Money Stuff talks ETH crash

Matt Levine: 

On Wednesday, the price of ether -- the cryptocurrency of the Ethereum blockchain -- on the GDAX exchange briefly crashed from $328 to $0.10. The story seems to be that there was a big market sell order that blew through a lot of the buy orders on the book, pushing the price down.

What was missing?

All traders must submit a risk profile, the red/green span they are willing to tolerate.  The trading bot that executes the orders can translate risk profile into stop limits on the trade.  Round robin access to the tradebook then prevents the trading bot from jumping across a concavity, as happened.

It is mathematics that requires risk profiles and auto trading need to go together.  In the Redneck model, each trade bot starts with the user's token, which contains the necessary risk profile. The trading bot format makes analysis easier because bot the pit boss and trading bots are treated semi-equally on the stack.  But there are limited types of bots that can trade,and they can be tested simply to avoid the concavity problem.

Xi will be a bit alarmed

The contract is completely outside the purview of the regulators, but is likely between two Chinese citizens in China.

Exchanges need the trading bot model

Simple traders just enforce finite bound on their bid/ask, and set aside to tradebook uncertainty.
The automatic trading algorithm has fair round robin access to the bid/ask before  matches are set.

The pit boss has to make the market and everyone measures its distribution of gains and losses.

Bots are prequalified by path tracing and mostly bonded by the pros. The stability cops. Pit boss cannot hog the stack, except by contract.  Check with the stability cops.

Trading bot model is the best for pre-analysis, working through paths in pairs or triplets and so on, the bound can generally be found, and its risk distributed. You can disqualify some unknown bots, and making the even money price is a farily easy task, to the accuracy of TU.

The sandbox and government crypto regs

Made this point several times.

The sandbox cannot show you any secret passages, it runs maximum entropy.  Try to sneak messages and they get hedge to garbldy doo.

In order to send messages and secret text, you have to make a presence in smart layer, extract a profit that has spare entropy, make a store front.  And you  might win or lose, government's got good shoe leather.  But, nothing to see in pure cash, by definition. No crime, no government; except when the issue is counterfeit, sandbox is on the hunt with government.

Is Coinbase liable for the crash?

Sure are.

The rules of fair, bounded variation trading are well established, by CATO in their free money project and by queueing theory as pointed out continuously on this blog.  Fair traded pits, bounded variation on the trading bots, equal and fair access to the trading stack by all parties, free entry and exit, and the bounded variation contract for the bit error function.

So, sure, clients should sue the frig out of Coinbase for mathematical incompetence. I suggest Coinbase go to settlement, otherwise a shitload of experts will testify to the incompetence of the firm.

Bitcoin reality, a bit of it

Bitcoin News:

Using a credit card to purchase cryptocurrency divorces virtual currencies from many of the core use-values that underpins bitcoin’s basic protocol. The innovation of the blockchain, a trustless ledger that comprises a decentralized ledger that can validate and verify transactions without the involvement of third parties, is made essentially inert by the involvement of credit card companies in a transaction. The transaction is immediately dependant upon a centralized third party, and involves paying fees to the credit card companies, Netcents, and Visa or Mastercard, in order to access technology designed to circumvent the very third parties that are now facilitating the transaction.

Under the current system, yes, traditional banking removes the need for block chain.  But we not going to do traditional banking, we are going to do automated S&L, and in the secure element sandbox, all money is transferable point to point with no central authority and no block chain.

Blockchain is still useful, it is a contract checkpoint.   What is missing in the whole debate is that neither traditional banking nor bitcoiners understand money, prices and savings and loan.  We cannot understand money until we understand the basket brigade theory of goods delivery.

As a reminder to bitcoiners, the original white paper theorized side chains just for this problem, it is in the design boneheads.

Coordination failure

From a review of Trezor, a hardware wallet:

It might be convenient to keep Bitcoin on those online services since you can easily buy or sell. 

This line blew me away.  It is convenient to keep bitcoin in your friggen pocket so you an put it in someone else's pocket, as it it were exactly like cash.  Send it pocket to pocket, either over the internet or directly, no third party exchange needed.

Never in my wildest dreams did I think that 200,000 geeks would get the idea that transferring a batch of watermarked bits from me directly to you is somehow prohibited in the software world!  I have made this point every time.  If we are eliminating cash transfers, then the system is useless, you may as well eliminate the badly designed exchanges like Coinbase which is crash and hedge prone.

So, I have a message to young software geeks, do not listen to the bitcoiners, ask yourself, and I repeat for the 100th time, how foes one human transfer a sweaty cash to another person? Think hard, this is not a trick question.  Pretend you have, in your past, handed a wad of paper to someone, how exactly did that work?  Now, with that in mind, imagine that NFC is cellulose and bits are ink.  With only that change, how could you pass bits from one secure element directly to another?  

You are having a hard time with the obvious because your marketing and sales folks seem a little dense, ignore them.  Just close your eyes and pretend you have a bunch of NFC bits in your hand, ready to pass to your neighbor.  Focus on and, think, radio link layer, maybe? send and receive, maybe? Any of this ring a bell?

Think what happens when you ship 10,000 of these Trezor wallets and start getting calls, "How to I send cash from me to spouse?"  And your help desk has to talk about cash transfers that are not allowed to happen with wallets! Is you sales VP that stupid?

On the Trezor wallet, did those folks think that we use a USB plug to spend money?

I looked at the features.  Taking your Trezor wallet to Walmart did not seem to be one of them.  It is not a wallet, you idiots, that is a stationary vault and only works when plugged onto a PC having a USB port.  That is not a wallet, your VP of marketing is a liar and SOB.

Block chain and the S&L pits

The savings and loans pits are not calling the block chain for each interest swap.  The block chain network would jam.

S&Ls for bitcoin are not currency issuers and must be backed by a bit error fund to remain zero bound.  So the pit boss has a bitcoin account on the block chain and all traders must check their bitcoins in to the pit boss on entering, and check their coins out when leaving the pit. The pit is secure, as secure as a hardware wallet and the pit boss runs an honest game.

Why would anyone leave their coins on the block chain instead of on account with the pit boss, utilizing the savings and loan function?  All of the side chains become savings and loan pits, I do not see any other way. Most of the activity on the block chain will be traditional savings and loaners checking in and out of the S&L pits.

But we can extend the concept. If you trust your S&L and it is well regarded by merchants, then keep the money on the pit boss address, it is as safe as your own address, then all the merchants can deal with the S&L and mostly skip any call to the block chain except for daily balances.

The block chain is really just an account balancing activity and need only happen once a day, week or month;depending upon the activity. Otherwise, keep it as pit boss money. Ledger services are there only to meet some smart contract or regtech condition of verifiability.  If no regulatory or contract is pending, just carry around pit boss money and spend it normally.

Make it the general rule.  All crypto coins are either issued from S&L or converted to S&L format, and shove the block chain completely up into the smart layer.  It is pretty clear the sandbox will not work without S&L functionality for pricing purposes, so let us just adopt S&L permanently on theoretical grounds as he main solution for congestion management.

Something clueless about this

My Patients Need Medicaid

My elecric car buyers need subsidies

My voters need right of free assembly in California

My grocery customers need need food stamps

My defense team needs weapons.

I am sometimes confused by the rhetorical stupidity of doctors.  

The correct method is to at least hand wave the concept that government can not do everything, then sort of weasel in there about how your thing is better than the other things.  Doctors don't get the concept, at least Kanosians do the handwave, then introduce their special thing about the third paragraph, not the title.

We already understand the problem

Cybersecurity is becoming a vital concern for the functioning of a modern economy. This column argues that the threat of cyber attacks should be tackled economy-wide, with economic policies aimed at overcoming the externalities and information asymmetries that lead to suboptimal protection choices on the part of private agents. There is an urgent need for an improved understanding of microeconomic mechanisms in the cybersecurity market, and for reliable data upon which policy design can be based.

We are encrypting cash, delivering tamper proof secure elements and pricing congestion in the money net,   We make it nearly impossible  to spoof pure cash and obsoleted the opportunity for HFT by going to asynchronous interest swaps. . Problem solved, everyone pay attention.