Our financial system is corrupt and oppressive. Cryptocurrencies represent an opportunity to route around that system, and make lots of money doing so.

Cryptocurrency is real, and presents the opportunity to make enormous amounts of money. Also, cryptocurrency scams are real, and present the opportunity to lose enormous amounts of money. Like the dot-com bubble in the 90s, you can add the concept of blockchain to just about anything and have a ‘business’ worth millions, no matter how idiotic the original idea. The vast majority of initial coin offerings are investments in businesses that are not providing anyone with any value, have no real customers and no obvious prospect of ever having any real customers.

The successful altcoin will be genuinely decentralized, as bitcoin was designed to be, originally was, and to some extent still is. Most of the altcoins, possibly all of them except the Bitcoins and Ethereum, are furtively centralized.

It will use, or at least offer the option, of Zooko type wallet names, as Bitcoin and Ethereum do.

It will be scalable to enormous numbers of transactions with low transaction costs, as Steemit and Ripple are, but Bitcoin and Ethereum are not.

It will support sidechains, and exchanges will be sidechained.

It will be a blogging and tweeting platform, as Steemit is, and will be a decentralized blogging and tweeting platform, as Steemit is not.

Every website reporting on the altcoin boom and the initial coin offering boom has an incentive to not look too closely at the claimed numbers. Looks to me that only Bitcoin and Steemit.com have substantial numbers of real users making real arms length transactions. Maybe Ethereum and Ripple also. The rest are unlikely to have any significant number of real, arms length, users. The white papers don’t tell you the qualifications of the people running the operation, or what they are going to do, what milestones they hope to reach.

The crypto coin business is full of scammers, and there is no social pressure against scammers, no one wants to look too closely, because a close look would depress the market. There is no real business plan, no very specific or detailed idea of how the coin offering service is going to be of value, how it is going to get from where it is now, to where it is going to usefully be. It is very hard to find out how many real users a crypto currency has, and how much stuff is available denominated in that crypto currency.

Most of the alt currencies are just me-too copies of bitcoin, not adding any substantial value, and/or they cannot scale, and they are deceptive about how centralized and how vulnerable to state attack they are. Nearly all of them are furtively centralized, as Bitcoin never was. They all claim to be decentralized, but when you read the white paper, as with Waves, or observe actual practice, as with Steemit, they are usually completely centralized, and thus completely vulnerable to state pressure, and quite likely state seizure as an unregulated financial product, thus offer no real advantage over conventional financial products. When you buy an initial coin offering, you are usually buying shares, usually non voting shares, in a business with no assets and no income and no clear plan to get where they will have assets and income, as in the dot com boom.

The numbers show that Bitcoin is number one, ethereum number two, ripple number four, and steemit.com number eighteen, but my wild assed guess is that Bitcoin is number one, steemit number two, ethereum number three. I have absolutely no idea where ripple stands. No one is providing data that would enable us to estimate real, arms length users.

Bitcoin exchanges are banks, and banks naturally become fractional reserve institutions. Bitcoin exchanges are furtively and secretly investing customer deposits, without reporting the resulting term transformation.

Genuinely free market banks, and bitcoin exchanges are genuinely free market banks, have a financial incentive to engage in term transformation – borrow short, lend long. Which is great for everyone until a rainy day comes, rains on everyone, and everyone withdraws their deposits all at the same time, and suddenly all those long term loans cannot be liquidated except at a loss, whereupon the banks exchanges turn to the state, and so begin the transition from a backed currency to a state currency, ceasing to be free market banks.

The trouble with fractional reserve is that free market banks, banks trading in a backed, rather than state, currency, tend to deny, understate and misrepresent the term transformation risk, making them slowly, and often unintentionally, drift into becoming scams. If the reserve fraction is visible to customers, then we could rely on caveat emptor. Right now, however, every bitcoin exchange is drifting into becoming a scam.

We need, and we could easily have but do not have, a system where the amount of bitcoins owed to customers by an exchange is knowable and provable, and the amount of bitcoins owned by an exchange is knowable and provable, so that the reserve fraction is visible, whereupon the exchange would have to provide information about the extent and nature of its term transformation, or else would likely lose customers, or at least would lose large, long term customers. This would involve the decentralized cryptocurrency making each exchange a sidechain operating a centralized cryptocurrency backed by the decentralized cryptocurrency. Which would also help mightily with scaling.

Bitcoin and ethereum is truly decentralized, in that it is a protocol that any entity can use, and that in practice lots of entities do use. If the government grabs some hosts, or some hosts do bad things, they can just be ignored, and the system continues elsewhere. They also use Zooko type identities, which in practice means your wallet name looks like line noise. This is outstandingly user hostile, and a reason so many people use exchanges, but it provides the core of resistance to state power.

Unfortunately, Bitcoin and Ethereum face scaling limits. Maybe ethereum will fix its scaling limits. Bitcoin does not seem to be fixing them. This makes Bitcoin and Ethereum transactions inherently expensive, which is likely to prevent them from replacing the corrupt and oppressive US government controlled financial system.

Steemit.com has a far superior design which does not result in scaling limits – although we have yet to see how its witness election system will perform at scale – as the system scales, money holders have less incentive to vote, less incentive to vote responsibly, and voting will inherently cost more.

Steemit.com is also highly centralized. The altcoin that will win will be the one needs to be scalable all the way to Visa and Mastercard levels, and needs to be visibly decentralized, visibly resistant to state seizure, and needs to have a mechanism that makes the fractional reserves of exchanges visible to exchange users.

Bitcoin was genuinely decentralized from the beginning, and over time became more centralized. Big exchanges and a small number of big miners are on the path to inadvertently turning it into another branch of the oppressive and corrupt government fiat money system.

The new altcoin offering are for the most part not genuinely decentralized. They have a plan for becoming genuinely decentralized some time in the future, but the will and ability to carry the plan through has not been demonstrated.

I like the steemit design. The witness system is scalable, the witness election system has problems which may be fixable, or may be inherent.

But I have a suspicion that investing in steemit is only going to profit whoever owns steemit.com, not the owners of steemit currency.

According to Steemit documentation, it looks like a well designed cryptocurrency that deserves to replace Bitcoin, because it is more scalable, more user friendly, and more immediately usable.

Well, that is what it looks like. Except its front end is the steemit.com website, and any one website can easily be seized by the feds. If actually decentralized, it should be a bunch of websites using a common crypto currency and a common identity system,

Remember usenet: A common protocol, and an internal name system. The particular host through which you accessed it did not matter all that much, because all hosts had to behave much the same. Steemit should be something like usenet with money, and it is not.

The way usenet worked, anyone (meaning anyone’s computer and his client program) could join as a client by having an agreement with a host, and anyone (meaning anyone’s powerful and well connected computer system) could join as a host by having an agreement with a few existing members.

A successful altcoin needs to be a blogging platform like Steemit, but it also needs to be a federation, like Usenet or Mastodon. Many of the blogs will be offering goods or services for cryptocurrency.

Then one could be more sure that success of the federation currency would benefit owners of the currency, rather than owners of a single central website.

Needs to be Mastodon with the ability to support a blog like post, and like Steemit, and unlike Mastodon, to send and receive money. Steemit.com is wordpress.com with the ability to send and receive money.

Bitcoin has a decentralized name system, rooted in Zooko style names that are not human intelligible. Its resistance to state power comes partly from the fact that there are several miners and anyone can be a miner, and partly from its decentralized name system.

Steemit has a communication and blogging system. But if I hold steemit currency, steemit.com connects that to my phone number, which the government connects to my true name. All that handy dandy data that the government would like all in one place that you can serve a warrant on or mount a raid on. Or just sell for profit.

Need a decentralized communication, identity, name, and blogging system, unlike Steemit.com’s centralized communication and blogging system, and a name system that is resistant to government intervention and control, like Bitcoin’s name system. Thus the blogs offering goods and services for crypto currency will be resistant to regulation or seizure by the state. When a ruler meddles as much as our state does, he gives dangerously great power to those dangerously close to him. The regulatory state inevitably drifts into anarcho tyranny, or, like Venezuela, into violent and chaotic anarchy.

But we also want human readable names. How can we square Zooko’s triangle? (As Aaron Schwarz famously asked, and then infamously gave a very stupid answer.) I will give my answer as to how a crypto currency can square Zooko’s triangle in a following post. (The answer being, much as namecoin does it.)

Tags: bitcoin, cryptocurrency