Bookmarkable + searchable summary of Cryptoeconomics by Erik Voskuil

Original post

This work is an attempt to put a summarized version of the book Cryptoeconomics by Erik Voskuil into one place in an easy-to-search way. The book can be found on GitHub.

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Other Means Principle

Other Means Principle: Bitcoin represents an act of resistance aimed at expanding freedom by reducing state power, potentially through risk sharing without violence.
Phases of Conflict: Bitcoin's security model anticipates four phases in the conflict between state and individuals over money control: Honeymoon, Black Market, Competition, and Surrender.
Honeymoon Phase: States seek regulatory control over money and securities, applying pressure at points of aggregation, leading to increased costs and reduced utility, driving the system towards greater distribution.
Black Market Phase: As controls fail and seigniorage is threatened, Bitcoin transactions and mining are outlawed, potentially leading to a global "War on Bitcoin" and the introduction of alternatives like Fedcoin.
Competitive Phase: Bitcoin persists as a black market money, with the state attempting to compete as a miner in a perpetual 51% attack, operating at a loss offset by tax revenue.
Fee Pressure: Transaction fees for censored transactions rise until they offset the state's mining tax subsidy, leading to a battle of hash power between the state and individuals.
Surrender Phase: The conflict continues until one side surrenders, potentially allowing Bitcoin to win the war by other means, though this victory may not be permanent as per the Threat Level Paradox.

Patent Resistance Principle

Patent Resistance Principle: Patents, unlike copyrights, are state-granted monopolies and act as anti-market forces.
Mining Competition: The mining process is highly competitive, and patent protection for efficient mining algorithms creates strong anti-market pooling pressure.
Bitcoin Security: Bitcoin's security relies on people resisting these anti-market forces, with increased risk for pooled and non-anonymous miners.
Impact of Patents: Without resistance, there is no security in the money. As the threat level rises, the risk of patent violation becomes comparable to the risk of mining itself, rendering the impact of patents inconsequential to the money's security.

Permissionless Principle

Proximity Premium Flaw: Latency, the time required for communication, cannot be eliminated as information moves at the speed of light.
Mining Latency: Different distances between miners mean some will learn of block announcements before others, leading to wasted capital on weak candidates as time progresses.
Opportunity Cost: Miners compete to reduce latency and thus opportunity cost, gaining a premium by aggregating closer to each other.
Pooling Pressure: This proximity-based pooling pressure arises from the linear block ordering required by consensus rules, causing disproportionate opportunity cost.
Variance Discount: Another pooling pressure caused by consensus rules.
Market Defense: Bitcoin aims to defend against anti-market state forces by distributing hash power broadly, but inherent pooling pressures work against this goal, making it a flaw with no known solution.

Pooling Pressure Risk

Pooling Pressure Risk: Pooling pressure refers to financial incentives for hash rate aggregation, including Proximity Premium, Variance Discount, Market Variation, Market Distortion, and Economies of Scale.
Incentives: Latency and variance are unavoidable, with consensus rules creating Proximity Premium and Variance Discount. Market Variation results from varying prices for mining resources, while Market Distortion arises from non-market costs like taxes, regulations, subsidies, and patents.
Economies of Scale: These may become negative in high-threat environments due to increased visibility but are otherwise positive.
Manifestations: Pooling can be geographic, cooperative, virtual, through relays, or via capital flow, all leading to hash rate aggregation.
Risk to Bitcoin: Continuous pooling pressure can result in transaction selection being controlled by one person, making Bitcoin vulnerable to co-option, a risk that cannot be mitigated by the economy.
Analogy to Federal Reserve: Pooling pressure in Bitcoin is analogous to the U.S. Federal Reserve system, designed to collect market money at a central authority through debasement.
Mining Role: Mining is necessary for Bitcoin, but pooling represents a risk stemming from flaws within Bitcoin itself, not from miners.

Price Estimation

Price Estimation: Various methods estimate Bitcoin's potential capitalization and unit price, but models based on past price are economically irrational.
Bitcoin as Money: Bitcoin is considered money, not credit, but the distinction is often misunderstood, leading to flawed estimations.
Credit Expansion: Bitcoin cannot limit credit expansion, and if it did, there would be no production, rendering it valueless.
Substitution Options: Five potential substitutes for Bitcoin are considered: tangible money, base money, bank credit, all credit, and gross product.
Estimation Table: Using 2019 values adjusted for 10 years of economic growth and assuming 95% of Bitcoin mined and 5% lost, the estimated USD/BTC prices for 2029 are:
- Tangible money: $279,852
- Base money: $527,016
- Bank credit: $2,318,578
- All credit: $15,243,965
- Gross product: $5,167,097
Net Present Value: With a 7.2% interest rate, the present price for base money replacement is $263,508.
Black Market Consideration: Bitcoin offers no security against state prohibition, so the black market, estimated at 28% of global trade, is considered. Assuming full replacement in the black market, the price is $73,782.
Adoption Rate: The 2019 price of ~$10,000 suggests a projected 2029 black market adoption rate of ~7.4%.
Stability Property: The estimate does not account for Bitcoin's stability property, which could force trade into monetary substitutes before reaching the projected adoption level.

Prisoner's Dilemma Fallacy

Prisoner's Dilemma Fallacy: The theory that states face a prisoner's dilemma when deciding to join a Bitcoin ban is invalid.
Economic Sanctions: A meaningful ban implies economic sanctions on states potentially using Bitcoin as a reserve currency.
Trading Partners: States using Bitcoin as a reserve currency must have trading partners to transact with.
Ordinal Utility: Subjective value implies ordinal utility with no outcome ties, evaluated under symmetric and asymmetric knowledge assumptions.
Outcome Scenarios: Four outcomes are considered: individual Bitcoin (Sucker), mutual Bitcoin (Reward), individual Dollar (Temptation), and mutual Dollar (Punishment).
Ordinal Outcome Relations: For a prisoner's dilemma, the relations T > R > P > S must hold, where T is Temptation, R is Reward, P is Punishment, and S is Sucker.
Symmetric Dilemma: In the symmetric scenario, Dollar is the dominant strategy because P > S (no international settlement benefit from sanctions) and the preference for Dollar over Gold implies T > R and P > S do not hold, thus no dilemma exists.
Asymmetric Dilemma: The asymmetric scenario evaluates the same relations as the symmetric one, leading to the same conclusion of no dilemma.
Gold-Bitcoin Relation: Assumes negligible clearing costs for both Gold and Bitcoin in international settlement, with Gold preferred over Bitcoin despite similar monetary stability.
Other Assumptions: Dollar has been preferred over Gold despite seigniorage, and Gold outperforms Bitcoin in volatility and liquidity, with no speculative return assumed for either.

Private Key Fallacy

Private Key Fallacy: Private keys do not secure Bitcoin as a system; they secure individual units of Bitcoin.
Individual Security: Private key control pertains to individual security, not the security of the Bitcoin system.
Ownership: The person who controls the keys is the owner, and Bitcoin provides security for that owner, even if the keys are stolen.
System Security: Decentralized validation secures consensus, and distributed majority hash power secures confirmation, but private key security remains an individual's responsibility.

Production and Consumption

Roles vs. Actions: Producer/consumer roles differ from production/consumption actions. All produce and consume.
Pure Bank Model: Illustrates production: borrowed capital is consumed (lent) or reserved. Product sales yield interest (dividend).
Real Producer: Converts capital into interest at market rates, like a bank investing in production.
Pure Consumer: Hoards capital, no lending, leading to depreciation. Seen as charity at 100% reserve.
Real Consumer: Affected by taxes and subsidies, altering hoard depreciation rate.
Buying vs. Mining: Buying spot Bitcoin is consumption-focused, where you're holding an asset for potential future value increase, while buying a Bitcoin miner is production-focused.

Proximity Premium Flaw

Proximity Premium Flaw: Latency, the time required for communication, cannot be eliminated as information moves at the speed of light.
Mining Latency: Different distances between miners mean some will learn of block announcements before others, leading to wasted capital on weak candidates as time progresses.
Opportunity Cost: Miners compete to reduce latency and thus opportunity cost, gaining a premium by aggregating closer to each other.
Pooling Pressure: This proximity-based pooling pressure arises from the linear block ordering required by consensus rules, causing disproportionate opportunity cost.
Variance Discount: Another pooling pressure caused by consensus rules.
Market Defense: Bitcoin aims to defend against anti-market state forces by distributing hash power broadly, but inherent pooling pressures work against this goal, making it a flaw with no known solution.

Proof of Cost Fallacy

Proof of Cost Fallacy: In a free market, Bitcoin mining consumes in cost what it creates in value, whether through block rewards or confirmation services.
Proof of Work: The computation performed in mining is reflected in block difficulty, and a valid block header serves as probabilistic proof of this work.
Energy Consumption: The energy used in block production is not provable, as energy efficiency varies, and block headers do not reflect "proof of energy."
Miner's Return: A miner's return is not fully represented by the block; fees from mining one's own transactions or side fees are not necessarily included in the block reward.
Market Rate of Return: In a competitive market, the miner's return equals the market rate on capital, making a valid block header a "proof of cost," though the exact amount remains unknown.
State Monopoly: In a state monopoly, price is not controlled by competition, allowing the monopoly to charge above cost, with enforcement costs subsidized by taxpayers and price premiums acting as taxes.
Censorship and Seigniorage: State-sponsored Bitcoin censorship can lead to fees exceeding market rates, subsidized by taxes, and monopoly mining can produce seigniorage, invalidating claims of Bitcoin's unforgeable production cost.
Monopoly Money: A valid unit of monopoly money proves real production cost but not that the issuer did not earn a monopoly premium.
Censorship Resistance: While Bitcoin is censorship-resistant, the effectiveness of this resistance is not guaranteed, and all goods have real production costs, which monopolies aim to exceed.

Proof of Memory Façade

Proof of Memory Façade: The proposal that proof-of-memory (PoM) can replace some of the energy cost of proof-of-work (PoW) with hardware is a façade.
Constant Security: A constant level of security requires a constant ongoing expenditure, so any reduction in energy cost must be offset by comparable hardware consumption.
Energy Transfer: Total energy consumption cannot be reduced; it is only transferred to hardware manufacture, operation, and disposal.
Cost Estimation: In December 2017, Bitcoin mining's annual energy cost was estimated at $1,628,000,000, equivalent to 32,560,000 terabyte drives at $50 each. Utilizing existing underutilized memory reduces unit cost but increases size requirements.
Theoretical System: In a system where PoM uses a fixed, cost-free memory pool with no operational costs, mining rewards flow at no expense proportional to memory. Any fee increase would reward memory holders, but zero capital investment implies infinite interest rates, and competition would still drive perpetual hardware expansion.
Resource Consumption: Proof-of-memory equals proof-of-work in terms of resource consumption, with no reduction in the energy component of the cost. Hardware acts as a proof battery, representing energy consumed in its manufacture, analogous to the "zero emission" battery-powered car façade.

Proof of Stake Fallacy

Proof of Stake Fallacy: Confirmation security requires an authority to order transactions, which Bitcoin assigns to the miner with the greatest proof of work, reducing to energy consumption and independent of chain history.
External vs. Internal Proof: Proof-of-work (PoW) is external, while proof-of-stake (PoS) is internal, dependent on chain history.
Ordering Authority: Both PoS and PoW delegate transaction ordering to the person controlling the largest pool of certain capital.
Capital Deployability: PoW excludes capital that cannot be converted to work, while PoS excludes capital that cannot acquire coin units, impacting security.
Censorship Resistance: PoS systems cannot overcome censorship as a censor with majority stake cannot be unseated, making PoS not censorship-resistant.
Invalid Theory: The theory that PoS provides comparable confirmation security to PoW is therefore invalid.

Proof of Work Fallacy

Proof of Work Fallacy: The theory that mining services are subservient to merchants in trade, described as "asymmetry" or "users rule," is invalid.
Transaction Control: Miners control transaction selection, while merchants control what they offer in exchange.
Hard Fork Response: If the economy is unsatisfied, it can split to a new coin with different work rules, potentially causing miners to suffer capital loss due to obsolete hardware.
Difficulty Adjustment: A hard fork may adjust difficulty, allowing mining to continue despite a drop in hash rate, introducing new miners and reducing pooling.
Market Dynamics: The theory overlooks that there is no asymmetry in trade; price resolves tensions in all markets, including Bitcoin.
Lack of Identity: Assuming capital loss will cause bad miners to exit and good miners to enter is unsupported; existing miners have advantages and may not exit, while new miners could make similar decisions.
Economics of Mining: Larger miners have greater returns due to proximity advantages, making them more profitable and better capitalized, likely to retool after rule changes.
Merchant Dependence on Mining: Mining cannot be replaced by splitting, and miners retain control over transaction selection, potentially allowing state or co-opted miners to continue disruptions.
Insurance Consequences: Future miners will insure against similar events, increasing costs, reducing hash rate, and leading to greater pooling and reduced security with no benefit.

Public Data Principle

Public Data Principle: System security depends on covert mining and trade, forming a mutually beneficial market between miners and merchants for transaction confirmations in exchange for fees.
Covert Activities: Miners and merchants must perform activities covertly, including obtaining and distributing blocks and transactions, and receiving or making payments for confirmations.
Anonymity and Security: Blocks must be obtained anonymously to ensure system security; inability to access the strongest blocks leads to network partition and localized insecurity. Anonymity or identity cannot guarantee seeing the strongest branch.
Transaction Visibility: Broad visibility of transactions is preferable for robust competition and leading information, but seeking specific transactions can introduce taint and compromise security.
Public Distribution and Taint: Public distribution of blocks and transactions is a primary source of taint; miners should use anonymous connections to community servers to avoid exposing identity.
Proof-of-Work Anonymity: Proof-of-work preserves miner anonymity as it has no associated signature and assumes ubiquitous energy. Transaction fees enable anonymous payment for confirmations.
Direct Payments: Paying miners directly off-chain for confirmations exposes both parties and complicates anonymous fee estimation.
Validation from Public Data: Bitcoin's novelty lies in validating all financial transactions from public data without identity, unlike centralized systems that rely on trust in connections or signatures.
Eliminating Identity and Authority: The purpose of validation is to eliminate identity and thus authority in the system.

Pure Bank

Concept: Demonstrates lending behavior with services: borrowing, lending, and hoarding.
Characteristics: No state intervention (free bank), perfectly efficient.
Ownership: Owned by creditors proportionally.
Objectives: Creditors maximize return, debtors minimize interest.
Money Substitutes: Accounts as demand deposits or money market funds.
Free Banking: No statutory control, uses commodity money.
Efficiency: All returns from time preference, no operational costs.
Key Relations:
- Reserved Capital: Money not lent out, used for settling debts.
- Depreciation: Opportunity cost of not lending (cash drag).
- Interest: Earned on money lent.
- Return: Determined by the expense ratio times interest.
Ratios: Reserve, capital, debt, and savings ratios based on reserve ratio.
Rate of Return: Influenced by interest rate and capital ratio, with cash drag affecting creditors.
Market Dynamics: Capital ratios determine market interest rates.
Real vs. Pure Bank: Real banks have operational costs, taxes, and potential subsidies.

Qualitative Security Model

Qualitative Security Model: Bitcoin's security is modeled through decentralization and security principles.
Decentralization Model: Bitcoin is represented as a directed graph of human relationships where vertices are merchants and edges are trades, with economic security dependent on the number and similarity of trades among merchants.
Economic Decentralization: Defined as the product of the distribution of receipts and the number of merchants, aiming for a fully decentralized economy where all people trade the same amount.
Confirmation Security: Modeled as an edgeless graph with vertices as miners and weights as hash power, with decentralization increasing with more miners and evenly distributed hash power.
Confirmation Decentralization: Calculated as the product of the distribution of hash power and the number of miners, striving for a fully decentralized confirmation process.
Security Model: Security is the product of activity, distribution of that activity, and the fraction of participating humanity.
Economic Security: Quantified as receipts * distribution(receipts) * [merchants / humanity].
Confirmation Security: Quantified as hash-power * distribution(hash-power) * [miners / humanity].
Limits of the Model: The model indicates relative effectiveness but not absolute values, considering factors like people's resistance and value perception.
Anonymity and Decentralization: Anonymity aids in defending trade and mining, making decentralization unmeasurable.
Complementary Security: Economic and confirmation security models are complementary and independent.
Security Representation: The model represents security as it exists in a given period, not as a continuous or absolute measure.

Regression Fallacy

Regression Fallacy: The Regression Theorem posits that the first valuation of a good as money must be based on its prior use value, progressing from barter utility to monetary value.
Ludwig Von Mises' View: According to Mises, a good cannot function as a medium of exchange without having prior exchange value from other uses.
Scope of the Theorem: The theorem claims to explain not only the origin of money but also what can be considered as money, implying that without following this progression, a good cannot be money.
Contradiction with Subjective Value Theory: The theorem contradicts the subjective theory of value it relies on, as value can be based on any subjective reason, even if it seems irrational.
Failure to Terminate Regression: The theorem does not explain the initial valuation of a good's original utility, which is assumed rather than remembered, and this assumption is subjective.
First Valuation as Money: The first valuation of a good, including its potential use as money, can be based on any reason, highlighting the subjective nature of value.
Anticipation of Money: Some suggest that anticipation of a good becoming money can satisfy the theorem, making it tautological and reducing it to subjective first value.
Empirical vs. Rational Basis: The theorem is based on empirical observations of monetary evolution, yet it rejects empiricism, relying on the apriorism of praxeology.
Bitcoin's Impact: Bitcoin's creation, intended as money from the start, invalidates the theorem's non-empirical claims, showing that new observations can contradict established theories.
Empirical Distinction of Money: The theorem is a reasonable empirical theory on money's evolution but fails as a rational theorem distinguishing money from non-money, which should be determined by observing people's behaviors.

Relay Fallacy

Relay Fallacy: The peer-to-peer network disseminates blocks and unconfirmed transactions, with nodes protected against denial of service, requiring no identity, thus allowing permissionless participation.
Latency and Hash Power: Protection against denial of service increases announcement latency, and lower latency due to proximity increases apparent hash power, leading miners to compete for reduced latency through pooling or more efficient networks.
Relay Networks: Joining a relay network can reduce latency by eliminating denial-of-service protections, such as using the cmpctblock message format with UDP-FEC, but this optimization is limited to nodes run by the same group.
Control by Relayer: Relays consist of machines controlled by a relayer, which communicates within an internal network and to joined miners, with the relayer having the ability to delay certain blocks based on miner, region, signal, non-payment, etc.
Relayer's Role in Mining: A relayer, by selling reduced latency, is effectively in the mining business, and this remains true even if the service is offered for free, similar to miners offering grinders free reduced latency and variance.
Aggregation and Profitability: Relays and mines are aggregations of miners and grinders, respectively, with larger aggregations being more profitable, making it costly for participants to leave the largest relays or mines.
Pooling Pressure Misconception: The theory that relays reduce pooling pressure is erroneous, as any reduction in pooling is merely transferred to the relay, increasing its pooling.
Masking Power Transfer: Relay statistics are not typically presented alongside mining statistics, which masks the power transfer and may lead people to mistakenly believe that mining is less centralized than it is.

Replay Protection Fallacy

Relay Fallacy: The peer-to-peer network disseminates blocks and unconfirmed transactions, with nodes protected against denial of service, requiring no identity, thus allowing permissionless participation.
Latency and Hash Power: Protection against denial of service increases announcement latency, and lower latency due to proximity increases apparent hash power, leading miners to compete for reduced latency through pooling or more efficient networks.
Relay Networks: Joining a relay network can reduce latency by eliminating denial-of-service protections, such as using the cmpctblock message format with UDP-FEC, but this optimization is limited to nodes run by the same group.
Control by Relayer: Relays consist of machines controlled by a relayer, which communicates within an internal network and to joined miners, with the relayer having the ability to delay certain blocks based on miner, region, signal, non-payment, etc.
Relayer's Role in Mining: A relayer, by selling reduced latency, is effectively in the mining business, and this remains true even if the service is offered for free, similar to miners offering grinders free reduced latency and variance.
Aggregation and Profitability: Relays and mines are aggregations of miners and grinders, respectively, with larger aggregations being more profitable, making it costly for participants to leave the largest relays or mines.
Pooling Pressure Misconception: The theory that relays reduce pooling pressure is erroneous, as any reduction in pooling is merely transferred to the relay, increasing its pooling.
Masking Power Transfer: Relay statistics are not typically presented alongside mining statistics, which masks the power transfer and may lead people to mistakenly believe that mining is less centralized than it is.

Reservation Principle

Reserve: Capital hoard distinct from invested savings, used by states and individuals for liquidity.
Reserve Currency: State's hoard for settling accounts; individuals use state-issued money (notes/fiat, some coin).
State Acquisition: Uses monopoly money, foreign exchange controls, and taxation, discounted by seigniorage.
Foreign Exchange Controls: Restrict reserve currency use, creating taxes on capital gains via inflation.
Official Rates: Below market value, tax reserve currency use.
Gold Standard: State collects gold; U.S. Dollar was redeemable at $20.67/oz until 1934, then $35/oz, ending in 1971.
U.S. Reserves: 74.5% gold, rest in foreign currency; citizens reserve in Dollars.
Taxation Purpose: State buys reserve with notes, issues more than reserved, abrogates notes, retains reserve.
Devaluation Tax: Excess issuance (seigniorage) taxes note holders; constraints preserve state's tax benefits.
Gold Benefit: No monetary benefit to individuals under state monopoly money.
Bitcoin Reserve: No better than gold; state control enables inflation and censorship.

Reserve Currency Fallacy

Reserve Currency Fallacy: Theory that states will hold Bitcoin as reserve, issuing backed monopoly money.
Bitcoin as Reserve: Seen as ideal due to no inflation, solving state money issues.
Scenario: States issue Bitcoin Certificates (BC) for Bitcoin (BTC), using legal tender laws.
Invalid Theory: BC/BTC ratio can't be audited; relies on state trust, prone to inflation.
Audit Issue: BC can't be validated like BTC, enabling currency inflation for taxation.
Decentralization: Bitcoin needs a decentralized economy; state control risks censorship, inflation.
Resistance: Only black market activity resists state control, lacking pressure to follow consensus.
Cryptodynamic Principles: Layering maintains decentralization; backing abandons it.
Conclusion: State-held Bitcoin offers no scaling or benefits to individuals.

Reserve Definition

Reserve: Capital a person possesses, distinct from invested capital.
Present Capital: Depreciates, incurs ongoing cost to owner.
Time Preference: Ratio of reserved to invested capital reflects owner's preference.
Settlement Medium: Reserve capital for debt settlement; e.g., gold if gold is the medium.
Certificates: Gold certificates are loans, not reserves, unless used to settle debts.
Certificate as Reserve: Holding certificates as reserve doesn't contradict definition; no cost/gain to holder.
Maturity Matching: Often confused with reserve; reserve is "present" capital with zero maturity.

Risk Free Return Fallacy

Risk Free Return Fallacy: Theory that Bitcoin can enforce loan principle return, enabling risk-free rate of return.
Covenant Requirement: Theory needs fixed time covenant on lent coin units, ensuring lender can't spend until maturity.
Interest and Opportunity Cost: Lender's opportunity cost offset by interest from borrower.
Zero Value to Borrower: Units have no monetary value to borrower; control returns to lender at maturity.
Invalid Theory: Zero value imputed to exchanges and loan itself, invalidating the theory.
Opportunity Cost as Expense: Lender's cost as provable expense similar to proof-of-work; not a loan, no interest, invalidating theory.
Tracking Perpetual Value: Units can't track perpetual assets due to expiration at maturity.
Tracking Fixed-Term Assets: Limited to 1 unit by dust rule, plus transaction fee; opportunity cost minimal.
Utility to Borrower: Reduces tracking cost over loan term; cheaper to spend 1 unit than borrow beyond ~7.2 years at 10% interest.
Rental Not Loan: Scenario more accurately described as "rental" of unit, not a loan; unit can't be traded or destroyed by borrower.
Economic Limit: Return possible on rental up to interest rate limit; requires zero fee for economic rationality.
Confirmation Supply: Scenario not rational when demand exceeds fixed confirmation supply; holds at any coin dust level above zero.

Risk Sharing Principle: Bitcoin's security relies on people, not technology alone.
Technology as Tool: Technology aids security but isn't the root; security requires human action.
Decentralization's Purpose: Sharing risk among individuals; centralized systems burden one person with all risk.
Bitcoin Security: Depends on people willing to take personal risks in accepting and mining coin.
Resistance: People's ability to resist coercion and co-option secures Bitcoin.
Risk Acceptance: Without people accepting risks, Bitcoin has no effective security.
Risk Minimization: More people sharing risk reduces individual risk.
Bitcoin as Tool: Emphasizes Bitcoin as a tool, not a magical solution.

Scalability Principle

Scalability Principle: Scalability is performance increase with more hardware; Bitcoin transaction throughput is non-scalable.
Block Size Limit: Consensus rule trades utility for security; larger blocks increase throughput and validation cost, impacting economic security and centralization risk.
Non-Scalability: Confirmation finality necessitates transaction selection, causing exclusion and a competitive market for confirmations.
Layering: Increases transaction capacity and utility with local, time-limited security compromise, unlike system-wide compromise of larger blocks.
Utility and Stability: Both layering and block size changes lower but don't eliminate utility threshold, preserving stability.
Conclusion: Stability and non-scalability persist at any block size and layering level.

Scarcity Fallacy

Scarcity Fallacy: Economic scarcity means limited supply; a resource has no value without demand.
Relative Scarcity: Increasing demand decreases availability, but also increases production; increasing supply increases availability but decreases production, stabilizing price.
Fixed Supply Theory: Theory that Bitcoin's fixed supply is its value source; similar to the Mona Lisa's uniqueness, but many unique artworks have no demand or value.
Bitcoin Value: Bitcoin's value doesn't increase solely due to absolute scarcity; it becomes more scarce as it's more valued, with prevalence affecting portability and divisibility.
Utility from Fixed Supply: Theory that fixed supply ensures non-increasing availability, requiring non-decreasing demand; Bitcoin's transfer cost increases with demand, creating negative feedback.
Substitution: Unlike the Mona Lisa, Bitcoin is subject to substitution, invalidating the fixed supply utility theory due to non-assured demand.
Commodity Money Misinterpretation: Gold's portability due to lower prevalence; electronic money's portability is independent of unit count, making Bitcoin's total units arbitrary for utility.
State Money Misinterpretation: States control money supply via anti-counterfeit laws, collecting inflation tax; without restricted competition, supply would expand, eliminating the tax and impacting portability.
Scarcity and Money: Scarcity depends on supply and demand, not inherent in money; both commodity money and Bitcoin eliminate inflation tax, but face different negative feedbacks.

Selfish Mining Fallacy

Selfish Mining Fallacy: Selfish mining is a mining optimization, not an attack.
Academic Misinterpretation: An academic paper mislabels selfish mining as an attack, using straw man arguments about a "prescribed Bitcoin mining protocol" and "fair share".
Bitcoin Consensus: Bitcoin consensus rules do not dictate announcement timing, invalidating the notion of a prescribed protocol.
Miner Rewards: Miners are rewarded based on blocks reaching maturity, not hash rate proportion, challenging the concept of "fair share".
Conventional Wisdom Error: The paper critiques conventional wisdom but wrongly labels the optimization as an attack.
Fallacy Source: The fallacy lies in equating incorrect conventional wisdom with an attack; selfish mining reveals latency-based pooling pressure, a known flaw.
Pooling Pressure: All pooling pressures reduce miner numbers, increasing attack vulnerability.
Optimization vs. Attack: Optimizations are not attacks; pooling increases attack opportunity, but this is not the same as an attack.
Attack Definition: The term "attack" implies theft, used in the Bitcoin whitepaper only for double-spend attempts.

Shitcoin Definition

Shitcoin Definition: A shitcoin is any system lacking cryptodynamic security but claiming Bitcoin's value proposition.
Presumed Scams: Shitcoins are often scams, though proponents may be well-intentioned but unaware of cryptodynamic principles.
Example: Proof-of-stake technologies are considered shitcoins.
Bitcoin Security: Bitcoin implementations vary in security, but none are absolutely secure.
Term Application: The term "shitcoin" does not apply to Bitcoin; proof-of-memory technologies may not be shitcoins despite not meeting central objectives.

Side Fee Fallacy

Side Fee Fallacy: Theory that off-chain transaction fees harm system security by favoring certain merchants.
Historical Fee Rates: Off-chain fees obscure average historical fee rates, potentially leading to underestimation by spenders; however, fee estimation adjusts for this.
Transaction Taint: Disparate fee levels may highlight transactions, but this does not compromise privacy as it's a choice by transaction creators.
Market Impact: No effect on market fee rates or confirmation availability; deviations from market rates result in losses for miners or merchants, similar to on-chain fee mismatches.
On-Chain Fees: Bitcoin's on-chain fee mechanism preserves privacy by compensating any miner without identity.
Privacy Choice: Miners and merchants choosing to weaken their privacy through side fees is not inherently undesirable.
Invalid Theory: The theory that side fees harm system security is invalid.
Confirmation Delay: Merchants accepting side fees face delayed confirmation times inversely proportional to miner's hash power; side fees align with market rates to avoid opportunity costs.
Pooling Pressure: Side fee arrangements do not create unique pooling pressures; market-consistent fees have no effect, while above/below market fees are distortions akin to subsidies/taxes, not unique to side fees.

Network Resilience: Centralized networks fail with one node loss; distributed networks are more resilient.
Bitcoin Social Graph: Individuals choose which money to accept, forming a social graph.
Consensus and Power: Consensus is shared money definition; authority defines money.
Bitcoin's Tool: Resists central authority, preserving consensus and utility.
Bitcoin Nodes: A node is a person, not just machines; losing a person loses a node.
Centralized Money Risk: Fails if one person changes rules.
Decentralization: Enables resistance to authority and resilience against state attacks.
Node Loss: Occurs when a person refuses to trade in Bitcoin.

Speculative Consumption

Capital Use: Catallactics categorizes capital use into consumption and production; both require saved capital.
Human Energy: Spent in leisure or labor, depreciating stored energy; all conversion to work consumes capital.
Subsistence Economy: Immediate consumption of produced goods, living "hand to mouth"; savings is stored body energy.
Savings: Source of production and leisure; applied to investment or hoard.
Investment vs. Hoard: Investment is capital applied to production; hoard is unproductive capital not used in production.
Dishoarding: Process of using hoarded capital for investment or leisure.
Human Action: Catallactics focuses on action, not thoughts; trade expresses subjective value.
Time Value: Essential for production and leisure, assumed to have objective value.
Uncertainty and Hoarding: Hoarding increases with uncertainty, trading production opportunity for certainty; hoard represents liquidity.
Time Preference: Ratio of hoarded to invested savings reflects subjective valuation of certainty vs. opportunity cost, expressed as interest rate.
Speculation: Hoarding represents speculation, valuing a good over time more than its opportunity cost; not investing is consuming capital.
Hoarding Costs: Hoarded capital erodes over time due to carry and opportunity costs, reflecting the time value of money.
Depreciation and Consumption: Purchasing goods is not consumption; actual consumption is property depreciation.
Entrepreneurship: Involves speculation and investment; speculative production vs. speculative consumption (depreciation of present goods).
Business and Personal Objectives: Personal objective is leisure, business objective is production; both involve consumption.
Credit Expansion: Driven by time preference as individuals and businesses balance hoarding and investment.
Labor and Production: People are both consumers and producers; salaried labor involves investing in oneself for returns.
Time Preference and Production: Higher hoarding to investment ratio indicates higher time preference and less production.

Split Credit Expansion Fallacy

Split Credit Expansion Fallacy: Theory that increasing monetary units via a split or new coin creates credit is incorrect.
State vs. Market: Error stems from assuming state-driven credit expansion is a market force; market money doesn't produce seigniorage.
Seigniorage as Tax: New units dilute existing ones, transferring capital ownership to the state; used to subsidize lending, reducing capital cost.
State Favoritism: State credit expansion results from favoring debtors over savers, not market forces like fractional banking.
Free Market Banking: Banks act as investment funds, with investors receiving market returns and bearing risks; state banking rearranges capital based on political goals.
Market Credit Expansion: Involves increased capital lending, not hoarding; driven by reduced time preference, lowering capital cost.
Time Preference Impact: Splitting or creating new coins does not reduce time preference, hence cannot increase capital availability or reduce its cost.

Split Speculator Dilemma

Split Speculator Dilemma: Post-split, original coin owners must decide whether to retain or sell units of original and split chains.
Dumping Fallacy: Exchanging or hoarding units does not affect the existence of either chain; choice is about maximizing value of existing holdings.
Trading Costs: Increased unit conversion costs and replay protection reduce net present value but are irrelevant to the decision.
Price Assumption: Assumes combined coins will increase in price over time.
Consolidation Principle: Similar coins will eventually consolidate, with one losing value; selling the failing coin for the surviving one is rational if known.
Uncertainty: Without knowing which coin will succeed, selling increases potential reward but also risk, potentially sacrificing all value.
Hoarding Strategy: Equally rational to hoard both chains, preserving pre-split assumptions.
Potential Failure: Both chains could fail, with value consolidating elsewhere; framework based on assumptions that may not hold.

Spam Misnomer

Spam Misnomer: Term "spam" originated from excessive Usenet posts and unwanted emails; emails carry identity, are non-fungible, and lack processing payment.
Bitcoin Transactions: Necessarily anonymous, fungible, and include payment for processing.
Email Spam Detection: Subjective due to no processing payment; facilitated by identity and non-fungibility.
Transaction Legitimacy: No test for legitimacy in Bitcoin due to anonymity and fungibility; all valid transactions are equally legitimate.
Denial of Service: Valid transactions don't cause denial of service; low fee transactions should be called "low fee transactions."
Denial of Service Risk: High volume of redundant transactions can cause denial of service, independent of fee; any person can do this, not just the spender.
Non-Redundant Transactions: Mutually-conflicting spends are not a denial of service risk; either rejected as invalid or accepted with sufficient fee increment.

Stability Property

Stability Property: Value is subjective; money stability is a damping relationship between demand and supply, not constant price.
Money Categories: Market supply (commodity, early Bitcoin), monopoly supply (monopoly money), fixed supply (late Bitcoin).
Unit Destruction: Decreases supply, increases value of remaining units; no financial incentive for loss, so no impact on stability.
Market Money: Supply increases with financial incentive to produce when price is at or above production cost; stable due to demand control and feedback.
Bitcoin as Market Money: Supply increase has no effect on price; stability based on demand changes, with production cost varying with demand.
Bitcoin Monetary Inflation: Aimed at distributing units, phased out over time.
Monopoly Money: Supply increased arbitrarily or taxed as demurrage by sovereign for seigniorage; changes often not published due to monopoly protection.
Seigniorage: Sovereign profit from monopoly money; mitigated by political unrest and capital flight, countered by foreign exchange controls.
Fixed Supply Money: Late Bitcoin remains stable; fees rise with demand, limiting transactions below utility threshold.
Stability Mechanism: Achieved by directly limiting demand, not increasing supply.
Price Bounding: Stability implies bounded price, but price can rise with increased transaction carrying capacity and utility relative to substitutes.

State Banking Principle

State Banking Principle: In free banking, no actual lender of last resort exists; in state banking, the central bank, supported by taxpayers, serves this role.
Discount Loans: State provides discount loans to member banks and treasury, below market rates, subsidized by taxes.
Seigniorage: Central banks fund discounted loans with seigniorage, despite claims of not printing money.
U.S. Federal Reserve: Orders new money from the Treasury's Bureau of Engraving and Printing, paying printing costs for paper (cloth) money and face value for coinage.
Coinage and Use Value: Coins produced with slightly higher face value than use value to prevent disappearance; use value decreases with fiat devaluation.
Monetary Inflation: Result of printing "paper" money, obscured by issuing loans first and printing money later as needed.
Settlement Process: Fed tracks member bank reserves, often netting settlements but moving money physically when necessary.
Member Bank Reserves: Held in Fed's vault, often through purchasing Treasury securities, which are money substitutes.
Treasurys: Debt issued by the Treasury, bought by the Fed on the open market, reducing yields by increasing demand.
Money Creation Illusion: Fed pretends to have money in vaults, printing only for settlement, creating the illusion of inflation from lending.
Printing Costs: Fed pays varying amounts for different denominations; when printing cost equals face value, money transitions to commodity money.
Hyperinflation: Central banks in hyperinflation scenarios print larger denomination notes as commodity money is abandoned.
Zimbabwe Dollar: Reached extremely high denominations before being abandoned for foreign currencies.
M0: Total U.S. Dollars in circulation, including tangible currency and intangible bank balances in Fed accounts.
Fed's Obligations: Can be destroyed by reducing borrowing, affecting tax revenue; Fed remits net income to the Treasury.
Federal Funds Rate: Changes impact federal deficit and debt through interest payments and Fed remittances.
Treasury Revenue: Peaked at $97.7 billion in 2015, falling to $80.2 billion by January.
Monopoly Protection: Ensures Treasury's ability to print money at nominal cost and recapture interest.
Cashless Society: Central banks would maintain accounting for not-yet-printed fiat, performing internal settlements, ensuring full censorability.
Fedcoin and e-Krona: Required for electronic transactions with state money, unlike Bitcoin, which lacks state control over issuance and confirmation.
Bitcoin's Role: Cannot serve as reserve currency for state banking due to lack of state control, akin to the failed gold standard; Bitcoin's value proposition is avoiding state money.

Stock to Flow Fallacy

Stock-to-Flow: Originally measures capital-income relationship; later applied to money supply.
Ratio and Time: Higher ratio means slower stock increase; theory suggests higher ratio leads to less monetary inflation, implying "harder" money.
Flow Rate Source: Theory assumes production rate is substance property; ignores that production depends on profitable price and competition.
Demand and Flow: Flow is demand-driven; no production if anticipated loss, not inherent to substance.
Invalid Theory: Supply and demand determine flow, making the theory invalid; a long-understood error, misapplication of concept.
State Money Control: Counterfeit laws restrict competition, allowing state control over supply; state can peg reserve notes to other money, like gold.
Stock-to-Flow and Inflation: Inverted monetary inflation rate; relationship with inflation is tautological, not predictive.
Predictive Limitations: Cannot predict future monetary inflation; useful for historical analysis and calculating future stock with assumed flow.
Speculation Error: Using historical ratios to predict profitability of speculation is incorrect.

Subjective Inflation Principle

Subjective Inflation: Driven by personal preferences in free markets.
Goods Pricing: Determined by subjective value.
Time Preference: Influences money credit expansion.
Money Creation: Does not cause price inflation.
Free Market: Personal preferences define its dynamics.

Substitution Principle

Substitute Good: Can replace another; higher product prices lead people to substitutes or cessation of use.
Price and Demand: Lower substitute prices offset desirability, reducing original good demand; substitutes compete like increased supply.
Fixed Supply Coins: Assumed to not reduce price pressure, but Bitcoin's rising transfer fees reduce demand, creating downward pressure.
Substitutes and Supply: Rising costs make substitutes viable, effectively increasing supply and exerting downward price pressure.
Multiple Coins: Similar coins can evolve, minimizing substitution tradeoffs; pressure toward single money (Consolidation Principle) conflicts with rising costs.
Substitution Theory: New coins' free creation doesn't make Bitcoin worthless; Bitcoin requires payment for use, invalidating the theory.
Supply and Demand: Increased supply reduces demand; insufficient demand halts production/security, akin to commodity monies and all products.

Thin Air Fallacy

Thin Air Fallacy: Theory that fractional reserve banking allows banks to create money at no cost; considered a result of free banking's accounting practices, termed "ex nihilo" or "out of thin air".
Lord Turner's View: Banks create credit and money simultaneously without using existing deposits.
Competing Views: Naive view assumes money is created by miners at a cost and lent at full reserve; practical view suggests banks create money substitutes at no cost via fractional reserve lending.
Naive View: Lenders lend only owned money, operating at full reserve, preventing credit expansion and persistent inflation.
Practical View: Banks create money substitutes through fractional reserve lending, leading to unbounded debt and persistent inflation.
Free Market Operations: People can perform banking operations without being banks, obscuring supposed fraud through accounting.
Lending and Savings: In naive view, lending originates from savings; fractional reserve inherent as part of savings is at risk.
Credit Expansion Calculation: With 10% reserve, credit expands to 8.903 times the money; money multiplier is 8.903.
Settlement and Expansion: Full expansion requires loan settlement to offset spending; no further expansion without more money or reduced time preference.
Bank Accounting: Banks create ledger entries for loans without transferring money, leading to the belief they create money.
Duality of Money and Credit: No distinction between naive and practical views; money and credit are inherently linked.
Historical Debate: Debate between Plato (credit theory) and Aristotle (metallism) resolved as theories are identical due to money-credit duality.
Bitcoin Insight: Bitcoin as fiat without state support exposes errors in metallism and chartalism.
Zero Reserve: Implies infinite credit expansion but no liquidity for withdrawals, making it irrelevant due to zero time preference.
Negative Reserve Scenario: Banks cannot fulfill promises if they create money substitutes without reserves; leads to default upon withdrawal.
Settlement Process: Crucial for understanding money and credit; failure to consider leads to misunderstanding of money creation.
Bank's Balance Sheet: Offsetting entries account for loans, not fraudulent money creation; aim to encourage redeposits.
Bank Run and Central Banking: Insufficient reserves lead to default or borrowing; central banks act as lender of last resort.
Summary: Banks cannot create money; fractional reserve is inherent in lending; reserve fraction reflects time preference; zero reserve prevents account settlement; no difference between naive and practical views.

Threat Level Paradox

Threat Level Paradox: Defeating external subsidy requires mining at a capital loss; defeating tax requires secret mining, increasing costs.
Axiom of Resistance: Assumes tax and subsidy reduce Bitcoin control costs; states use subsidies to cause regional pooling, then tax power for censorship.
Hard Currency Mining: People may need to mine at a loss for hard currency benefits; censorship enables profitable mining offset by higher transaction fees.
Censorship Resistance: Bitcoin's black market thrives under attack, less effective otherwise.
Pooling Pressure: Internal pooling pressure disrupts balance; essential for subversive mining but works against risk distribution.
Attack Surface: Expands without contraction unless alternatives are suppressed; suppression increases miner rewards in affected regions.
Centralization Pressures: Paradox also applies to centralization pressures.
Expected Consequence: Bitcoin unprepared for attacks in low-threat environments due to financial disadvantage.

Time Preference Fallacy

Threat Level Paradox: Defeating external subsidy requires mining at a capital loss; defeating tax requires secret mining, increasing costs.
Axiom of Resistance: Assumes tax and subsidy reduce Bitcoin control costs; states use subsidies to cause regional pooling, then tax power for censorship.
Hard Currency Mining: People may need to mine at a loss for hard currency benefits; censorship enables profitable mining offset by higher transaction fees.
Censorship Resistance: Bitcoin's black market thrives under attack, less effective otherwise.
Pooling Pressure: Internal pooling pressure disrupts balance; essential for subversive mining but works against risk distribution.
Attack Surface: Expands without contraction unless alternatives are suppressed; suppression increases miner rewards in affected regions.
Centralization Pressures: Paradox also applies to centralization pressures.
Expected Consequence: Bitcoin unprepared for attacks in low-threat environments due to financial disadvantage.

Unlendable Money Fallacy

Fisher Equation: Used to combine money growth rate with inflation; adjusts nominal to real interest rate.
Growth Ratios: Commodity money growth rate is 0% (100% ratio); monopoly money depreciates due to seigniorage; fixed supply money may appreciate due to price deflation.
Monopoly Money Growth: monopoly-money-growth-ratio = commodity-money-growth-ratio / seigniorage-ratio; example: 100% / 103% ≈ 97%.
Fixed Supply Money Growth: fixed-supply-money-growth-ratio = commodity-money-growth-ratio / inflation-ratio; example: 100% / 97% ≈ 103%.
Purchasing Power: Fixed supply money's purchasing power changes with product demand; example: purchasing-power-this-year = purchasing-power-last-year * annual-growth-ratio; 103 = 100 * 103%.
Economic Growth: Assumes positive growth for fixed supply money price deflation; interest exceeds depreciation.
Time Preference: Both interest and depreciation are always positive.
Economic Contraction: Implies increasing interest rate until growth is restored; self-correcting condition.
Interest and Growth: Interest must exceed growth in both growth and contraction scenarios; lending is the only source of growth.
Hoarding: Represents monetary depreciation (consumption) in deflationary money.
Unlendable Money Fallacy: Theory that it's irrational to lend deflationary money is invalid; lending any money, including deflationary, is rational.
Speculative Condition: Any contrary behavior suggests speculation, not supported by fixed supply fact.

Utility Threshold Property

Utility: Preference for coin over substitutes for transfers of comparable value.
Increasing Utility: Implies rising fee levels due to increased transaction volume; competition for confirmation bids up fees.
Market Fee Price: Varies over time; uncompetitive fees lead to longer confirmation times; some may use substitutes.
Average Transfer Value: Rising fees imply increasing average transfer value to avoid transfer costs exceeding value transferred.
Confirmation Depth: Greater depth increases security; time can be traded for higher security against double-spend.
Security Levels: Cannot be reduced below one block period; lowest security levels are unconfirmed and one confirmation, no trade between these.
Higher Fees and Hash Rate: Higher fees mitigate need for increased confirmation depth for high-value transfers.
Minimum Value Transfer: Rises with utility as security for lower value transfers cannot be reduced.
Substitutes and Value Ranges: Failure to support certain value ranges makes substitutes cheaper; suggests coexisting moneys for different ranges, but all Bitcoins exhibit this property.
Block Period and Size: Rule differences do not change the utility threshold relationship; effects are strictly proportional, even with unlimited size blocks.

Value Proposition

Core Value: Removes state control over monetary supply and transaction censorship.
Advantages: Freedom from seigniorage, FX controls, financial surveillance; enables global, permissionless transfers.
Taxation: Changes nature of taxation, not its total amount.
Voluntary State Funding: Option to fund state remains for those who value it.
Efficiency: Not about technological efficiency but resistance to state control.

Variance Discount Flaw

Variance: Varying frequency of achieving rewards; inherent to mining's probabilistic nature, cannot be eliminated.
Hash Power and Rewards: Different hash power leads to varied reward frequency; 10% hash rate expects rewards 10 times more often than 1%.
Proportionality: Assumed for simplicity; example: one miner rewarded every 100 minutes, another every 1000 minutes, with rewards proportional to hash power.
Small Miners' Challenges: Tiny miners may wait years for rewards; misconfiguration risk; must improve cash flow for frequent rewards.
Variance Discounting: Miners discount returns due to variance; smaller miners convert mines to grinds, paying larger miners for reduced variance.
P2Pool and Pooling: P2Pool aims to avoid aggregation, but less efficient distributed variance reduction leads to dominance of pooling.
Pooling Pressure: Result of singular difficulty required by consensus rules; small miners compete at high difficulty, magnifying variance.
Proximity Premium: Another pooling pressure caused by consensus.
Bitcoin's Defense: Intended market defense against state forces requires broad hash power distribution among people to resist co-option.
Consensus Flaw: Pooling pressures in consensus work against broad distribution, termed a flaw; no known solution to eliminate it.

Zero Sum Property

Zero Sum Property: Bitcoin mining is a zero sum game; one block added every 10 minutes, fully controlled by its miner.
Miner Competition: Miners compete for rewards, proportional to hash rate, excluding pooling pressures.
Return on Capital: Difference between miner's cost and reward over time is interest on invested capital.
Zero Sum Aspects: One miner earns reward while others earn none in any time period; reward magnitude (coin units or exchange price) doesn't affect return rate.
Idealized System: Bitcoin mining as a closed system; return on capital varies due to proximity premium, variance discount, economies of scale, and operator efficiency.
Proportionality: These factors affect relative cost of hash power, not overall returns.
Actual System: Bitcoin not a closed system; subject to market and anti-market pooling pressures (variation and distortion).
Bitcoin's Purpose: Defends markets by pitting distortion against variation.
Distortion Impact: Subsidy to one miner acts as a tax on others; tax on one miner acts as a subsidy to others.
Subsidized Miner: Operates at lower cost or higher effective hash rate; attracts more capital, expanding hash power toward majority control.
Subsidizer's Goal: Ultimate control over subsidized mine, not expecting return on capital.
Tax Effects: Moves hash power to untaxed mines; broad application can give taxing authority control, suppressing competition.
100% Tax: Authority co-opts mines, putting taxed miners out of business, using tax proceeds for control.
Consequences: Explored in Threat Level Paradox, considering zero sum mining and inherent pooling pressure.