zach: Hey, I’m great. Welcome to the first video edition of the Tokenomics Podcast.

Brendan: Glad to be here. Thank you very much.

Zach: Yeah. So as opposed to butchering an introduction, how about you tell me a little bit about your background and what you’re working on at Pngme.

Brendan: I’m Brendan Playford, cofounder of Pngme, my other cofounder is my partner Kate. We have been working on Pngme now for just over a year, started building in stealth and we actually have brought the technology out and started testing. And what Png me is is our vision for democratizing the way in which businesses access credit and finance. So we’re building a two sided lending marketplace that allows lenders and borrowers to connect between developed economies where lending rates are very low and emerging markets where the cost of acquiring credit is very high. So bringing these two markets together, using blockchain technology means that people, for example, from the US can get that yield on their cash assets and people in emerging markets can get a low cost of credit, which is otherwise very expensive.

Zach: So could you explain a little bit about how you’re using blockchain and why that’s necessary for the core function of your business?

Brendan: Yeah, so part of our kind of vision is that we’ve seen over the last 10 years, a lot of instances where rate setting in markets is generally done by individual verticalized industries. So in 2012, we had the LIBOR scandal where LIBOR has been fixed for a long period of time.

Zach: And what’s LIBOR for our listeners?

Brendan: So it’s the London Interbank lending rate is the rate at which banks can lend between each other. And that was set by small group of banks for a very long time. Deutsche Bank, Credit Suisse, there’s a whole host of banks are involved in that. And generally what we see in the markets right now is if you’ve got great credit, you can go and acquire capital for very low rates below the Fed or around the Fed interest rates with like the 1.5, 2%. But if you’re somewhat new to the market or a small business, you’re paying really high rates. And actually accessing growth finance for businesses is quite challenging. So there’s a big gap in the middle of rates between five to sort of 20% that currently is by banks, and you end up getting verticalized by your sort of risks. So when you look at somebody in, say Kenya for example, they might go to get bank financing from micro finance institution. We call those MFIs, we’ll go to a smaller local regional bank. And those rates can range from anywhere between 30 to 200%. And that is because right now there’s not much competition in the market and those rates are being set by individuals that really only give one point of access to this kind of facility. And in addition the access to credit is limited because traditional scoring mechanisms through centralized credit rating agencies is pretty limited. You still get credit agencies in many countries, but when you start getting into emerging markets where there is a lot of growth right now financially, smaller companies can’t get this traditional credit. So we do digital credit scoring to allow companies to come into a marketplace of unknown risk.

Zach: So for the companies and individuals that are looking for loans and right now having to pay 30 to 200% to these MFIs, what’s actually the risk on these loans? I’m sure there’s a lot of empirical data about the repayment rates and I happen to know a bit about your business being an investor, but even when I first kind of heard this, my initial thought was, wow, the cost of capital is absurdly high and there’s a complete disconnect between what the real risk is and what’s being priced in.

Brendan: Yeah, that’s a really good point. And I will get back to your original question, which was how does blockchain fit into this? I’ll ask this question and kind of underpin it or we’ll come back to that. So just ask the question again.

Zach: So it seems to me that there’s a humongous spread between what the real risk is and what it is being priced at. So I can see the cost of capital being necessarily higher for small companies in emerging markets without a formalized credit score compared to a small business in the US. But being orders of magnitude higher, it seems like the risk is probably not orders of magnitude higher and there’s a big inefficiency in this market.

Brendan: You’ve hit the nail on the head with the, with the inefficiency. And really, I think where we see blockchain playing a critical role for us is the way in which you match these two sides of the marketplace in a decentralized way. So we just referred to the fact that rates have been set in a centralized manner by few individuals. Our vision is to democratize that down. So the marketplace dictates what those rates should be based on known risks. So we may not be bringing in a lot of borrowers to the market that necessarily have low credit, we may be picking a group of borrowers that are MFIs, B2B to start with that run their own risk management and currently suffer from high borrowing rates on USD. And the reason is because they have to source their capital overseas. They generally can’t source it in country. So that actually makes the cost of capital for MFIs very expensive. With blockchain architecture, allowing the markets to find an equilibrium without a central policy effectively raises the yield for people looking to actually put money to work and lowers that cost of capital for people that do have a low risk. So if you get into where does that risk get mitigated? We can go deeper into it, there are lots of techniques, but you’re absolutely right. Companies right now are penalized for having early credit, a lack of credit, even if they do have assets that they can collateralize loans with, in these markets because there’s not very much competition.

Zach: And it’s the geography. You’re penalized for geography.

Brendan: Geography and competition. You have a couple of new obviously neo lenders, and they have verticalized themselves into this digital credit scoring model where it’s unsecured loans. The default rates for those guys is at about eight to 9%, which is disproportionate to the actual rate of interest they charge across the market. So they still show charging annualized anywhere between 30 to 200%. These figures are pretty public, they are on their website. You can check them out. And that doesn’t account for the actual current default rate. And you can look up there, the highest risk borrowers are people that haven’t had credit. This a new credit model that hasn’t been tested through a downturn. And what they are doing is providing short term loans to individuals that don’t secure it. So the highest risk loans right now have a default rate of between seven and 10%. And that’s covered by extraordinarily high APRs. A little bit above that you have MSMEs, which is what we are targeting. And these businesses that are making profit,have assets, we can secure the loans on the borrower side with their assets. Whether that be equity assets, whether that be fixed assets like plant and machinery. And then on the top end of our marketplace, you can view it almost like a risk stack. We have MFIs and mobile money providers, and those individuals actually hold the risk of default in the marketplace. So they manage their own risk portfolios. They take a larger chunk of capital, let’s say a million dollars, and they will lend that out to a thousand people and they manage the risk, but we’re able to save them money on the cost of capital.

Zach: So long term you’re going to be going direct to MSMEs and direct to consumer, right? But to start to mitigate your risk and go to market more quickly, you’re going to be just lowering the cost of capital for the MFIs. So there’ll be one intermediary to start, but the rate is still going to be set in an algorithmic function to start?

Brendan: Yeah, we have two methods of doing this. So that’s a really good question. Ultimately what we’d like to get to is this notion of a decentralized order book of loans of which all participants in that market basically determine the rate on a certain date.

Zach: Is there anything like that that exists right now?

Brendan: No, there’s nothing. The nearest analogy you can think of this is the way that Bitfinex runs their margin funding facility collateralizing against margin positions. And they have a lending and borrowing market basically. You could think of it analogous to that, adding a risk variable into the way the marketplace works. And you’re absolutely right. So going to market for a company like us it’s extremely critical to manage risks on the borrower side, minimize that, build trust in the platform and get liquidity in the platform. Having actual capital flowing is vitally important. So our first target is the good MFIs that have got solid traction and longstanding mobile money providers. We have an early partnership with a mobile money network in Nigeria. They’ve been going for 14 years. They have around 3 million customers and 9,000 agents. An agent is effectively like a bank branch run by a human. We’re working with these kinds of companies to lower that cost of capital. At the minute the cost of capital for an MFI or a mobile money provider can be anywhere between 15 to 30%. And they want to be looking at 10% price or lower to be really competitive and they want to pass that on to their actual customer. So that is something that we may be catering to.

Zach: And you feel that you could offer a rate like this and still have a large margin of safety in terms of the risks of your taking on lending to the MFIs?

Brendan: Yeah, absolutely. And what I want to be clear on is we’re providing this platform. Going back to your question about rate setting with algorithms, it may well be that in our first iteration is done using some sort of auction process. So we have a small number of high volume MFIs. So you can have multiple participants coming into a particular offer and you can ask to obtain the best rate of interest. And that we think is a really good way initially, of limited participants, for optimizing the best rate of interest.

Zach: So I think that’s a really nice summary of what you’re working on, how you’re going to market, but this is the Tokenomics Podcast, so why do you have your own token and why is that part of your go to market strategy?

Brendan: Yeah, so the token functions is in three ways. First and foremost, this vision of having a decentralized network that allows this rate setting functionality to happen with all incentives aligned for all participants. So in order to launch a network like that we need to have validators and nodes on the network that provide truthful outcomes and record that. So the token serves as an incentive mechanism. In the way that proof of stake works we’ll be onboarding validators onto the network as we build it out. And those validators will, in the way that a proof of stake network gets rewarded for providing the validation and enforcement of that, and also governance as well. So there’ll be an election process within those validators to bring more in. And over the course of three or four years we’ll gradually increase the number of nodes on the network, starting off around 10 to start with and trying to get more and more progressively decentralized, a little bit the way that EOS block producers started off, but not counting that 21 going beyond that. So there’s a way you can vote more people in to make it more inclusive. Secondarily, we use it for incentives. So ultimately we want to have a marketplace where we have retail borrowers and retail lenders as well as institutional. That’s the ultimate goal. And we offer a point system where people who sign up to the mobile application platform get rewarded for certain behaviors. So we use it as a very clear incentive mechanism that drives adoption on the network. And that adoption comes from Jeremy, the B2C customer. We have been running tests on this and we have people that are able to come download the app, and then tokens for staking those and using the actual app.

Zach: So when I first invested in this business and first started seeing things it was much more of a B2C play to start and like a lot of early stage companies it becomes B2B and B2C, and then to B2B for obvious reasons. How does the token still play as much of an integral role at the outset now that you’re going kind of direct to the MFIs?

Brendan: Yeah, so I really think it does. For our actual value proposition the network is building on the core of this landing engine. However, we spent a lot of time building our own mobile wallet, which has a lot of the functionality of a theory I’m abstracting. So gas fees are abstracted and you pay your fees in the token you’re transferring in the wallet. We’ve used some of the Bread implementation, open source Bread wallet to provide us architecture and our own side chains to Ethereum which then updates its’ state. You can think of it a little bit similar to the way that IDEX provides decentralized exchange in a mobile app, it’s peer to peer payments.

Zach: So how does this come into play for the direct learning gamifies?

Brendan: So we see the having a core base of organic B2C for the actual app itself, being able to have people transacting using the payments and other functionalities as really important because when you look at an MFI, they have about 62% of their costs built in the disbursement and the administration of the actual loan.

Zach: So when you’re working with the MFIs, they’re using the Pngme wallets, or using your architecture?

Brendan: That is our goal. So our goal is then with these MFIs over the next year or so is that we partner and we have one initial partner in Seattle doing this where they will take a white label version of our application and then we’ll actually deploy that into market. So for them being able to have their users use our app and have the same incentive mechanism actually benefits their business and it helps them reduce that cost.

Zach: So then if other lenders want to use that data to set their own rates, they have the benefit of that as well. So you have a lender that’s based out of Seattle, they’re now running all things on their own white label, but that information can be shared to set rates broadly speaking for your B2C customers and your other B2B clients.

Brendan: Yeah. And we do see this value in this peer to peer payment app where people can transact at very low fees without the complexity of Ethereum. And that’s something that we built. We started B2C, we built that. We’re now pivoting more to our go to market for B2B, but we still see there’s inherent value in that. So yeah, building a community around that, a strong community for us, long term is a three to five year thing and we can start that now. And that can be our grassroots community that’s built around the token.

Zach: So you kind of answered this in the answer to the last question, but why is it necessary to do this via token secured by a distributed network versus a loyalty point or something because just to start. there’s going to be some degree of trust for Pngme as a company. So can you just kind of really hammer on why a blockchain token is necessary and not just kind of some other marker for this more decentralized rate setting?

Brendan: So when you look at having multiple parties in an ecosystem, which we have, we have stakeholders ranging from validators to B2C users, to various apps that are also going to be using our architecture, when there is more of a distributed interest from multiple parties, and we feel that there is not a good outcome when one organization has sort of monopoly over that infrastructure, the logical sort of philosophical route for us is to make sure that we’re using a decentralized architecture, not a centralized one from the go. The way that we look at the technology now is that, generally speaking, on a base layer, when you’re looking at side chains or instances of our Ethereum kind of space layer that we use, the cost of deploying that is around the same cost as a centralized database. It’s just the tooling around it that becomes a little bit more bespoke and a bit more specialized. So for us, we have multiple parties on a network and we have a rate that’s being set for the benefit of the participants. We don’t view that that should be coming directly from us. We think that should be more of an ownerless structure.

Zach: I understand that. But more specifically, why couldn’t the borrowers, not the MFI ends, but the end borrowers, use some type of still white label Pngme wallet, but instead of receiving a token that’s secured on an Ethereum side chain?

Brendan: So a lot of this is the way in which you can kind of look at compliance. So we’ve been really careful to, in the mobile app, maintain custody of the assets in the user’s device. So when you create an account and a wallet through Pngme, you as the user have custody of your private keys. If we were to do a vertical stack where it was a normal kind of custodial solution to a bank, we wouldn’t have the flexibility of being of service in many markets and be able to go truly peer to peer. So it gives the user full ownership of their assets that is not possible on a centralized system. And then in each of the markets we go into those different regulations. So for us with this vision of being more global and peer to peer, that really is only possible by having a non-custodial blockchain solution.

Zach: So what made you decide to build as an ERC 20 on an Ethereum side chain versus kind of all your other options?

Brendan: So having looked at building things like DAGs in the past, the way that IOTA has gone and just the general proliferation of lots of new networks. There’s still a first mover advantage of Ethereum in terms of how there’s obviously a lot of conjecture and noise about ETH 2.0 and whether or not that’s really going to happen. When you look at the kind of services that are deployed on Ethereum right now, for example USDC, that’s a USD-backed stable coin issued by circle which we have been supporting, that has about half a billion in actual liquidity and its treasury. There are no other stable coins on any other network that come close to that. So there’s a lot of product forward decisions in terms of we’re going to an end user and an actual business use case. We want to be using infrastructures. So far, to this point, it’s been built to serve and integrate. Circle has great on and off ramps within the US, we have a banking partner that can provide custody of those assets. An institution could come on and go through compliance and KYC, on board circle and then easily across circle.

Zach: Yeah. Those on-ramps with that level of ease, it’s just not possible off Ethereum, right? So does ETH 2.0 worry you? For the long term future of your token?

Brendan: That’s a good question. I think for us, the way in which this thinking being graduated is that you still have grandfathering into the ETH one point we’re going through sort of the beacon into the Charlotte kind of ecosystem. The way it stands at the moment, it’s so far off that the infrastructure we’re building, we’ll get a lot of value out of it first contributing that backend. What I hope is that as the ecosystem evolves, we can either contribute back or we’ll find another alternative that’s established itself to be honest.

Zach: Well, I definitely agree. It’s far off. As I’ve made clear to you in conversations off the air, I’m personally very skeptical of basically all kinds of proof of stake networks, especially those that are trying to be incredibly decentralized, including ETH 2.0. So definitely one of frankly my concerns around the Pngme token is the governance, and how so much of governance for Pngme and in distributed networks in general is really untested and the kind of proof of stake like methods. There’s, I think inarguably a security trade-off compared to proof of work, and wanting to know what your thinking is on proof of stake and what made you decide to go that direction?

Brendan: Yeah. So as a long term miner, I love proof of work. I think it has a lot of family, both the culturing and fostering community that gets around and asset and even a network. To hear my kind of favorite networks outside of this, if you look at something like Decred, which is a Bitcoin fork, they were really experimenting with new governance, it’s community based and that becomes very interesting. That is a proof of stake / proof of work hybrid, which is interesting in the way the participants can become a little bit more democratic, including voting on issues. So that is still highly experimental. I think that we’re in a phase of, with governance, it is all experimental and we haven’t yet figured out what truly works. So at the moment you’ve got a couple of choices; you choose security and distribution, the proof of work at the sacrifice of maybe speed, or you take speed and efficiency and being a little bit more towards an enterprise environment. You can sell more customers but you end up being a little bit more centralized, there’s generally a trade off range. So what we’re trying to do is take a pragmatic view where at the minute we are not being too ambitious in our goal and letting some other people, if you look at to credit Radix as well, Radix is noting a new kind of DLT specifically full payments, really interesting consensus algorithm, crazy speeds, really interesting throughput, going to have a whole host of different languages you can build on. I’m really excited for seeing my Radix comes. It’s been seven years in development already and I’m still not production grade and they’re doing amazing work, but we need to be cognizant that some of this technology takes a while. So we want to capture some of this market now and for us doing a proof of stake and getting stakeholders that we feel can add value to the network initially is really important. And that is a little bit more easy for us to do with an initial proof of stake.

Zach: And you’re making a clear trade off, for a proof of work level of security and immutability, which is to my understanding rival to none, for something that is still, but meaningfully better than the way the types of decisions are made for existing products out there. Yeah. If, let’s say there was a highly scalable proof of work, blockchain that continues to grow in terms of maximum possible, practical block size, how would that potentially change your thinking on governance, and on the token long term?

Brendan: So I think ultimately, we would like the underlying network to be owned by the network and for that decision to come from the community. So ultimately we want to get this thing launched, and as a company build on this framework. We’re building a company, we have a revenue model, we have a business model that’s going to drive profits for Pngme the company. But underneath this, there is this network layer, which we view as providing an infrastructure for this new financial technology to build on, of which Pngme is the first thing on it. And I would like to think that we can work with the community to move towards a good option. If there is a better option, we should seriously consider that as it comes up in the future, 100%. I don’t have any kind of aversion to that. I would say that we are focused on building the most functioning base layer right now because it can get extremely costly building these new networks. Which is sort of somewhat intimidating. I think there’s a lot of people that are quite ambitious and the resources and that development talent you need to deploy on these networks is quite high.

Zach: And that’s what’s so difficult as an investor looking at, you know, both crypto assets, networks and companies, which is a lot of times you have the normal, incredibly high startup risk of starting a company, building a new product, getting new users and then you know, multiplying that by building a completely new governance, distributed ledger system… The ambitions start to get very high, not necessarily something attractive to get funded.

Brendan: And it’s also, you know, your engineering resources are quite challenging. When you start looking at really technical distributed networks and novel consensus algorithms, there is a small set of individuals that can cover that. And when you go out and try to source people as extremely competitive environment. Not only have you got the likes of Google, Uber, Salesforce, getting these people at deep learning, distributed computing systems, which all of these companies had on their back end, there is also big applications of this kind of technology in a centralized setting. That’s an extremely competitive marketplace. Without trying to attract those people into the blockchain market is a real challenge.

Zach: And as a result, you get the ideologically motivated. Because they of course can’t compete with the cash of these large companies. So talk to me a little bit about your vision for governance for the Ping token and what that looks like to start and how that will grow and especially with a focus on how you might be doing things differently than other networks that have come before.

Brendan: That’s a really good question. I am a big believer in the kind of mining incremental distribution tokens. We’ve seen in the past in 2013, everything was mined from the ground zero with them and to a 2014/2015, pre-mine scenario where tokens are pre-mined by developers a lot.

Zach: How many altcoins were there in 2014/2015?

Brendan: Oh there was a lot. Continuous launches, you know, anything from Myriad coin, which is in the top 500 somewhere, to Via coin, there’s a lot. There’s a big graveyard and then big list on coin market cap that has these ones. So that was a generally a fork of some description with a different, either x11 or you know, various, different novel algorithm on top of one of these tokens being launched every day. Through Bitcointalk you can look through the archives and see how many announcements that there were. Our model is such that we’ve tried to lay out a very limited initial distribution where as people join the app or the network, we mint tokens into existence. So we have a very small distribution for the treasury of the issuer. And then some core advisors and people that have come in to help get everything set up, but we’re not telling a public sale, we are doing an initial distribution coming up very soon. And ultimately we have from the get-go a set allocation of where tokens are going. That is going to be in, it’s proof of stake distribution, and we’re not going to have it with just one group of individuals can stake and then tokens, that’s not just the validators. Anybody that stakes tokens on the network right away, from someone that has 10 tokens right away, right through to 100,000 for example, will get the same rate of reward as anyone on the network. So in terms of the governance initially, we’ve set what we think is a transparent token model with fixed inflation that reduces over a period of time. Our goal ultimately is to introduce the right amount of liquidity sequentially with the growth of the network and the growth of users on the platform. As we evolve the network, if there’s any changes to be made to that model we should invoke the voice of the community and those kinds of decisions. And that is very similar to what to Decred does. Decred has a voting and ticketing mechanism where they have issues come up and you have to stake or submit a certain number of votes. And that is something that we’d like to, to find more than what we have right now. But we’re starting off with initial fixed supply distribution schedule that everybody can understand, and is planful, and is driven by growth. It’s not driven by a sale for example.

Zach: Yeah. Well things are really clear on the distribution side of things, but really more on the governance of how future decisions will be made on the network. It’s going to look like to start, in the realm of delegated proof of stake, and similar to EOS in that regard. Can you talk a little bit about just specifically what it will look like and how it differs from EOS and the other kinds of DPoS networks out there?

Brendan: So that’s a good point. Maybe say in mining, if you have like a software upgrade, you have to do a hard fork, if there is a disagreement in the network you’ll end up with a hard fork, like to give rise to Bitcoin, BCH, BSV for example. So that is a difference in sort of the community wanting a different for the network to go and they choose by hash power and you get a fork. So that’s where the proof of work works on that look when really exists like that. We’ll have initially a group of validators much more like unfortunately the EOS model. I say unfortunately because that is one where there are different views around whether or not that’s a good thing for the EOS network. We want to go a little bit further than that and allow validators to be voted in and acquire a position in the network. To govern that from the staking position. We see that as an incremental increased proof of stake. And there’s a couple of things that you have to be careful of here. One is the number of tokens that are required to stake on the network. So we’re running an auction process behind determining what the adequate amount of tokens to become a validator. So again, the network isn’t going to set the required number of tokens to become a validator. The number of participants, sort of bidding for validated spots will determine the required state beyond a certain point.

Zach: In the reverse Dutch fashion?

Brendan: We’ve modeled this on Vickery Clark Groves mechanism.

Zach: Could you maybe explain for the group?

Brendan: Yeah. So you’ll have a group who has its problems, and you have a group of people like me that sets like an elegant way of creating a strategy for selling an asset or setting a price on asset. And basically what you do is you take a summation over all of the bids for an item or two items. So if you’re selling two of something and you have three bidders, one bidder might bid an amount to buy both of those items. Let’s say they paid $5,000 for each item, the grand total of $10,000. And then two other parties enter, one bids $8,000, the other bids $4,000. That aggregate total is $12,000 and it actually gets split. So each party pays six and six and that’s optimizing the amount of capital yielded for selling those assets and the price paid for each one between the two parties.

Zach: What if the person that bid $4,000 can’t or doesn’t want to pay $6,000?

Brendan: That’s a matter of checking to see whether they actually have the capital to pay that in an auction. That could be a barrier. But generally speaking in these, in these auctions, in order for the second party to follow through with the actual sale, they have to agree on that price.

Zach: Is this something that’s checked upon the time of bidding? So it’s known that the funds are in the wallet or does it assume this and that if it doesn’t work it re optimizes?

Brendan: So for us we will need to implement a way in which to have that almost guarantee, but this is used in things like auctions for Olympic cities for example. In real sitautions, when you’re buying a house, you have a certain amount that you have kind of escrowed and you can bid within that range. So they’re the same thing. You have like a certain maximum bid and you bid within a range under the thumb.

Zach: So yeah. My thought was just that, given you’re going to be bidding, presumably using crypto assets, you have the ability to then like connect something to a wallet so that you can see the total capital that that person has. There perhaps could be some types of terms to the auction anything you put in the wallet can be the rest of what you bid, what you’re comfortable doing. And then there could be optimizations from that.

Brendan: Yeah. There’s going to be an escrow element where in order to participate you have to escrow assets and then you’d bid within the balance of that escrow.

Zach: If you’re able to check the wall too, do you need to be able to escrow?

Brendan: Yes. In this environment, yeah. You would escrow in a multi-sig wallet where each party at the end of the auction, they can choose to finalize the sale, because obviously the third bidder who loses gets the assets back and they will have to sort of agree that the sale is completed in some way.

Zach: Okay. So my, my last question here is, could you briefly summarize the differences between this and a reverse Dutch auction?

Brendan: Yeah. So a reverse clutch auction, in this case is where you have a number of parties bidding at varying rates. So, uh, for example, if we had a certain quantity of something, a known quantity of a good, let’s use of a loan as an example, let’s say there was a bid out for $100,000 loan and you had three parties wanting to buy that loan at a ceratin interest rate. So the hundred thousand dollars, the person looking to take that loan isn’t setting the interest rate. You have buyers coming in that are going to fill that loan. Let’s say there’s three participants and the first two participants put in bids of 6% interest in the first one, second one puts in a 7% interest and both of those bids are for $40,000 each. That means that we filled up $80,000 about demand. We then have a third one come in and they want to buy another like $40,000 but there’s only $20,000 left and they’re bidding at like 8%. So we actually take the second highest rate in the auction. So not the 8%, the 7% rate to determine the rate of this loan. And each participant at the bottom contributes 40 and 40. And then the person on the top contributes 20 of that hundred thousand allocations. So it optimizes for the second highest sort of bid. And in this case it’s interest, until the full thing is set up.

Zach: And if those bids were made in a reverse Dutch auction, how would that differ?

Brendan: So that as a reverse Dutch auction.

Zach: Oh yeah. So sorry if that, if that was made in a Vickery Clark Groves?

Brendan: It’d be slightly different because you would, there’s various mechanisms for doing different sales. This, we’re talking about setting an interest rate for a singal item. In the previous example we gave using Vickery Clark Groves, we might have one or more items, in which case you’re trying to sell all of those items for the best price for all items. And we use that in my setting, let’s say for example, multiple validator nodes.

Zach: So Vickery Clark really only makes sense when you’re selling multiple of the same.

Brendan: Yes, exactly. Yeah.

Zach: And a Reverse Dutch is on a single basis?

Brendan: That’s right. Yeah. If you look at the ETH auction for example, there was X number of Ethereum tokens sold, and instead of the rate of the rate of interest in that example, it was a price that people were getting. So the price filled up from the bottom and then once all tokens were sold, it took the price below the highest you have to set the overall rate. So that’s where there’s a single auction, but multiple items all priced the same, and you can do that again with validator nodes as well. If you have 20 different nodes you’re trying to auction, each person put a bid in. Pretty similar that.

Zach: Okay, cool. Yeah. I know you’ve mentioned the different Clark auction before, but thanks for explaining it. Well, Brendan, I know you got a lot of stuff on your plate. I don’t want to take too much of your time today, but thanks so much for coming on the Tokenomics Podcast.

Brendan: Yeah, thanks. Really appreciate it.

Learn More

Pngme’s Website

Telegram Group

Pngme is a mobile finance platform connecting lenders with borrowers using our decentralized financial marketplace and digital credit score.

Pngme and the future of Lending — an interview with Co-Founder and CEO Brendan Playford was originally published in Unbounded Thoughts on Medium, where people are continuing the conversation by highlighting and responding to this story.

by Zach Resnick and Dave Mullen-Muhr

Facebook’s recent foray into the cryptocurrency space with the Libra token has spurred a slew of opinions on if it will be another enormous success or Facebook’s first spectacular failure. But what is Libra? As it currently stands, in light of early regulatory roadblocks and lack of functioning MVP, Libra is simply an idea described in a white paper, a few supplemental documents, and a test network. To judge the quality of this currently unrealized idea, we need to understand what Libra aims to become once actualized.

Based off the publicly released information at the time of this writing (7/23/19), Libra’s success state appears similar to a PayPal or Venmo but with the potential of a more global reach and specific focus on minimizing fees in the notoriously expensive-to-operate-in developing world. In addition, Libra aims to provide a less volatile base currency in terms of purchasing power compared to the currencies used in many of these jurisdictions.

This approach poses some initial problems. One concern when aiming to become a global paypal with its own currency is that this business model directly challenges the central banks of the countries in the developing world in which Libra will go to market. In banking, as we’ve seen attempted by Robinhood and others fintech companies, the tried and true Silicon Valley mantra of moving fast and breaking things doesn’t work so well. This would likely apply even more so for the intersection of banking and monetary policy. If Libra were to take an approach of directly challenging central banks around the world, it wouldn’t likely get to market or maintain legal compliance in most jurisdictions for long.

Facebook is not stupid, and for all the talk of Libra being an open cryptocurrency for the people, it’s likely that by the time of launch they will make sure to have all the formal and backchannel approvals needed from regulators and central bankers around the world. As a result, we think if Libra launches it will focus on remittances within developing nations rather than competing with payments and banking in so as not to seem too threatening to these institutions upon launch. This would allow Libra to compete in an area where countries are comfortable having foreign companies operate, and even dominate, that segment of their market.

While these potential successes could bode well for Facebook’s profitability, it’s important to note what this success state of Libra lacks; namely, the promise and unknown potential of a public immutable data ledger emerging from the incentive structure of a global proof of work blockchain like Bitcoin. While Libra, as a PayPal 2.0, could be the next in a storied history of hugely successful Silicon Valley fintech companies, it cannot build the novel network anticipated by the potential of Bitcoin.

Overall, the advent of Libra is a positive development for cryptocurrencies and blockchain whether it goes live or not. There is now an increased public awareness of blockchain and the innovations enabled by the technology as well as a sense of legitimacy from the broader public. Some in the crypto space see Libra as a harbinger of increased regulation. While those that seek to shield crypto from any future legal compliance may not like it, anyone serious about mass adoption has to accept that regulation is coming, for the long-term benefit of the industry. Beginning the process of iterating on this regulation sooner than later is likely for the best.

Next week, we will dive into what it would mean if Libra achieves its goals.

Libra: Will it Become Facebook’s Most Successful Failure? was originally published in Unbounded Thoughts on Medium, where people are continuing the conversation by highlighting and responding to this story.

Much has been made about the most recent major fork of the bitcoin blockchain: Bitcoin Satoshi’s vision (BSV). From crypto celebrity billionaire lawfare to conspiracy mass exchange delistings to high profile social media campaigns of threats and retaliation, the crypto space has been unavoidably abuzz with BSV and its most prominent supporter Craig Wright. But this, as with much of the “news” in the world of crypto, is almost entirely noise.

What is actually going on here?

In this series of essays we will explore this question, but first, more importantly, in this series of essays we will ask this question. If you get lost in the noise generated by the mob you will find that in the minds of most observers there actually is no question that needs asking. To them, the story of BSV is self evident: scam, fraud, shitcoin.

A sense of peculiarity stemming from this superficial crypto consensus became a personal obsession after attending a San Francisco BSV meet-up. Taking to heart the popular Bitcoin slogan “don’t trust, verify”, I ventured into the chaotic unknown of BSV open to discovering the steelman argument (opposite of strawman) for BSV’s raison d’être. Though I was open to this possibility, I was certainly hoping to have my presuppositions confirmed in discovering a cult of Craig Wright (more on him later) populated by mindless pawns echoing unoriginal arguments received directly from the twitter profile of their dear leader.

This is not what I found.

This series will be loosely formatted around the who, what, when, where, why, and how of BSV. At times this will look similar to any other asset valuation you may have read, weighing the pros and cons of the low level minutia of the platform and token. At others, it will be much more broad and high level in an attempt to explore the bigger picture.

The outline for the series will look as follows:

Table of Contents

• “What” is going on?: Fractals and Contrarian Consensus (this essay)

This essay (part I) attempts to answer how we found ourselves in this situation where general crypto consensus appears at odds with reality.

• “Where” is the problem?: BTC, Small Blocks, and Lightning Network

This essay (part II) looks into this hidden reality and outlines potential problems with crypto consensus that are largely unaccounted for, and as a result, not appropriately reflected in the price of assets.

• “Why” BSV?: Darwinian Fitness and Irrational Markets

This section of this essay (part III) explores the mechanics of forking and investigates what it means for the investor. It also investigates possible investment theses and hedging approaches that stem from forking. On a high level it attempts to introduce a useful crypto-relevant heuristic via simple biological analogy.

• “Who” is Craig Steven Wright?: Satoshi? Does it Matter?

This section of this essay (part III) dives into the identity of the mysterious and controversial figure of CSW. Who/what does the crypto community think he is? Why? And ultimately, what does it mean?

• “How” did we elect thought leaders?: Complexity’s Preference for Genius over Excellence

This essay (part IV) is a high level look into how we arrived at our crypto consensus. What methodology and epistemology are implicit in this process? Did we actively decide to use these tools? Are they the best tools for the job?

• “When” to make an investment: A Conclusion

This essay (part V) is a conclusion. What is the take away of the series? Where can we look to continue this exploration?

Let’s begin.

“What” is going on?: Fractals and Contrarian Consensus

Before we enter the discussion of BSV we need to familiarize ourselves with one another in order to provide necessary context. If you are someone who has never explored cryptocurrency or bitcoin, this essay likely won’t provide maximal value. Likewise, if you are someone who sees their worldview well articulated by Paul Krugman in his NYT op-eds. There are other essays which would benefit you more as an introduction. This isn’t an ad hominem attack on these points of view, though I realize it may sound as such. Instead, this is a recognition of the fractal nature of “red pills” with special consideration for this specific fractal pattern. Let me explain.

I fancy myself a free thinker, or perhaps even a contrarian. I’d imagine you do as well. Who, after all, would self identify as someone who “just believes what everyone else does”. Nope, not us. We are all free thinkers with the ability to be contrarian. So the operative question becomes: contrarian relative to what?

For example, if you were to take a broad look at the landscape of institutionally approved, good opinion, capital E Economics (academic, political, establishment media, etc), you would find that the overwhelming influence comes from the Keynesian school of thought. The policy level debates engaged in between Ds and Rs are largely centered within the Keynesian game.

“The income tax rate should be X% and the slowly transition towards Y% over 10 years in order to achieve Z effect on consumption and aggregate demand.”

or

“The federal reserve should increase the money supply to X to manipulate the interest rate towards Y% in order to achieve Z% GDP growth by year 2023.”

These discussions weigh the pros and cons of differing strategies within the boundaries of the Keynesian game. However, every once in a while you have someone like Ron Paul who will come in and say something along the lines of:

“Let’s remove the ability of the federal reserve to even have the option of manipulating interest rates by fixing the money supply to a scarce and tangible asset outside their inflationary control. I suggest we use gold.”

Rather than playing within the boundaries of the Keynesian game, Ron Paul is playing with the boundaries. In this example, he is contrarian relative to consensus economics. In modern lexicon (influenced by the film The Matrix, itself influenced by Plato’s Republic before it) Ron Paul is “red pilled” on academic economics. That is, he has access to an alternate lens outside of the Keynesian game through which he can view the study of economics. The existence of this new perspective would not be visible to him were he not red pilled. This asymmetry (the very notion of having the ability to play with the boundaries) is the defining factor of the phenomenon of a red pill.

This specific example of Ron Paul voicing the ideas of contrarian Austrian economics over consensus Keynesian doctrine isn’t an arbitrary one. I chose it because if you’re reading this essay now you are likely empathetic to Ron Paul’s point of view. This is because crypto currency itself is another scale transformation smaller in the same fractal pattern of consensus/contrarian as it applies to economics. Thus, if you are an avid Krugman accolite, you would likely find this deep dive into a specific crypto currency a futile exercise. Let’s imagine this fractal looks something like this.

A minority of people looking into economics via the institutional expertise of Harvard’s Economics department or the New York Times’ Paul Krugman end up contrarian relative to this consensus opinion, Keynesianism. One prominent minority group standing contrary to the Keynesian consensus is the Austrian school of economics. Now, let’s assume this Austrian minority arrives at some other consensus opinion of their own, like Ron Paul’s suggestion that we should opt for gold as a form of sound money over value by fiat and the US dollar. Alas, we have contrarian consensus. Contrarian in that Austrians are contrarian relative to Keynesians, and consensus in that they, among themselves, mostly hold this same sub-view that gold is the optimal form of sound money. A key implication of the formation of this fractal pattern is that if you are not already sufficiently contrarian relative to Keynesian economics, the case for gold being a superior backing for the dollar than the full faith and credit of the US government won’t be easily made. Does the fractal go deeper? Is there another minority within consensus Austrian thinking? Enter crypto currency.

Since you chose to read this essay you are likely still tracking with me. As with the dependence of the case for gold resting largely on a contrarian disposition towards institutional economics, so too does the case for crypto currency. But because of the fractal nature of the pattern, crypto currency requires both a contrarian view of sound money AND a contrarian understanding of Keynesian economics. These views are nested within each other like a set of Russian dolls.

Despite receiving a bachelor’s degree in economics from the University of Michigan, or perhaps even because of it, upon first hearing about bitcoin in 2013 I could only interpret it through the framework provided by institutional consensus. At the request of a friend who considered my area of study an indication of some relevant expertise, I looked into if she should buy some at around $400/BTC. My expert opinion: “Nah. It looks dumb.” Steeped in the Keynesian context of institutional economics, I saw no need for any form of sound money, let alone elusive and intangible “magic internet money.” Because of this lack of contrarian Austrian context, it read as a speculative fad not dissimilar to Beanie Babies or Pokemon cards.

Would this understanding still have been true if I was aware of the contrarian arguments against Keynesian thought? Peter Schiff, a prominent Austrian thinker and proponent of gold as sound money was made aware of crypto currency around this time as well. However, he too was not a believer in its efficacy, opting instead for the contrarian consensus of gold and other historically valuable precious metals. The contrarian nature of crypto currency relative to Austrian thinkers as a whole is roughly quantified by examining the market capitalization of each asset class. At that time, in 2013, gold had a market cap significantly higher than Bitcoin’s. According to the votes of market participants with their dollars, crypto currency investors were a contrarian subset of Austrians, even considering the utility value of gold as raw material.

Once we recognize the existence of contrarian consensus and the fractal pattern forming in this specific economic domain, the question stands: how deep does it go? Is there a contrarian consensus within cryptocurrency that warrants additional red pills beyond the three already discussed? Are we (crypto currency early adopters) sufficiently red pilled?

For the remainder of the essay I am going to assume the reader is not the aforementioned Paul Krugman lover or crypto rejecting “no coiner”. While the first three scale transformations of the above fractal patterns likely didn’t alienate you, statistically speaking the following should.

This version of the fractal pattern will serve as a visual representation of the thesis of the remainder of the essay series. Thus far in part I, a key distinction has been implied that is worth explicitly emphasizing now.

DISCLAIMER: holding a contrarian position, or being red pilled, on a given topic IS NOT evidence of being correct about the topic.

Still assuming your position on economics and crypto currency, you and I agree that our contrarian disposition towards these fields has offered us a point of view that is providing an edge over the broader market. If our beliefs about future trouble facing the US dollar and the upside potential of crypto currency as a solution pan out, this contrarian position will offer us a huge financial opportunity. However, we could both be wrong. This is partially why we haven’t built our subterranean bunkers. The US dollar and Keynesian thought may surprise us and withstand the test of time. Crypto currency may end up as Beanie Babies 2.0 after all. Thus, the value of internally accessing this contrarian position is not that it ensures the infallibility of our predictive ability, but rather that it improves the landscape of additional options for our choosing. Optionality provides us the possibility of using these new points of view as a tool to obtain alpha.

If your initial reaction to the fleshed out fractal pattern as visual thesis is one of condemnation or dismissal, then we actually share this in common. But why let your first reaction dictate your ultimate position? Just as you are now glad you once peered through the thick consensus of Keynesian doctrine and exposed yourself to the contrarian study of Austrian economics, wouldn’t you also like to know the argument against the contrarian consensus of BTC as superior sound digital money? Do you currently know a steelman of this argument? Are you sure? If you are curious enough to find out, please continue reading. If not, I hear that Krugman has a great new op-ed on the benefits of a $15 minimum wage.

Continue on to part II

Bitcoin Satoshi’s Vision (BSV): Identifying Signal Through the Noise was originally published in Unbounded Thoughts on Medium, where people are continuing the conversation by highlighting and responding to this story.

Our Core Values: Unbounded Capital

Seek the truth, no matter where it leads.

If someone asked me four months ago whether I would ever invest in Bitcoin SV I would have replied no, I would never invest in a project spearheaded by ‘Faketoshi’. Now it’s the largest position in our fund. How did that happen?

It started with one of our team members, Dave Mullen-Muhr, attending a local Bitcoin SV meetup. After a few hours disproved most of his assumptions about the project and quality of community, this began a long journey of learning more about the technological approach Bitcoin SV is taking, meeting those involved in Bitcoin SV which we found had the highest ratio of thoughtful builders to speculators of any major cryptoasset we’re aware of, and ultimately seeing this as one of the best asymmetric opportunities I’ve seen in my life. You can read more about our fund’s decision to invest in Bitcoin SV here.

We treat your money as if it is our own. Because it is.

While I wouldn’t advise this to almost anyone, I have most of my net worth in our fund. As the fund grows I want that number to come down a bit, but I never anticipate having anything less than 60–70%.

Every one of our advisors has money in the fund too. This ended up coming at a significant financial cost and headache, but I don’t regret that decision for anyone involved in our fund to share in both the upside and downside of our investment decisions. Skin in the game matters.

Remove the ego from decision making

An essential skill in poker is not getting emotionally attached to specific hands. This is one of the biggest mistakes an investor can make. Having played and studied over 10,000 hours of poker in my lifetime, I’ve systematically identified where I’ve deviated from the optimal strategy due to emotions and ego, and have created systems to make the best, unemotional decisions. I am now actively working on scaling those systems to every decision the fund makes.

For example, this includes a Bridgewater-inspired approach of writing down the reason for every decision and having a regular practice of the team reviewing these decision thoughts and seeing how we can learn from them.

Never stop learning

Almost every morning before I get connected to the world, I read between 1–2 hours of books that I think will make me a better investor, but are rarely related to the assets we’re actually investing in. I recently (6/12/19) finished More Money than God, a book about the history of hedge funds and am currently reading The Most Important Thing by Howard Marks.

Myself and our fund’s core team got into this business to have a vehicle to spend most of our day learning. When not actively reading or researching, we spend much of our remaining time debating issues internally or seeking out forums to learn and discuss from those outside the fund.

Our Core Values: The New Economy Fund was originally published in Unbounded Thoughts on Medium, where people are continuing the conversation by highlighting and responding to this story.

If you are arriving at this essay without first reading parts I, II, III, and IV, all the necessary context will be lost. The following links to each individual essay, several of which build off their predecessor.

Table of Contents

• “What” is going on?: Fractals and Contrarian Consensus
• “Where” is the problem?: BTC, Small Blocks, and Lightning Network
• “Why” BSV?: Darwinian Fitness and Irrational Markets
• “Who” is Craig Steven Wright?: Satoshi? Does it Matter?
• “How” did we elect thought leaders?: Complexity’s Preference for Genius over Excellence
• “When” to make an investment: A Conclusion (this essay)

“When” to make an investment: A Conclusion

Many in the crypto currency space have dropped the time tested and old fashioned tools of Benjamin Graham-esque value investing and traded them for sexy and new technical analysis, algorithmic trading, and crypto native conventional wisdom like the inevitability of the halving price pump. Perhaps some of this novelty is rooted in the intangibility of crypto assets or the Ponzi-adjacent notion of a “store of value.” Admittedly, the value potential of the assets on the market are often abstract and hard to grasp and these burgeoning frameworks for trading them have appeared somewhat predictive over the past several years of this immature market. However, we think the fundamental rationale behind value investing is appropriate even for this new asset class and its wisdom will prevail over time.

The dream of any good value investor is to find a fundamentally valuable asset that is universally ignored and maligned such that market sentiment artificially lowers its price below its value. With BSV, we believe we have found one, with the added benefit of unusually asymmetrical upside.

Given this framework, BSV is an attractive investment not in spite of, but because of, its universal condemnation as an obvious scam and fraud. After doing the due diligence for yourself, upon observing the behavior of those shouting and the arguments they are voicing, it’s clear that they haven’t looked into it deeply. Reassured by the depth of their contrarian disposition (and its implication that they would never fall for the musings of the mob), crypto currency contrarian consensus doctrine seems to be blinding itself to the arguments made by those actually working to build and improve the value of BSV. In other words, ignorance and emotional vitriol are already baked in and thus we are able to identify the existence of an artificially lowered price without much effort.

To determine if this artificial price suppression falls below the investments fundamental value requires more effort. However, the justification required for a positive expected value investment in BSV does not need to rely on the specific claims of a controversial individual like Craig Wright or even on the lofty ambitions of the project itself. While Craig’s claim about being the inventor of bitcoin would certainly bode well for BSV’s future value and price, it’s not necessary to make it a good investment at these prices. If BSV’s vision of an enterprise friendly public blockchain that is mindful of legal compliance and remains pragmatically stable to achieve these ends is realized, what is the future value of the investment? The larger the market one can realistically capture, the more asymmetric the bet is.

Alternatively, does the inclusion of BSV into what was previously understood as an investment in bitcoin stand to reason? What is a bitcoin? Putting aside the value investor’s approach to BSV as an investment in and of itself, one can take advantage of the asymmetry of a hedge for BTC the species by diversifying into all of bitcoin’s Order level variations. In so doing, one can also hedge against the potential failure of lightning network and other unproven scaling solutions as bitcoin ownership and use grows over time. As for when this hedge could be essential for a successful bitcoin investment, Nassim Taleb stated in a recent interview with Bloomberg (in reference to non crypto asset financial markets) “I’d rather be very poor at the timing and very good at the hedging”, adding “I engage in financial markets if and only if I have tail hedge protection and it’s done right. Otherwise, don’t engage in financial markets.”

Crypto currency contrarian consensus has emerged to tell us that these concerns are unwarranted FUD (fear, uncertainty, doubt) that do not require further investigation. As first principle oriented free thinkers, we have heard this before at each level of fractal contrarianism and ignored the warning opting to “not trust, but verify” for ourselves. Perhaps this series can serve as a catalyst for that process for yourself with regard to BSV.

For an entry point for further research beyond the sources linked in this essay we have compiled a list as follows:

Further Resources

Adaptive Valley Crossing and Fitness Landscapes with Jordan Hall (alternate framework for Weinstein’s excellence vs genius distinction)

Daniel Krawisz Bitcoin Stuff: I think I figured out nChain’s Business Model

Daniel Krawisz Bitcoin Stuff: Enter the Wardrobe into Narnia

Kevin Pham Interviewed by Kurt Wuckert Jr

Jimmy Nguyen Interviewed by Michael Hudson

Joshua Henslee Interviewed by Marianne Jett on Use Cases of BSV

BSV Series: Part V was originally published in Unbounded Thoughts on Medium, where people are continuing the conversation by highlighting and responding to this story.

If you are arriving at this essay without first reading parts I, II, and III, some necessary context will be lost. The following links to each individual essay, several of which build off their predecessor.

Table of Contents

• “What” is going on?: Fractals and Contrarian Consensus
• “Where” is the problem?: BTC, Small Blocks, and Lightning Network
• “Why” BSV?: Darwinian Fitness and Irrational Markets
• “Who” is Craig Steven Wright?: Satoshi? Does it Matter?
• “How” did we elect thought leaders?: Complexity’s Preference for Genius over Excellence (this essay)
• “When” to make an investment: A Conclusion

“How” did we elect thought leaders?: Complexity’s Preference for Genius over Excellence

While it’s fun to mock fallen gatekeepers like the NYT or the Harvard economics department from the first level of our fractal contrarian image, it’s important to remember that “experts” do exist for a reason. Theoretically, these institutions are designed to sit atop hierarchies of competence and meritocratically separate the wheat from the chaff, saving the wider public the necessary time and knowledge required to individually do this ourselves. However, if these hierarchies were functioning properly they wouldn’t present us with Nobel prize winning Paul Krugman as high quality wheat and relegate someone like Nassim Taleb as disposable chaff. In the absence of well functioning institutional gatekeeping, we are left to determine this by some ad hoc, less standardized method. Whether consciously or not, crypto seems to have done some version of this. We now appear to have “thought leaders” and organizations with a degree of crypto community prestige. These entities would likely rate highly on broad polling of the crypto community and empirically do “rate highly” in the continuously ongoing poll that is Twitter follower counts, with Twitter serving as a vital communication network for the industry as a whole. So who are these crypto currency “experts” and what might their effect be on blue pilled (non red pilled) contrarian consensus?

Determining who is an “expert” out of a large community without the aid of the gatekeeping institutions is a difficult task. Particularly when the domain in which you are seeking expertise is one that involves complexity. Crypto currency ought to be considered a domain of meta-complexity because it is an irreducibly interdisciplinary field (cryptography, computer science, economics, systems theory, evolutionary theory, game theory…among others) containing several individual domains with complexity as standalone subjects. Given its meta-complex nature, it’s arguable that all-encompassing expertise in crypto currency is an impossibility altogether. Notwithstanding, this won’t prevent curious individuals from seeking out experts upon first entering the field. Naturally they will look for people to listen to in an attempt to educate themselves. People who appear as experts, perhaps marketing themselves as such, will emerge. Iterated over time, these “expert” individuals will be the ones who accrue the highest Twitter follower counts. Without the ability to properly discern the competent from the fraudulent, newcomers will be especially susceptible to individuals offering the appearance of polished excellence in a form they are superficially familiar with from seemingly analogous fields like finance or computer science. These individuals will signal, and read, as those who have achieved excellence and expertise, and the social proof from high online metrics will ostensibly confirm it.

Excellence, as Eric Weinstein the Managing Director of Thiel Capital, posits, is qualitatively different from genius. Excellence is primarily concerned with quality control which is traded off for adaptability and innovation, the primary fruits of genius. To demonstrate this distinction Weinstein uses the example of music performance.

“If I’m going to go for a classical music concert, I want to assume that the piece will be played flawlessly, and I will concentrate only on the interpretive aspects of the piece above that. But, in fact, quality control can be deadly. For example, in a jazz date where an improviser takes few risks, the music may be pleasant enough as background music but it’s scarcely the sort of thing that would have animated the bebop generation who played live dates under open mic conditions never knowing what would happen next.”

Excellence, he argues, is the ability to narrow ones variance in some domain to regularly achieve near-perfect outputs. Genius is the ability to thrive in sloppy, high variance environments and ultimately innovate to create new domains that perhaps the excellent will later come and improve (read: lower the variance) upon. Given the immaturity and meta-complex nature of the domain of crypto currency, excellence is a fool’s errand. One cannot sufficiently narrow the variance of the field in order to deliver on that promise. Especially at this stage in the development of crypto currency, the underlying complexity is out of individuals’ control. Unlike playing the trumpet, crypto currency isn’t “masterable” for even the most competent individual. This is dissimilar from more mature domains like the aforementioned finance or computer science. Although crypto currency can at times superficially appear similar to these fields, the type of “thought leader” required to successfully traverse them is wholly different. Crypto currency is better suited for genius. In 2018, we are not even close to the classical concerto stage, we are still improvising.

If we look at the variety of “thought leaders” and organizations who have emerged and most heavily influenced the contrarian consensus of crypto currency in 2019, it appears that we have foolishly (though understandably) overvalued excellence to the exclusion of genius. To illustrate this point, we will look at the crypto currency figures of Richard Heart and Daniel Krawisz as representations of a broader pattern. Let’s look at their Twitter profiles. How do they choose to present themselves?

Richard Heart:

Daniel Krawisz:

Even just aesthetically from their Twitter profiles there is a lot to be learned. Heart’s is gilded and strong (albeit somewhat quirky) like the facade of a centuries old wall street bank. His royal-ish sounding pen name centered in golden typeface is buttressed by Obama ’08 esque pop art profiles of his face. Krawisz, to the other end of the spectrum, demonstrates a fuzzy softness with a watercolor sunset and his avatar (literally) of a flamboyant blue furry donning eye make-up and antlers. The short text profile from Heart includes (presumably earnestly) “billionaire”, “thought leader”, and “founder”. Krawisz similarly includes “cofounder” but follows it with the ironic title of “emperor of bitcoin” and then the unassuming and amateurish name of his Youtube series “bitcoin stuff”. While there is certainly some tongue-in-cheek aspect of Heart’s profile as well (wearing a top hat in his avatar and the gaudy aesthetic of the golden candelabra behind him) the difference between the two is clear before you even hear them speak. Once you do, this difference is solidified. Heart is signaling excellence, Krawisz is signaling genius.

Both Heart and Krawisz have dozens of videos and I encourage you to watch as much as you can from both. They each offer interesting perspectives. Heart is the classic “smartest guy in the room.” His IQ is obviously to the far right of the distribution. He knows computer science technicals, has a history of successful business experience, and a confidence that shows he’s not only smarter than you but also that he knows it. Every time I watch one of his 4K live-streamed interviews I am bamboozled by 13 new words I’ve never heard before that he throws out so nonchalantly it seems like he’s boring himself. This is fine for me in the judgment-free safety of my home watching on a computer, but his interview and debate guests are often quickly dismantled by it. Quintessential excellence.

Krawisz takes a different approach. While he is also likely a high IQ individual, it seems like he doesn’t want you to know it. If you are comfortable learning about “bitcoin stuff” from an antlered blue furry, you pass the first test. If you don’t mind his shitty SD webcam recording him in his (what must be intentionally) poorly lit bedroom, you pass the second. If you aren’t put off by his intricate weaving of complicated literary metaphors referencing CS Lewis or John Milton to explain the cutting edge technological innovation of crypto currency, you pass the third. Both Heart and Krawisz are alienating. Heart is alienating with his excellence, you think he’s smarter than you (he is) and as a result you should listen to him. He isn’t talking to you as if he wants you to understand him. At times he will explicitly say things and follow with “but you have no idea what I’m talking about anyway”. Instead, he wants you to trust him. Krawisz is alienating in his difficulty. You’re not sure if he’s an idiot or a genius and as a result your time spent trying to answer that question may end up being wasted. Unlike with Heart, it seems like Krawisz does earnestly want you to understand him. So long as it’s in the same manner as he understands things AND (importantly) so long as you’re the type of person by whom he wants to be understood. Krawisz himself more or less articulates this method in one of his more difficult and interesting videos. The root of this Heart vs Krawisz distinction is somewhat elusive but there is something profound at its core. Maybe genius, maybe not.

On the surface it might sound like a universally good thing to signal genius. Everyone respects a genius! But as Kanye West noted, “name one genius that ain’t crazy”. Genius is typically a retrospective label of recognition granted with the clarifying benefit of hindsight; think van Gogh, Tesla, or Copernicus. Contemporaneously, the genius, horizontal, unorthodox, or weird thinkers who play with the boundaries rather than within the boundaries are often dismissed as fools. But, like with Ron Paul playing with the boundaries of economics and monetary policy, sometimes these foolish sounding ideas are just what’s needed to drop down into the next level of fractal contrarianism.

Perhaps the best illustration of Heart and Krawisz’s two styles is when they have a conversation together. The topic of the discussion is bitcoin scaling, especially relevant to this series. Just as we’d expect, Krawisz is difficult (playing the online game Peggle with the volume on high over Heart trying to talk) and Heart is intellectually flexing. Who “wins” the discussion/debate? There is no perfect controlled experiment, but Heart certainly has won the race for social proof (51k vs 13k Twitter followers, 39k vs 1.3k Youtube subscribers) and prestige expert status among the crypto masses. In the discussion Heart defends BTC against the threat of contentious forks as Daniel argues for their benefit to the community. Thinking about this selection mechanism for who crypto currency’s “thought leaders” are and the methodology they use to arrive at their ideas is a useful exercise.

Continue on to part V

BSV Series: Part IV was originally published in Unbounded Thoughts on Medium, where people are continuing the conversation by highlighting and responding to this story.

If you are arriving at this essay without first reading parts I and II, some necessary context will be lost. The following links to each individual essay, several of which build off their predecessor.

Table of Contents

• “What” is going on?: Fractals and Contrarian Consensus
• “Where” is the problem?: BTC, Small Blocks, and Lightning Network
• “Why” BSV?: Darwinian Fitness and Irrational Markets (this essay)
• “Who” is Craig Steven Wright?: Satoshi? Does it Matter? (this essay)
• “How” did we elect thought leaders?: Complexity’s Preference for Genius over Excellence
• “When” to make an investment: A Conclusion

“Why” BSV?: Darwinian Fitness and Irrational Markets

If we accept the difficulties facing BTC and the community’s failure to acknowledge and address them, the next question becomes: which alternative blockchains are positioned to outlast, and eventually overtake, BTC? While bitcoin as BTC might be irreparably flawed, we are in the fortunate position of being able to capitalize off of its open source nature. Unlike an individual company that is built and will either fail or succeed over time, the public code and transaction history that is the bitcoin blockchain protocol is infinitely forkable, or copyable. If you copy the blockchain, make a change, and secure the energy to sustain it alongside its parent, your new blockchain will effectively be a variation with a genetic mutation. In a Darwinian battle for fitness, you can then hold all of the various forks (mutations) and rather than betting on the individual chain (species) who will be most fit to thrive in its economy (environment), you can simply wait and see, knowing one of your investments will likely prevail.

Imagine you are an early speculator observing the prehistoric Earth and its landscape of primates are your investment options. You are saddled with the task of picking the species who will be able to reach the moon. If given the opportunity to pick between two formidable primate competitors of your moment, say Neanderthal and Homo sapien, you may be tempted to develop a thesis around strength and pick the species that seems strong enough to build a staircase to the sky, or perhaps you value intelligence more and opt for the one that seems smart enough to innovate a tool which can catapult them from the top of the tallest mountain. These both sound like reasonable theses, but settling on just one is risky nonetheless. If instead, you were able to start a few generations back on the evolutionary chain and could bet on “primates” (whose species are blessed with both strength and intelligence) as a category rather than an individual species, surely your odds of ultimately seeing one of your choices orbit the moon greatly increases. Who can know which of these theses is best for the current landscape, let alone which will be best for the future (and ever-changing) landscapes to come.

Thanks to bitcoin’s open source forkability we have this same option. To continue the biological analogy (Neanderthal vs Homo sapien), if blockchains are the Kingdom (Animalia), and the proof of work consensus mechanism is the Phylum (Chordata), and the SHA-256 hashing algorithms the Class (Mamalia), and Bitcoin is the Order (Primate), then we can in fact bet on “Primates” to reign supreme. If either neanderthal reaches the moon by brute force or Homo sapien reaches it through brain power, we will come out a winner. Some speculators might argue that they know ahead of time the species of bitcoin which will win. Maybe it will be BTC with its strength, or BCH with its ideological purity, or maybe it will be BSV with its strategy. Regardless, holding all forks as a bet on “primates” writ large could prove most wise.

Note: If you spend time in the crypto currency space, or silicon valley generally, you will almost certainly hear the language of Nassim Taleb utilized. Antifragility and lindy are powerful concepts but often misapplied. While bitcoin is maximally lindy compatible within its field (10+ years old, 100% uptime, unhacked, high value blockchain) and, given bitcoin’s aforementioned forkability, it has a degree of antifragility, one must be careful not to assume bitcoin (the Order) is equal to BTC (the Species). BTC is arguably neither antifragile nor lindy. Thinking deeply about the implications of this is a fruitful exercise.

If this bet on bitcoin (again, as an order not species) opens us to the big block alternatives to BTC, in BCH and BSV, how do we go about valuing this range of investments? For the most hands off approach, one could simply aim to hold one complete “original bitcoin”, or 1 BTC + 1 BCH + 1 BSV = 1 bitcoin. If you bought a bitcoin prior to the major forks in 2017, then this would be your default investment barring any active rebalancing. However, now that the forks have occurred, in order to hold all forks new buyers need to effectively roll back the clock and manually purchase each. At current prices at the time of writing (5/5/19), if our total USD investment allocation was $1,000 this would look like $943.71 invested into BTC, $47.16 invested into BCH, and $9.14 invested into BSV for .165 of each coin’s 21 million total supply. This would guarantee us exposure to all three bitcoin potentialities without biasing our nominal vote for any single selection. While nominally we are hedged, emotionally we will rationally favor current market sentiment continuing such that our $943 investment into BTC doesn’t one day value as less than our $9 investment into BSV. Essentially, this hedge is saying “I think the market today is mostly correct regarding bitcoin forks”. Alternatively, another passive investor could equilibrate their hedge in real USD terms at today’s prices. This would look like a $1,000 investment into “bitcoin” as $333.33 for each BTC, BCH, and BSV. This approach would yield .058 BTC, 1.17 BCH, and 6.039 BSV. While you are now equally hedged in USD terms, you have an economic incentive biasing you to hope for a black swan event that proves BSV most fit giving you the largest percentage of total coin supply of the three. Essentially, this hedge is saying “I think the market today is likely incorrect regarding bitcoin forks.” Beyond these two somewhat passive approaches, a curious and more active investor with detailed knowledge of the differences between forks and a thesis about the future landscape of the industry could more heavily utilize current market sentiment and resulting price disparities to their favor by designing a portfolio that fundamentally respects the impossibility of perfectly foretelling Darwinian fitness while also incorporating observations about current market conditions and contrarian consensus biases.

Recalling our fractal contrarian consensus image from part I, we now enter into the smallest known transformation: BSV.

Given our concerns with BTC’s small block roadmap and its proposed last second fix-all in lightning network, we should error more towards the latter of the two passive investment theses from above. The market seems to be wrong, or worse, naively and wholly unaware, of these problems. However, rather than relying on a simple arithmetic real USD hedge between the three major bitcoin forks, let’s consider their specifics. Perhaps all three forks aren’t equally likely to survive. Perhaps market sentiment has an unwarranted bias against BSV. The noise surrounding BSV seems to universally suggest that it’s a scam. So much so that those earnestly seeking to understand it better can be led to believe that the very endeavor is a fool’s errand. Surely this is having an effect on its market price, perhaps to an extreme effect. Looking beyond the surface noise, what is the case for BSV from those who support it and what could cause a black swan to trigger a polar shift towards it in the market?

As I mentioned in part I, my introduction to the BSV community and their arguments as delivered from their own mouths was at a San Francisco BSV meet-up. I expected a mirrored echoing of the noise I was hearing about BSV, but what I got was light on noise and heavy on signal. My two big takeaways from this meet-up were:

1. BSV has a different fundamental conception of what bitcoin should be

and

2. BSV is uniquely concerned about miner incentives and profitability

The first was entirely unexpected. I thought we all, at least, agreed on the what of bitcoin, and the fork disagreements were primarily concerned with the how. This proved incorrect. The highly technical discussion of the BSV meetup was primarily concerned with bitcoin as a serverless database infrastructure. If the popular conception of bitcoin was a future oriented competitor to dethrone gold (according to BTC) or the USD (according to BCH), BSV’s counter suggestion was that bitcoin was more like a future oriented competitor to dethrone AWS and other large, siloed server farms. This foundational change has huge downstream implications. If you are building a decentralized web protocol to be utilized by large corporations and governments, you want different things than if you are building a competing form of value or money with which to undermine and make those same corporations and governments less relevant. Having entered the meet-up as someone who understood the case against small blocks and the case for big blocks, this was still a new vision for bitcoin for me. The privacy features being added to BCH that I was celebrating as a benefit to government resistant money were being condemned by BSV as a surefire way to alienate the target market of enterprise business who would be concerned with legal compliance. Again, to my surprise, the disagreement was on the what, not the how. This required a mental system reboot. Immediately I was transformed from someone with competence and comfort in subject matter bitcoin to someone without.

This disorienting transformation was also significant in discussions I had regarding mining. The conventional wisdom regarding bitcoin’s halving always struck me as patently wrong. BSV elaborated on this intuition. Every four years, bitcoin’s block reward or block subsidy is decreased by 50% (from 50 to 25 to today’s 12.5) such that over time it asymptotes at 0. This reward is the mechanism for bitcoin’s inflation and the mathematical explanation for its absolute scarcity of 21 million bitcoins. The conventional wisdom in bitcoin is that the halving leads to a price increase since inflation is lower and, as a result, coin value is less diluted from that point forward.

Understanding the sound intuition behind basic rational market hypothesis from my economics study, this didn’t make sense. How could something public and mathematically fixed on specific time intervals not already be priced in? It seems illogical. If we know price will definitely increase tomorrow, we will buy it today. This results in a steady upward price appreciation given bitcoin’s fundamental selling point of scarcity, rather than the piecewise jumps suggested by the crypto currency contrarian consensus on halving. BSV then expanded on this notion and painted an even less rosy picture. Not only would the upcoming third BTC halving (in May 2020) down to 6.25 BTC/block likely not help the BTC blockchain, instead it could be an existential threat. While each halving is a 50% decrease, the drop from 50 to 25 is acceptable so long as mining margins remain profitable. If the USD exchange rate for BTC outpaces the block reward halving, this could even result in a real increase in mining revenue (exe. 50 BTC * $1/BTC = $50/block is orders of magnitude less than 25 BTC * $400/BTC = $10,000/block). If the block reward decreases by half and the speculative price growth of BTC doesn’t outpace this, miners may start to worry. Again, this is something that is mathematically fixed and curious miners should already be anticipating the change and investing into capital accordingly. However, if crypto currency contrarian consensus of the halving price pump is sufficiently doctrinal, the potential for a halving in real USD revenue may be under appreciated. Suppose the expected real USD block reward value increase doesn’t come as expected. How will miners respond? Will their support for the consensus pick of the crypto community supersede their value seeking?

The roadmap for BSV (and BCH) plans to make up this block reward difference by increasing the quantity of transactions per block, and as a result, the number of transaction fees miners receive as compensation. If there are millions of tiny transactions fees per block come next halving, this could make up for the 6.25 BTC block reward decrease. Since BTC has its fixed, small blocksize, their increase in transaction fee aggregation comes not from allowing more transactions per block but instead through increasing the fees per transaction. If the future prospects of BTC’s value is sufficiently high to incentivize users to pay increasingly high fees to compensate miners this may continue to remain viable. However, if this increase doesn’t come on schedule with the halving, miners may be incentivized to leave the network as they find themselves operating at a loss due to their primary fixed cost of electricity. If the SHA-256 miners currently mining on BTC opt to turn off their mining rigs, they could consider the capital invested into them as a loss, or they could easily transition to mining another SHA-256 chain, like BCH or BSV, which may have more aggregate transaction fees to pay them.

If BTC miners are more like profit seeking mercenaries than benevolent team players, BTC’s lack of transactions and aggregated transaction fees could prove costly. What happens if enough miners opt to leave the BTC blockchain and dedicate their hash power to a sibling blockchain that they deemed more future oriented?

Whether I agreed with the conclusions of the people at this meet-up or not is somewhat beside the point. Their arguments were rational. If BSV was building an enterprise and government friendly protocol in order to accrue as many transactions and transaction fees as possible, how would they make this pitch to said enterprises? Beyond legal compliance, BSV is focused on the theme of stability. “Solid foundation” is often juxtaposed to “quicksand” in professionally polished presentations delivered by nChain’s Jimmy Nguyen. Bitcoin as an Order level protocol is stable (perhaps lindy) in that it has existed for 10 years, but the Species level BTC and BCH have been regularly innovating and changing. Within crypto currency contrarian consensus, this is touted as a positive. To build the best value store or digital money you should implement the best code from the best coders and thinkers concerning themselves with that goal. They should stay competitive and maintain first mover advantage over the competing crypto currencies. Because BSV disagrees about the goal of the use of the protocol, they fundamentally disagree with this outlook. In order to attract established enterprises and entrepreneurs, they argue, bitcoin needs stability such that the rules for operating remain consistent and people can build for the future rather than the ever changing present.

This fundamental case for BSV doesn’t slightly differ with general market perception, it’s entirely absent. My assumption that BSV would be trying to implement some better plan to build decentralized cash was incorrect. Because of this, when I saw a lack of github commits to the BSV code I read this as evidence of a scam: they forked and are doing nothing! I was right about the lack of code commits, but I wasn’t made aware that this was essentially their entire pitch. A feature, not a bug. I know that I am not alone in this fundamental confusion regarding what BSV is aiming to do. Thus it must be reflected in the market via relative prices. What events could begin to change this? What could be a catalyst to trigger a rebalancing?

In the case of BSV there are a host of potential black swan events of which curious investors considering a hedge would want to be aware. Many revolve around the influence of BSV’s infamous unofficial figurehead, Craig Steven Wright: the man who claims to be bitcoin’s inventor, Satoshi Nakamoto.

“Who” is Craig Steven Wright?: Satoshi? Does it Matter?

Craig Steven Wright (CSW) is an integral part of the BSV story. This statement is actually a point of agreement between both the pro BSV camp and their anti BSV opposition, though in different ways. The noise from crypto twitter regarding CSW, the contrarian consensus of both crypto currency and big block BCH, is that he is an obvious fraud. The antithesis to King Midas; anything he touches is turned to shit. The unanimity of this consensus was powerful over me personally. Initially, the involvement of CSW, or Faketoshi as he is known, was the primary roadblock preventing me from investigating BSV altogether. While attending the BSV meet-up, Craig’s name did come up, but not in the way I was expecting. There was no “cult of Craig Wright” but there was a contrary perspective regarding who he was and was not. The cartoonish cult of CSW I was warned of was one where his followers are 100%, beyond a doubt convinced he is Satoshi Nakamoto, and as such, an infallible King Midas figure for bitcoins future development. Although contrarian consensus within BSV seems to be that he is indeed most likely Satoshi, nothing fundamental for the protocol depended on this being the case. If he were Satoshi, it would likely bode well for the protocol’s long term success as well as the coin’s short term price movement, but if he were not Satoshi, he was still providing value simply as CSW the Australian bitcoiner. Since we can’t know with certainty as we weigh the size of a potential BSV position in our bitcoin hedge, we should examine the ramifications of the two potential outcomes.

What if Craig is Satoshi Nakomoto?

If Craig is Satoshi this would obviously be a bullish revelation for BSV. The simplest reason being that Satoshi Nakamoto was an exceedingly bright guy. He had some really great insights and ideas that he compiled to invent bitcoin in 2009. If that came from the brain of CSW, then BSV will likely benefit from the ideas he has worked on since and will continue to work on over time. Craig, and his company nChain, have filed over 100 blockchain related patents since 2017. nChain says they have more waiting to be filed and Craig hopes to be the single largest patent holder in the world before he dies. A goal that seems realistically within reach. If these patents prove fruitful, developers will have many additional tools at their disposal when building on the BSV blockchain as nChain plans to license use of them for free to people building on their preferred protocol, a method historically used by Microsoft and other companies seeking to develop ecosystems that foster innovation and network effects.

If Craig is Satoshi, more weight would be given to his criticism of the directions that the BTC and BCH protocols have chosen. Although blind appeals to authority should not carry much weight, if the inventor of a category defining innovation offers a criticism of a secondary developer’s adjustment to that innovation, it should be deeply considered. Current crypto currency contrarian consensus accuses CSW of “technobabble”, or saying a lot of words that don’t culminate in anything of substance. Because of the baseline technical competence required to distinguish the substantive from the technobabble, determining this is often outsourced up to the most respected and technically competent voices in the space (more on them in the following section). As someone who is often required to do this outsourcing when discussion gets too technical, I noticed the interesting internal experience of watching CSW lectures and interviews with different framings biasing my viewings. If I watched him with the presupposed mindset of “let’s watch Faketoshi’s lecture on bitcoin” it read as clear technobabble. But, if I watched him with the alternate framing of “let’s watch Satoshi lecture on bitcoin”, it was profound. Because content like interviews and lectures are regularly shared embedded in twitter posts or reddit threads, the bias of the framing is often overt and unavoidable. The contrarian consensus of Craig being a scammer technobabbler likely plays a large role in confirming and propagating this bias.

Another key implication if Craig were Satoshi would be his potential plurality ownership of both BTC and BCH. Craig has made overtly malicious threats against both BTC and BCH as bitcoin chains he sees having perverted the goal of bitcoin. If he is one of the largest owners of both coins and he decides to dump them on market, both of these coins could see quick and drastic price decreases. This threat has existed since before CSW was claiming to be Satoshi with websites and email lists dedicated to tracking the currently unmoved “Satoshi Million”, fearing any movement could cause a preemptive psychologically induced crash in the markets even before they could possibly reach exchanges. If Craig is Satoshi, the asymmetry of coin ownership for some sort of malicious attack is likely in his favor as he would own all his forks as the result of a defacto “hold all forks” investment philosophy. This is in contrast to most BTC and BCH purists and their relative levels of fractal contrarian consensus who have likely already sold the majority (or all) of their post fork BSV.

What if Craig is not Satoshi Nakamoto?

If Craig isn’t Satoshi, the threat of malicious market sales fall away but his influence and patents wouldn’t necessarily suffer. Without needing to appeal to his authority as Satoshi, multiple high profile developers I met from the BSV meet-ups credited CSW with opening their eyes to previously unrealized potential of the bitcoin blockchain. Regardless of Craig’s position in the early days of its invention, his knowledge of the protocol must be real enough to inspire and enable these developers to build novel applications on the serverless web protocol of BSV.

If Craig is not Satoshi, what does this mean for his criticisms of the BTC and BCH roadmaps? Although this would remove his appeal to authority, it wouldn’t necessarily negate the case for BSV. A theme of Craig’s criticism of the other forks is their lack of pragmatism:

“People want to make this thing that they say will get around government. You don’t do it by walking to a government official and kicking him in the fucking nuts. I’m sorry. You do not make a system that will change the world by fighting the big bad gorilla and kicking him in the fucking nuts.”

-CSW

With or without the approval of Satoshi, by building a protocol that is legally compliant and enterprise friendly in its stability, BSV could grow to a level that facilitates competition with other currencies after it has reached an appropriate size and utility such that it could not be easily removed or undone. The logic of this strategy is sound: the Uber method. If Craig as Faketoshi is successful in building a powerful company like nChain to achieve these ends, the fundamental value of the protocol and its native coin should be valued higher than it is today as an “obvious shitcoin”. If Craig is somehow proven not to be Satoshi, then BSV price would likely decrease even more and could counterintuitively become an even more attractive buy if this fundamental value proposition is strong.

Let’s assume Craig is not Satoshi. Might it still be the case that the hatred of Craig (no matter how deserved) is impairing the sensemaking ability of potential investors in the platform? Although it’s likely true that Craig being proven not to be Satoshi would have an immediate negative effect on BSV’s price, is the crypto currency consensus’ level of emotional disdain for him blinding them to the BSV protocol’s unrelated potential? In a recent video, Ryan X Charles, an 8 year veteran bitcoin developer and BSV proponent, demonstrated a social experiment he conducted to explore this issue. In it, he showed the response to a tweet he posted stating his personal experience of CSW. The tweet read:

“Craig Wright has 17 degrees and he’s getting two more PhDs right now, simultaneously, while working a full-time job. He is the most serious life-long learner and scientist I have ever heard of in my life. Inspiring.”

In the video, reading through all 200+ responses he demonstrates the low quality of the tweets, anonymity of the posters, and largely emotional (rather than rational) nature of their arguments. The video is definitely worth a watch. What tangential information could be gleaned from this social experiment? What are the origins of the emotionally fueled hatred of CSW and who is promoting it?

Continue on to part IV

BSV Series: Part III was originally published in Unbounded Thoughts on Medium, where people are continuing the conversation by highlighting and responding to this story.