Archive for February, 2014

Date: February 5th, 2014
Cate: Finance, Systems

Ethereum & Bitcoin : Protocols for $9.3 trillion in value for dead capital?

E-8 Lie Group representation

Warning! this post is going to be technical and deep in nature. To ward off casual readers, I am inserting this image of E8 to the right which may or may not satisfy your need for supersymmetry and a TEO.

Firstly lets discuss value and representations of it. Money is a representation of perceived value. Representing societies perceived value of things correctly is integral to economic development. Value perception in the form of price or expected price is what allows for decision making and choice. It is the operand enabling economic operations by actors.

Representative value using a token allows for virtual ownership. Separating a thing from its representation allows you to sell a house, car or security without having to physically possess it at all times as a squatter. You transfer a title or property right and the thing is then recognized socially as owned by someone else based on that representation. Without titles and representative rights, every time you left your house or car, someone else could possess.

The social invention of value representation using tablets or paper is why capitalism work in the west according to Hernando de Soto.

So abstracting a things ownership attribute via representation using socially agreed to information structures such as titles using centralized public property registries was powerful and a key to economic development. Think about the Joint-stock company as an example of this. Patents do this for ideas, and bonds for future cash flow streams. Even claims to skills are vital for trust. A persons ability to be a doctor or engineer is predicated upon a social claim to expertise in the form of a license, which is an earned asset. Registered, recorded representation prevents or limits theft by occupation, falsification or physical coercion etc. It enables future claims to cash flows, lending and investment.

The mechanism of Socio-economic value representation and assignment enables the economic macro-process choices for spending and investment. The choice to swap representations of money, assets claims (property) etc. are maintained by code (legal code) with lawyers and judges acting as societies processors. Legislators and technocrats are cast in the role as developers of the code and regulations.  Due to corruption or ineptitude, a lot of the property assignment and representation can’t or doesn’t occur properly in poorer countries. This property is then outside the formal system leading to the inability to resolve super-ordinate problems like soft and hard utility infrastructure like waters, sewers, schools and fire departments.  Many squatters interviewed in the emerging world would gladly pay taxes in exchange for the security of ownership and infrastructure that property claims would represent a claim to support and receive.

According to economist de Soto, the value of property that is economically dead capital or lost value due to improper or unavailable rights registration is $9.3 trillion (yes that is trillion). Most of this $9.3 trillion property or dead capital lies among the poorest people in the world. This link shows a map of latin american dead capital by country. This dead capital to poverty relationship is likely causal and not just correlate; ask the World Bank or read de Soto’s book, they get this. Think about trying to sell your house or car without a title, the claim uncertainty would reduce its claimable value  to the buyer. Having only squatter’s rights significantly impacts its sale price.  Buyer’s don’t know who is going to show up and make a claim. That discount due to uncertain claim is dead capital. The property is there but trust in its ownership is missing. Bad actors and mafia become the informal mechanism for claims production, further sapping the wealth from poor, but unregistered property owners.

Bitcoin, like money is misunderstood by 99% of the people using it. Money is a social protocol with each us accepting its various forms or APIs, be they Dollars of Dhirams. People organized as cultures agree to pick various objects, bits etc. and ascribe representations of value to them. Value is perception. Most monies average a 27 year life before the dream dies, usually due to a captive central banks forced on an unhealthy diet of government debt which has become unserviceable.

An economy is an adaptive social process not a strictly linear physical phenomena like a machine. Organization and trust among groups winning over corruption and deceit allows for the rule of law, capital, knowledge and most importantly human development. Its all in my book which took 4 years to write. FYI author’s make about $2-3 a book and economics books sell 2-5,000 copies on a good run . I am shilling for the sake of your knowledge, more than my pocketbook. So how do bitcoin and ethereum etc. enter in to this? Aren’t they just digital cowrie shells or beads?

Bitcoin is a technical protocol that happens to be expressed as a blockchain ledger, wallets and services that are then expressed and mostly understood as the social protocol collectively known as money. So here is where Ethereum and Bitcoin become interesting as form of money. Money as a believed representation of value is valuable to an economy. Registered property minimizes corruption, allows property rights, mortgages, capital formation etc. The integrity and ease of access to the legally and publicly recognized representations of property are what can help free up the $9.3 trillion in global dead capital.

Costly bureaucracy, ignorance, illiteracy and politics limit many from receiving and being able to use the legally recognized representative claims to their property. This forces them to be squatters or operate in the informal economy which is actually costlier and less safe etc. again read de Soto to understand this.  If you are from a rich world country it is tough to understand that these choices are sub-optimal but rational for local economic actors who are dis-enfranchised often by design from the formal property system. Formalizing property and title, brings it in from the black market allowing for legal protections such as company formation, lease-holding, utility connections, political voice, capital accumulation, financing and legal standing and yes taxation. So where does the Ethereum and Bitcoin stuff coming in?

Bitcoin currently has a market cap of $10 billion. In global economic’s terms it doesn’t count for much. It may one day, but $10 billion doesn’t swing the needle in a forex market that trades $4 trillion a day (hint bitcoin trades $30-50million a day as of Feb 2014).  The protocol for bitcoin, alt-coins and Ethereum may one day be profoundly interesting.

Full disclosure, I volunteer as a spokesperson for www.solarcoin.org which uses a representation of energy based on this paper to stimulate solar energy production for the next 40 years. SolarCoin may  use Ethereum for grant representation if it makes technical sense to the SolarCoin community.

The Blockchain concept is where things get interesting.  The Bitcoin blockchain is by design a distributed (there is no center) data structure that maintains an almost inviolable record of each transaction that passes into it. When a message is added to that transaction its a record, like a public land registry etc. Anything can be recorded in the Blockchain by associating a transaction message to some trusted meta data.  Thats pretty cool computationally and philosophically. The blockchain is a bit like a platonic growing symbolic structure. Instead of representing $10 billion in bitcoins as it does today, the bitcoin blockchain could be the key to represent trillions in property, like home titles or securities transactions (look out Northern Trust $5 trillion and State Street $5 trillion in assets).   Who needs a custodian to track ownership when the blockchain may do it cheaper and safer?

Ethereum is  the next level.  The current blockchain is effectively a huge database structure with no center and very limited ability to falsify previous records. Computationally that is very cool but kind of like an unbreakable clay tablet.  What is now pejoratively called the cloud isn’t a cloud at all, its actually the clod. There is a clod of servers here and there owned by various people and groups (amazon, google, NSA (handling your personal back-ups), etc.). The blockchain is the first real cloud computing transaction structure. bit Torrent was static transfer, but a fleeting record.  The true cloud of data in a blockchain is a place where the additive database (think of it as having millions of tiny records) is everywhere. For the physicists and math geeks reading along bit-torrent structures could be considered to have lower symmetry over time than the clod. To the data consumer the data and its history of a blockchain looks the same from everywhere to everyone. It is persistent and identical from many directions and sources. The data has become the protocol. Use the bitcoin protocol and the data is maintained.

So here comes the next super cool step. Ethereum represents the first attempt at persistent omnipresent computation and state maintenance. Ethereum takes the blockchain data structure with its data user symmetry and integrity and pops a Turing complete language and process capability inside. Wow! Welcome to the machine.  Suddenly one has the ability to create a machine or computational functions that are at once inviolable (to a degree) and highly symmetric.

The protocol is the processor. Now that is pretty amazing, it won’t get you out of that nasty Goedel problem, but… The ability to complete and compute in trusted fashion with an omni-present 3rd party to act as escrow etc. agent.(pun intended) is deeply profound.  If you are a clod vendor like Amazon, IBM, Microsoft, database vendor or escrow agent dealing with symbolic representations or certificates of value look out. Ethereum and its ilk could eat your current lunch in the same way the TCP-IP protocol ate so many industries with layer of firms built on top of it.

Optional geek  paragraph ahead, on the physics of information and evolution of energy processing:

If you understand the data symmetry concept you will get the E8  reference earlier and appreciate the Wheeler reference about a digital universe resolving itself across energy and structural gradients as it from bit. Wolfram’s alpha may end up living in Ethereum resolving itself. Ethereum indeed! It may end up having the highest phi(m) in the known universe. Have to ask Eric j. Chaisson about that.