ArseneSpeculoos

An overview of how it works first. On BTC, miners work to create blocks using a proof of work. The miners keep each other in check so that if some tiny miner decides to produce bad blocks, the rest of the network will just ignore the rogue miner.

The trouble is that when the majority of the network becomes rogue, and you can have a 51% attack.

What could a 51% attack look like?

Imagine that you sell your motorbike and receive some coins in exchange. You check the blockchain, coins received, and all is well. As soon as the buyer is gone with your bike, you check the blockchain again, and oops! Your coin is gone! 80% of the miners decided to collude, re-mine the latest blocks, remove the transaction where you received the coins, and replace that with a bribe from the motorbike thief. You are left there, bamboozled, with no bike and no coin...

This attack would be catastrophic for the network and erode the trust people place in it. It is fortunately hard to pull off because you need a majority of the hashrate for that.

You could buy 10 million USD or 20 million USD of equipment to mine, but that still wouldn't get you to 51% of the BTC hash rate.

Of course, if you had unlimited resources like a magician, you could print out mining rigs like there is no tomorrow and then overtake the network. But you are not that rich.

So, it's the economic cost of overtaking the network that protects it from the collusion of bad miners.

It would be so much cheaper and simpler for bad actors to attack if more and more miners just stopped mining!

Why do the miners keep mining anyway?

For the money! They buy cheap equipment, use cheap energy to produce blocks, and receive mining rewards. With the rewards, they pay back the equipment and the energy and then keep a profit.

As long as this business is profitable, the hashrate of the miners stays the same or increases.

What happens when the block reward is reduced? Nothing at first, but if it is reduced too much, the reward is no longer enough to cover the energy and equipment costs, and then the miners start shutting down some of their units. They are not in it for the tech; remember, they want to make money. They will shut down mining rigs unless the price of the coin has increased and the new price is enough to cover their costs.

On BTC, every 4 years, the block reward is divided by 2. If the price of BTC stays the same during that time, it means that mining brings half as much revenue every 4 years, so it's rapidly going to zero.

For example, if the miners are at break-even in a given year, 4 years later they will receive half as much money for their work, so they will have a 50% loss.

If somehow the price of BTC managed to double by that time, the miners would be back at break-even, but they might fear what will happen after 4 more years.

As the block reward keeps dropping and there are not nearly enough transaction fees to compensate, the BTC hashrate is going to drop more and more, and at some point the bad actors will be able to pull off their motorbike heist.

This was my understanding of the troubles of the BTC security model until very recently. That is, until I read "Highjacking Bitcoin" by Roger Ver.

The book explains how bitcoin was captured by the bitcoin core developers and their company, Blockstream. It's an interesting read, and I highly suggest you give it a look.

Why does it matter? My understanding of the book is that now that Blockstream controls the code of the project, the main discussion spaces of its community, the BTC ticker, the 'Bitcoin' brand, and it is no longer challenged as to how to update the BTC protocol. They have effectively become the masters of BTC. They can steer it how they see fit. Roger gives the example of the Liquid Network as their proprietary alternative to the troubled bitcoin network.

This centralization of power could be very 'useful' if the miners have a problem (the mining rewards are too low) or if the miners ever become a problem. During the civil war, the miners had the power to choose the new King. At that time, everyone agreed that bitcoin was the chain with the most POW, starting from the genesis block of Satoshi. If Bitcoin Cash had been able to divert enough miners to it, it would have won the BTC ticker and the Bitcoin brand. Bitcoin Cash didn't win, and nowadays, the consensus is changing to "Bitcoin is what the Bitcoin core developers are working on". The subtle difference is that if there is a problem, the core developers could decide to update the protocol and sideline the miners that don't fit their vision.

What happens if the block reward and transaction fees are systemically too low for too long? Let's imagine a scenario where the number of miners decreases and the hashrate fluctuates violently. The core developers then decide to protect the network by updating the protocol rules so that only serious miners can continue mining. The result would be that only the ones aligned with the core developers will remain. This is drastically different from a few years ago, where the miners were still the kingmakers.

How does this change the security model of BTC? BTC now has a king, and its name is Blockstream. The king does not want to die, and it will take actions to avoid that. BlockStream will never let the miners close shop en masse if it endangers the whole network they control. The network will survive, with or without miners, because it's the foundation of the power of the king.

Granted, for me and you peasants and humble farmers, getting value out of it will probably involve a fair bit of grovelling, frantic begging and pleading for mercy to our new overlords,

but hey! The Number will Go Up!

PS: I would love to get opinions on the topic. What do you think of Roger's book?
PS: Justin Bons often has very interesting posts about the BTC security model and crypto projects: https://x.com/Justin_Bons
PS: Here are my socials: https://links.arseneoaa.me. If you find this post interesting, I think you will also like the Chronicles of Degendaland.

Once upon a time, there was a beautiful island called Degendaland. On the island lived little people ruled by a king, and the king had a formidable magician. Every time the king desired, he would ask the magician to make him pieces of money to spend, and the magician would immediately make them for the king.
The king really liked the power of the magician. With this power, he could pay for everything he wanted, without even having to make people give their pieces of money to be put in his coffers as tax.
Every time he felt like it, he could give pieces of money to the biscuit sellers in exchange for his favorite biscuits. The biscuit sellers from all the islands liked exchanging their biscuits for the king’s pieces of money. They would later exchange the money for the fish or the great houses of the island.
Every time he felt like it, the king could also play and practice his gambling skills. Sometimes he would play and win, that would make him quite happy, and he would talk about it all day long. Sometimes he would play and lose, he did not like that, but it wasn’t too big an issue, the magician would make up the missing pieces of money in his coffers.

Slowly, something bad started happening. The king was losing more and more often, and then one day, it was just every single time. The king had a consistent streak of bad luck, and he was losing every single game he played. Every day, he had to make the magician make him new pieces of money to settle his games. The king thought that surely he was about to win big any time now, especially because he now had a solid losing streak. So the king was betting more and more pieces of money each time, to recoup all his losses in one magnificent win. But every day was the same, and the king continued to lose.
Another worrying thing was that when the king settled the games, the people that received the pieces of money went on to spend them and the people that received those pieces went on to spend them too. Slowly, everyone had more and more pieces of money in their pockets to buy things. When it came time to bid for the biscuits and the houses of the little people, the little people had more pieces of money in their pockets to bid, so they bid more and more pieces of money, and the prices were always increasing, and people did not like that. Even the biscuit sellers from the other islands found out that the pieces of money they had got from selling biscuits during earlier trips to the island, could now buy them way fewer fish than before, and they also were getting angry.

The king thought about these issues and decided it was time to fix them once and for all: he called to consult an accountant about how to fix his losing streak.

The envoys of the king spread the word, traveled far, found a very powerful shaman accountant, and they brought him to the court.
The accountant started by setting up his stage for the divination ritual. There were cosmogonic symbols representing the life of the island: the coffers of the king, the expenses of the little people, the flow of the pieces of money, and even all sorts of mathematical symbols. After the incantations were spelled, the incense was strong, and the possession was over, the shaman accountant announced his findings.

He explained that everything we do in our world has an impact on the metaphysical world, and everything the metaphysical beings do, also has an impact on our world. The culprit of the problems of the kingdom was a being of the metaphysical world that had grown too much, it was now trying to wreak havoc on the island, and its name was Deficit!
In our world, the Deficit being was linked to the coffers of the king. The flow of the pieces of money in and out of the coffers is what gives it its substance. The more the difference between the flows of the coffers grew, the more that being became a powerful and evil beast. Unfortunately, he said, slaying the beast is a tricky task because, as a being of the metaphysical world, it would just re-manifest itself from its ashes at the first opportunity.
The solution would be to put a leash on the beast to reign in it so that it did not transform from a docile and useful pet into a great beast of chaos.
For that purpose, the shaman accountant took out a few blessed belts from his bag and offered them to the king and his servants. By wearing a belt and tightening it, they would be putting the beast on a leash and reining in it.

The king was not impressed. Not only the accountant was not addressing the main issue: the losing streak, but he was also coming up with some nonsense about chaotic coffer beings and leashing up their belts.
Nevertheless, the king ordered some of his servants to try the belts to see how they fit. After being offered their belts, the servants came up with very bright ideas about how to deal with the problem of the flow of pieces of money in the coffers.
The solution would be to ask the little people for their contribution in the sacred battle against the beast. They would contribute some pieces of money whenever they got any pieces of money from trade. For example, when someone received pieces of money after selling fish, that person would contribute some of it to help defeat the beast.
They would also contribute pieces of money whenever they spent money to buy things. For example, the little people buying houses would give a great blow to the beast by contributing to the coffers some percentage of the money of the sale.
Last but not least, the little people would continuously batter the beast by also regularly contributing pieces of money for things they owned, like their houses, even though they had already contributed pieces of money to make the houses theirs.
This innovative system of contribution of pieces of money by the little people, with the goal of defeating the beast of Deficit, was greatly appreciated, and the servants were congratulated for their wisdom.

The accountant on the other hand, was not congratulated. He said that if the belts were not worn, adding the generous contribution of the little people to the coffers would only delay the chaos of the beast, like duct tape on a rupturing dam.
The beast can grow unnoticed, larger and stronger, and only when it strikes can everyone feel its blow.
Even if the losing streak were fixed, what would happen the next time it came back? What would happen if the beast stroke hard and the biscuit sellers realize the pieces of money they have accumulated over years and years were suddenly almost worthless? What would happen if the little people had more and more trouble affording their fish and their houses?

The accountant was hushed away. If the losing streak continued, and the magician had to create a lot of pieces of money, they could just make the little people of Degendaland contribute even more of their pieces of money to the coffers, and this way, they would rein in the beast once more.
They could not make the biscuit sellers on the other islands contribute to the coffers, though, so those pieces of money would make the beast strike if they ever came back to the island. What they would do instead is tell those biscuit sellers to deal with it: prices had increased, and they need more pieces of money to buy the same things. It wouldn’t be too much of an issue because there were not a lot of pieces of money outside the island in any case.
And what if some day the magician had to create even more pieces of money? The reply was that there was no need to keep scaremongering with the same metaphysical dangers over and over! Of course, they could again just increase the contributions of the little people and be done with it!

This was the plan, and this was the world, and the world stayed like that until…

One day, in some far corner of the world, on another island, in another story, someone discovered the spice. The spice was said to be nuggets of the sun left in the world.
When you put the spice in the fields, the crop would grow plenty and strong.
When you put the spice in the night fire, it would light up all night and day.
Incredibly, when you put the spice in the forges they would heat up hot as the sun, and then you could drop in some sand to make glass, add some other dirt to make metal, and if you added some spice again to the metal, it became almost alive! It could now move and make you more things, faster and cheaper than you could ever imagine!
Everywhere you put it, the spice was truly magnificent, and it spread like wildfire across the world.
It really was the spice of life itself!

Like everyone, the king of Degendaland also wanted the spice, he wanted lots of it.
One day, in a new world, on another island, in another story, the king of Degendaland was able to convince everyone that he was rich, he had a lot of pieces of money and that everyone should trade the spice using his pieces of money only.
And everyone agreed!

Thus, the spice-money was born and lots of ships full of spice-money were loaned generously to the biscuit sellers on the other islands as debt.
The biscuit sellers liked the system. In return for their future biscuits they could borrow pieces of money from the King and exchange them for the spice or, just as easily, for products from the whole world.
The magician liked the system. He could continue practicing his skills in ever more artful ways.
The king also liked the system. He now had access to any biscuits in the world, and could continue practicing his gambling skills as much as he wanted.

The shaman accountant, though, he did not like the system. Every year, during his shamanic rituals, he could see the beast grow bigger and stronger, tensing, ready to unleash chaos on all those who hold the pieces of money. Every year, ever bigger amounts of pieces of money were shipped to the other islands. Every year, he kept asking himself: what will happen when it all comes back ?
The beast of the coffers will eat, its enormous, unleashed and ready for the onslaught.

You can open your eyes now, my friend. Tell me, do you remember how to make biscuits?

I hope you enjoyed this episode, here is the previous one if you missed it:
Chronicles of Degendaland - The ships of spice money are empty

You can also checkout my work and other networks

This story is part of a miniseries I am writing, you might enjoy it even more after reading this episode.

Once upon a time, there was a beautiful island called Degendaland. On the island lived little people ruled by a mighty king, and the king had a terrific magician.
The magician was able to create any amount of pieces of money that the king desired.

Some years the king would make the magician create very few new pieces of money, just a few to replace the ones lost at sea or that children had dropped in the wells of the island.
Other years, the king would make the magician create way too many new pieces of money, and he would spend them. The new pieces of money would slowly travel the island, from the king’s personal shoppers to the shoppers’ suppliers, from the suppliers to the suppliers’ providers, etc. Slowly, from hand to hand and from shop to shop, everyone would have more pieces of money to buy the same houses and other stuff, so everyone could bid more pieces of money to buy the same thing, and in the end everyone needed to spend more pieces of money to buy things than before. This side effect had the tendency to upset the little people, and the king wanted a way out of that.

One day, in some far corner of the world, on another island, in another story, someone discovered the spice. The spice was said to be nuggets of the sun left in the world.
When you put the spice in the fields, the crop would grow plenty and strong, and people could then make huge fields with a single crop for years and years without having to switch crops or let the land rest.
When you put the spice in the night fire, it would light up all night and day, and you could take pieces of it to replace the lighting candles of the city and people started extending their days and sleeping later.
Incredibly, when you put the spice in the forges they would heat up hot as the sun, and then you could drop in some sand to make glass, or add some other dirt to make metal, and if you added some spice again to the metal it became almost alive! It could now move and make you more things faster and cheaper than you could ever imagine.
Everywhere you put it, the spice was truly magnificent, and it spread like wildfire across the world.
It really was the spice of life itself!

Like everyone, the king of Degendaland also wanted the spice, he wanted lots of it. One day, in a new world, on another island, in another story, the king of Degendaland was able to convince everyone that he was rich, he had a lot of pieces of money and that everyone should trade the spice using his pieces of money only. And everyone agreed!

From then on, the people of the other islands could borrow money from the very generous lender that was the king of Degendaland. The people of the world were happy to borrow the pieces of money because they could always trade it for the spice. The king of Degendaland was also happy because now he had more and more people owing him money, owing him the spice!
On Degendaland itself, the prices of houses and other stuff stopped increasing excessively, and it was now common sense that there is no relationship between more and more new pieces of money from the magician and the prices of houses and other stuff.

The trade of the spice was booming and now and then you could see one of the ships of the king on the water, calmly leaving Degendaland to the other islands.
Interestingly, they never contained any spice, only pieces of money. The pieces of money were made from nothing by the magician.

The ships of spice money are empty, completely empty!

You can open your eyes now. Tell me, my friend, where are you?

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Once upon a time, there was a beautiful island called Degendaland. On Degendaland there were little people living their little people lives in their 1000 great houses, and the 1000 great houses were all the greatest treasure of the little people.

-------------------- degen play, amateur mode --------------------

Little Degen was one of them. He sometimes liked to play with some of his pieces of money, trading up or trading down, depending on his intuition. He wasn’t too bad at it, he even knew the ancient magic: “Buy low, sell high”.
Sometimes he played and won. He was happy to party with his friends to celebrate when that happened. Sometimes he played and lost, there was no party with friends those times.
One day he went in with a 100x leverage on his game. He wasn’t careful and started loosing his bet. He was pretty sure of his bet though, he tried adding some money to his bet by borrowing from a few friends. Unfortunately it just wasn’t his day, he lost the bet and went back to work after that.

-------------------- degen play, god mode --------------------

On the same Island there was also a magician called Mister Fiat. Mister Fiat was a great magician, he could create money just like that and make it appear out of nowhere, and it was his little secret. Mister Fiat also liked to play with his money. Sometimes he would win and be quite happy, other times he would lose, but he wasn’t too sad about it as he could go back to his house, make the money out of thin air and come with it to pay what he owed.
One time he also tried the 100x leverage bet and lost. He had played big and had to pay 1000 pieces of money. That was a lot of money to make, but Mister Fiat was pretty sure he could do it. What he was not sure about was what was going to happen after he delivered the money. You see, at that point there was a total of 1000 pieces of money on the island and the great houses were worth 1 piece of money each. After Mister Fiat was going to deliver the money he owed, it would be spent by more and more little people, and they would end up buying houses with more and more money in hand to bid for the houses. They would then have 2000 pieces of money for the 1000 houses, and the little people buying houses would soon need 2 pieces of money to buy a single house instead of 1 piece that was enough earlier.

The little people of the Degendaland would surely notice that price increase, the young little people would have trouble buying a house for themselves, they would get angry, find out that Mister Fiat had caused the mess, and he would be in big trouble!

Mister Fiat got afraid of this, so he went to see the king and told him his little secret. The king was very angry at first, but the king was also a degen, he calmed down when he understood that Mister Fiat could make an infinite amount of money for him to use. The king told the army to protect Mister Fiat, and together the King and Mister Fiat would manage the money. If they gambled and won, bravo! If they gambled and lost, no worries! They would just make the money out of nowhere. If they gambled and lost too much money and had to create way too much money, the goal would be to avoid that the little people felt the increase in prices too much in one go.
The price of the houses would still keep increasing, slowly but surely, because more and more money would be in the hands of the little people to buy houses and soon there could be 3000 or 4000 pieces of money for the same 1000 houses.
The houses were the same as they were before all that, it’s the pieces of money that had lost value. The young little people of Degendaland were not that happy with the new system, the salaries of the little people did not increase much, and now the young little people had to get into debt with the magician for their whole lives to buy a house.

Mister Fiat on the other hand liked the new arrangement, he could continue practicing his magic when the young little people came for a loan to buy a house, and he even got to keep part of it for himself. When he gambled and won he would just reduce his personal debts, when he gambled and lost he would just create it from nothing and let the young little people work more and more to pay for it.

-------------------- One day --------------------

One day, little Degen heard something, something small, but it was there. He didn’t think too much of it at first, but it was still there….
(… Coming soon)

-------------------- Are you ready? --------------------

Are you ready, my crypto friend? You can open your eyes now. Welcome to Degendaland!

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So, here it is, “Fiat money is degen gambling”.
Previous episode: The killer app of crypto

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p.s.: At Speculoos Finance we are looking for a partner in MeV (searcher, validator, etc.) for our next product. Please get in touch if you know someone that could be interested.
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The first time I heard of crypto and bitcoin was in 2016. It was all the hype in the local tech community, people were excited about it, talking about peer-to-peer payments without a bank, a new form of money, something that will change the world, etc

I got curious and decided to really research the topic, understand what bitcoin is, how it works and find out if this was just another ponzi-style scam based on hype and new people buying it or if there really was something behind it.

I went with the most technical book explaining how bitcoin works I could find: “Mastering Bitcoin: Programming the Open Blockchain” by Andreas Antonopoulos. It’s a very good technical book with the mathematical and economic foundations of the blockchain, and it even has a description of how to program on bitcoin.
I read it with passion for a few weeks, my first dip in “crypto”. I got to understand why bitcoin uses a blockchain, how transactions are sent, what is the 51% attack, etc. I didn’t finish it, but I liked the book.

In the end, I put the book on my desk and thought, “This is a very nice technical concept, but there is no use-case for it. You don’t need a blockchain to make payments, your bank already does that. You never needed to ‘program money’, why would we need it now?”
I was thinking of buying 1 BTC with some of my spare change to mark the fact that I had gone through all that, but the price had increased again in the meantime and I didn’t want to put in so much money for the new fad of the day, 1 BTC was 800 USD!

Today my decisions can seem a bit silly, I could have got 0.1 BTC instead of a whole BTC, I could have diversified the info I got about the blockchain and it’s uses.
The main point stayed though, my perception was that crypto had no “utility”, no killer app that would make it find a niche of usage and not disappear in a crash in 2 weeks.

What I didn’t realize was that the killer app of the crypto was already right in front of me. Here by killer app I mean a very desirable use-case that cements the usage of the technology in a niche and then expands it.

For example, in the old days when people were used to listen to the radio or the VHF television in the evenings, some people created a complicated thing called the TCP/IP protocol for computer networks (1974) and the internet was born! The web browser (Netscape Navigator in 1994, Internet Explorer, now Google Chrome, Firefox, etc.) is the killer application for that protocol.
It started with some techies, and niche businesses writing the first web pages about their hobbies, games or expertise. Then more and more people really wanted to try the ‘new’ internet and watch cat pictures and porn on it, and then it was everywhere in the lives of everyone: gradually, then suddenly.

For a killer app, you need people who really, really want something as a result of using the new technology. A technology can start with one killer app and evolve with other ones later on as it reaches more and different people.

The killer app of crypto is not money (for now…). The killer app is what you thought about when I said I had the opportunity to buy bitcoin at 800 USD, it is what most people buying bitcoin in 2016 were doing, it would later make a name for an entirely new category of financial assets, motivate thousands of institutional and private investors around the globe for something they really, really want.

The killer app of crypto is degen gambling.

This is the application that would bring masses to the crypto ecosystem in an undisputed niche and pave the way for the other applications of the blockchain; and I did not see it coming…

It’s funny though, even after I realized that it would still take me years and years before I realized something else that was right in front of me all along, something that maybe even you my crypto friend you don’t consciously realize yet:

The US Dollar, the Euro, the Japanese Yen,... fiat money is also degen gambling.
How is that possible? That will be a story for the next episodes.

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