Pull Your Own Strings

Our Problems are Man-made

Friday June 10, 2016

Therefore they may be solved by man.

When I wrote the Hard Fork Missile Crisis article, it was a direct allusion to the Cuban Missile Crisis incident JFK encountered during his Presidency. During the Cold War it was as if the world superpowers were willing to terminate the entire world for political disagreements – disagreements between men – The East against The West. A few months before the Hard Fork Missile Crisis, Gavin Andressen released his “Scalability Roadmap” (aka a block size increase), on the now defunct Bitcoin Foundation’s blog. Opposition rose to this roadmap, and eventually this deteriorated into a plenitude of political disagreements. Consequently, a cold war began. Eventually two vocal communities arose, each completely ignoring the true problems of Bitcoin – the problems of men: problems of trust and faith.

Bitcoin was created to abolish the need for a central authority to create and enforce a monetary supply. This allows peers to transact freely between one another. Instead of having law enforcement hold a gun behind our head, coercing us to be honest, we now have the option to trust one another openly. Isn’t a person who is voluntarily honest more trustworthy than someone who needs to be tortured into telling the truth? A lot of people, in fact most people, are not ready for this psychological revolution in interacting with one another. My father constantly tells me, “A man’s word is worth more than gold.” We can never take trust for granted; otherwise we leave a littered path of broken promises behind us.

There are two type of people in Bitcoin: people who will do whatever it takes to fulfill a promise they’ve made and those who willingly break those promises when things get tough. A new Eternal September has taken hold, and a dearth of people who are willing to stick to their word has accompanied it.

Well, enter the web of trust. nanotube created the first Bitcoin Web of Trust for the IRC community #bitcoin-otc on Freenode. The Web of Trust is a centrally federated but peer driven system of ratings connected to GPG keys that any third party can easily verify. The Web of Trust is not a new concept. In fact, even the developers of GPG acknowledged the socio-human problem of trust years before Bitcoin even existed.

A desire to simply use GnuPG yourself is not enough. In order to use to communicate securely with others, you must have a web of trust. At first glance, however, building a web of trust is a daunting task. The people with whom you communicate need to also use GnuPG, and there needs to be enough key signing so that keys can be considered valid. These are not technical problems; they are social problems. Nevertheless, you must overcome these problems if you want to use GnuPG.

– Gnupg Documentation

The same quote could be used with Bitcoin: “A desire to simply use Bitcoin yourself is not enough. In order to transact securely with others, you must have a web of trust.”

nanotube’s Web of Trust didn’t become mainstream, just as GPG hasn’t become mainstream due to usability issues. I personally feel this is just a human aversion to things that are slightly difficult or have a learning curve. It’s easier to be lazy than to learn tools with a proven track record, despite any associated difficulty in use. Even with its limited adoption, nanotube’s Web of Trust has millions of BTC worth of ratings. That is, his Web of Trust has been used to transact a total volume of millions of BTC between peers. In fact it serves as a tamperproof record of many of the scammers in Bitcoin, some who are well known, some who are not. Listed below are six scammers I’ve encountered, who likely defaulted on upwards of some 1mn BTC from creditors and investors.

usagi – The Insurer sold fraudulent insurance which was completely exposed to pirateat40’s default. I personally lost 17 BTC “investing” in this fella. After misrepresenting shareholder statements, he began having what appeared to be a psychological breakdown on the forum.

MagicalTux – AKA Mark Karpeles who ran the MtGox exchange into the ground. He had been operating on fractional reserve for years before his house of cards imploded.

PatrickHarnett – A Bitcoin banker who “earned” the trust of a lot of investors. Once seen as a “pillar of the community”, Patrick Harnett ran a private Bitcoin bank offering 2% interest per week. He lied about having any pirate exposure, and like many others defaulted on his loan obligations.

pirateat40 – The king of Bitcoin Ponzis.

Nefario – Created GLBSE, which became an exchange with assets that were nothing but scams: assets which IPO’ed and would disappear, much like unregulated Penny Stocks.

Ukyo (Utko) – Created Bitfunder, which completely collapsed after issuing a bond he defaulted on.

gigavps – The first “cloud miner”. IPO’ed his mining farm on GLBSE, although most of the hashpower he claimed to have owned didn’t even exist.

As they say with any pest, such as roaches and rats, the ones you see in the light compose only a fraction of what is lurking in the shadows, underneath the floorboards, and behind the drywall.

[Bitcoin] is basically a massive spotlight that shows everything as it is and quickly vaporizes any bullshit coating idiots like to cover things with. From there it immediately follows that the only sane attitude in handling a fuckup is to actually stand up and clearly admit that they fucked up before sitting down, shutting up and fix whatever needs fixing, and if fixing isn’t an option, throw it away and start over.

– David “davout” Francois

There are two types of people in the world – those that hold their agency accountable, and those that blame others.

The core of the block size debate is an argument of limiting adoption – a question of how many people should use the system: conservative vs. liberal. The liberal argument rarely takes into account humans and their fallible ways – everyone is equal. Would you really lead your people into the desert in promise of false riches? I am a reasonably educated and technical person; I got scammed. Proponents of this utopian vision of Bitcoin mass adoption fail to acknowledge the endless supply of scammers waiting for the newcomers to enter into the space. The scammers love the fresh blood; they are ready with new ways to fraudulently separate people from their bitcoins.

The solution is not regulation – having law enforcement point guns at us forcing us to be honest. Satoshi didn’t give us back our freedom to transact value between one another just for us to give it back to a dysfunctional tyranny.

With great freedom comes great responsibility. In a world where this responsibility is ignored, willfully or unknowingly, scammers become the majority. Is this really an invitational world?

BTCJam is an older Bitcoin “service” which specializes in peer to peer loans. It clearly frames the problems of humans discussed above, by allowing individual peers to loan one another bitcoins with varying terms. Unfortunately, the average human is not ready for the level trust and auditing involved in underwriting a loan procured in Bitcoin. In the Autumn of 2012, shortly after opening, BTCJam was empirically determined to be a cesspool for scammers to congregate:

Average loan duration 1 month, average repayment rate 77%, average interest rate 5% per month.

January: start with 1000 BTC, get back 770 btc + 5% interest, for a total of 808.5 BTC

– MPOE-PR aka hanbot

Above is just one hypothetical month of loaning out BTC. The apologist will claim that in a bullish market, those who loan money will eventually get more BTC back valued in fiat, but this practically ignores the fundamental purpose of Bitcoin. When left to their own devices, the current average human will inevitably take the easy way out by scamming their peers, which seems significantly easier than dealing with the stress and hard work involved in fulfilling contractual obligations.

Some will point out the state of Bitcoin has changed since 2012, and there are less scams. It’s true, the impact of scammers has lessened since the end of 2012. This is partly due to long term holders tightening their grips, making them significantly less susceptible to scams. However the likelihood of the majority keeping their promises is still very low. One recent BTCJam investor reported their findings:

I started investing last May 15′ and stopped my investing in July 15′ to see how the interest would accrue. As it stands right now, I invested exactly 4 bitcoins and have gained back 3.72 with another .38 to be paid (of which I will likely get .1 back). Lets call it 3.82 bitcoins returned from a 4 bitcoin investment, a 5.5% loss over over the entire course of investment.

– Source

This investor put significantly more effort into auditing loan candidates than the average investor. Three years later, with a proper investment strategy and execution, BTCJam has a 94.5% repayment rate on the principal.

Bitcoin doesn’t change human nature, it merely reveals the truth, as machines don’t lie like humans. Perhaps all this evidence isn’t a new phenomenon, but an indicator of people completely relying on outside coercion (be it a government’s laws or other third party), to stay honest.

A teenager lies to her parent about where she’s going Friday night. She comes home late, wasted, and in result is caught in a lie. We know the classic phrase the parents use here, “You broke my trust. It’s going to take a lot of work on your part to earn it back.” Trust cannot be bought nor sold; it can only be earned. The scammers previously listed, have all vacated the world of Bitcoin. The chance of MagicalTux ever being entrusted again with hundreds of thousands of bitcoins is extremely small. It could possibly take him his entire life to earn that much trust back from the community.

Ultimately Bitcoin rewards those who are honest and ever vigilant. Without vigilance one becomes the mark of the con artist. Without honesty one inevitably devolves into a scammer. Bitcoin doesn’t die when it isn’t used, it dies when the scam artists drive everyone away. Hopefully that day never comes.

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