Madness of Crowds

Investment Analysis Clubs Macro Economic Trends and Risks
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There is an enormous self-assembling Ponzi scheme forming and reforming right in front of our eyes and they is called Web 3.0. Like the crypto bubble, it depends on its participates unwavering, fanatical belief in the power of blockchain. And it seems almost unstoppable.

Like crypto and Bitcoin in particular, there might be a few specific niche use cases that make sense (mostly illegal). But the rest of the time when asked for the advantages of crypto, proponents just start waving their hands and it always ends with some version of “well, you just don’t understand.”

Web 3.0 is a repeat of that on steroids. This article by Charlie Warzel points out the difficulty of Web 3.0 proponents to come up with a use case. In one Twitter interview billionaire venture capitalist Marc Andreasen (more on him on a bit). Andreasen throws as podcasting as a possible use case for blockchain. The interview respectfully tries to prod him into explaining why blockchain improves the existing situation. And of course Andreasen never comes up with anything.

https://newsletters.theatlantic.com/galaxy-brain/62ba500cbcb…

Andreasen’s VC company pumped $365 million into the Helium Network, a distributed LoRaWAN (“Internet of Things”) where users could buy a hotspot terminal for like $6-800 and then sell access for Helium tokens. The part that doesn’t quite make sense is that I don’t feel the need to hook up my coffee pot to my neighbor’s Wi-fi. And indeed, for the month of June total review was $6500. Not per hotspot. For the entire Helium Network.

https://www.aroged.com/2022/07/27/helium-web3-project-that-c…

Now Helium has announced plans to build a decentralized 5G network. Same question: Why do you need blockchain for that? Answer: You don’t understand.

Similarly, there are now play to earn games, where completing tasks in game can earn tokens which can be exchanged for stuff in-game. Seems like the main question should be if the game is fun to play, not if you can earn tokens. The way most online games work is they are free or cheap to play, but you can buy power-ups. The key is to attract whales who spend a lot of money on power ups. Attracting people to perform tasks does not seem like a good idea for a game.

I would suppose that everyone will get the blockchain out of their systems and things will return to normal, except that crypto proponents have an unshakable faith in the libertarian, decentralized promise of blockchain that prevents them from asking any of these basic questions. They believe in it so strongly they kept getting caught up in these schemes. It is a confidence game, and they are both the con man and the mark.

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America celebrates ignorance and innumeracy. I’m bullish on Web 3.0 and the continued unlimited price gouging on insulin for US customers.

Someone Spent $450,000 for ‘Land’ Next to Snoop Dogg’s NFT House
https://www.rollingstone.com/culture/culture-news/sandbox-de…

intercst

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an unshakable faith in the libertarian, decentralized promise

Well, that’s it right there. These are people who have no trust in established players (for… reasons… of course), so anything “decentralized” is obviously better. For… reasons…

What don’t you understand? :smiley:

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I’ve been reading a book called “Why We’re Polarized.”

The basic argument in the book is that our mix of beliefs/opinions is really no different than in the past. What is different is that we’ve been “sorted out”.

Lots too much to summarize. Basic thrust is that if we go back to the 50’s to 60’s the basic separation was around segregation. The South was in control of the Senate because of time in office and controlling key committees. This was recognized, so not debated, and the subject was dropped. That left a mix of people on each side of the aisle. And they could frequently agree on other issues. So progress was made in other areas. Compromise worked.

Then came the Civil Rights legislation after JFK’s assignation. The one whose name was not to be said was being said. And positions started hardening on both sides. People changed sides.

The book’s argument is that now we’re in the latter stages of what is still the same debate - white supremacy. And we’ve been sorted out - there is little remaining overlap in other areas of potential agreement. We’ve become one side or the other. A lot of other issues are swept along in the division - including climate change. But we’ve reached the level of the old theological argument: “There ain’t no hell. The hell there ain’t.” Compromise has been lost.

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In advertently hit publish before being finished - and before putting some more flavor around too simplistic a summary.

But that’s still what I’m reading. And “news” has become an entertainment battle for viewers. The old concepts of “equal times for equal viewpoints” has disappeared in a battle for viewers.

I read today of a new effort to put together a new US party in politics. Those, however few or many, who still long for the period when we could learn to compromise and make progress.

I’m interested.

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And “news” has become an entertainment battle for viewers

I’m putting Why We’re Polarized on my list. Thanks. With regards to the above, I suggest this book: https://www.amazon.com/Bad-News-Decline-Reporting-Business/d…

It was released in 2005, but boy does it paint a very compelling picture for how the news media got to this place. #TLDR: profit, and the repeal of the equal-time doctrine. But of course there is so much more to it.

“Ripped Apart” is also on my list. And 2 books work related on RTL design assertions and the Django web framework. Too much to read…

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I’m putting Why We’re Polarized on my list.

One of the better books I have read in some time. While I know Ezra Klein has been credited with the authorship in other threads, I thought it should be mentioned here too.

https://www.amazon.com/Why-Were-Polarized-Ezra-Klein-ebook/d…

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I read today of a new effort to put together a new US party in politics. Those, however few or many, who still long for the period when we could learn to compromise and make progress.

I’m interested.

Count me in… Ironic that on today’s FB “your memories” feed, there was a Johnson/Weld advert from 2016 that I had essentially captioned “These guys get it… don’t tell me why the other guy sucks, tell me why you’re better.”

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The book’s argument is that now we’re in the latter stages of what is still the same debate - white supremacy. And we’ve been sorted out - there is little remaining overlap in other areas of potential agreement.

I don’t think white supremacy, abortion, or LGBTQ issues are the problem in and of themselves. CNN had a show last week about a couple of West Texas oil billionaires who were using the social issues to reshape Texas to advantage their book of business.

https://www.cnn.com/2022/07/24/politics/texas-far-right-poli…

Their strategy is keep the electorate focused on the social issues while they pick everyone’s pocket. A former President from Texas outlined this strategy in the 1960s. It’s just as true today – and you can make a lot of money in the stock market if you understand it and act on it. It’s the major macroeconomic trend of our times.

https://www.washingtonpost.com/archive/opinions/1988/11/13/w…

intercst

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There is an enormous self-assembling Ponzi scheme forming and reforming right in front of our eyes and they is called Web 3.0. Like the crypto bubble, it depends on its participates unwavering, fanatical belief in the power of blockchain. And it seems almost unstoppable.

Returning to the original subject of the thread, I’ve been noodling around with the idea that the ease with which these schemes are forming is based, in part, on the fact that these companies are often just running their own currencies. Because they’re running their own currencies, there’s no risk that they won’t be able to make the payouts they promise to investors in their schemes denominated in the native currency. But investors get crushed because they basically don’t realize that they’re making foreign exchange bets that violate interest rate parity theory.

In short, when one of these crypto companies is offering their own tokens, they’re basically like a foreign country that’s got its own currency. They’re asking you to invest in this foreign country, and offering all kinds of goodies and returns for that investment. Which they are absolutely able to do, because they control the “mint” for their little “country’s” economy. So hey - no ponzi scheme, right? You will always get paid the promised return, regardless of whether any new investors come in, right?

Well, yes - but what you’re doing is making the equivalent of an uncovered forex bet. All your investments are denominated in the host currency of the crypto market. Eventually, you will want to convert your foreign exchange to a domestic one - whether it’s another token like ETH or BTC, or back to USD. How much you get is based on the exchange rate on offer. And if the foreign token is offering you a crazy return, interest rate parity strongly suggests that there’s a massive devaluation coming down the pike. You can earn 20% on your investment in ALB tokens…but by the time you get your 20% premium paid in ALB, the value of ALB tokens relative to other currencies will probably have devalued.

So that’s what’s been happening. Rather than traditional ponzi-scheme frauds, where investors just don’t get their invested assets back, these guys are mostly running massive inflationary schemes. They sell tokens at a given exchange rate, pay themselves a bunch of tokens out of the “mint” as compensation for running this system, which they convert to other currency at the given exchange rate, and then the currency devalues once people stop buying the currency - sometimes down to zero. “Not a ponzi scheme!” they will cry - “everyone still has all of the tokens that they’re supposed to have in their account, and they can withdraw them and sell them!” Because it’s a currency devaluation, not moving tokens out of people’s accounts, that let them steal all the invested value out of a system that generated no new value.

Albaby

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Well, yes - but what you’re doing is making the equivalent of an uncovered forex bet. All your investments are denominated in the host currency of the crypto market. Eventually, you will want to convert your foreign exchange to a domestic one - whether it’s another token like ETH or BTC, or back to USD.
Wish I could dump all my remaining recs for the day on this post… possibly one of the easiest-to-understand conceptualizations I’ve read yet about how crypto works.

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“Not a ponzi scheme!” they will cry - “everyone still has all of the tokens that they’re supposed to have in their account, and they can withdraw them and sell them!” Because it’s a currency devaluation, not moving tokens out of people’s accounts, that let them steal all the invested value out of a system that generated no new value.

Albaby,

I’m not an attorney and I don’t play one on TV, but I did have to take a law course to pass my CPA exam (the teacher opened the course saying that we had to learn things for the exam, but the most important thing we had to learn was that if we got involved in any legal matter, hire a good attorney).

Anyway, wouldn’t a judge pierce the veil of the corporate structure and call a spade a spade (it’s a Ponzi scheme or some kind of fraud)?

AW

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Anyway, wouldn’t a judge pierce the veil of the corporate structure and call a spade a spade (it’s a Ponzi scheme or some kind of fraud)?

That’s certainly a possibility for any of the rug-pull events we’ve had over the past couple years, but I suspect as long as there’s no cashing out by the corp officers or those related to them, the legal implications are the same as a publicly-traded company going bankrupt and the shareholders being wiped out (or relegated to the pink-sheets) since the blockchain “asset” (notice how I put that in quotes!) still exists and is “owned” by whoever paid for it.

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Anyway, wouldn’t a judge pierce the veil of the corporate structure and call a spade a spade (it’s a Ponzi scheme or some kind of fraud)?

Maybe? I hope so - but not certainly? You see, a key difference is that the people running these schemes don’t actually have to commit any of the specific types of fraud that make up the easily provable elements of a Ponzi scheme.

To see why, consider a ‘classic’ Ponzi. I promise everyone 12% annual returns on their deposits (1% monthly for simplicity) if they give me $100, and 100 people sign up. There’s $10,000 in the scheme - and if I was doing something that actually generated a 12% return, then after six months there should be $10,600 in the scheme. But I am not actually doing anything with the money. After six months, all of their account statements are showing them as having $106 - but they really still only have $100. One of my depositors decides to make a full withdrawal - in order to send him $106, I have to take $6 from someone else’s account. Because I can’t make $60 appear out of nothing.

Notice all the individual acts of fraud I’m committing. I’m sending out account statements to all my investors every quarter with the wrong (inflated) amounts on them - first $103, then $106, even though they don’t really have that much money in their accounts. I’m making affirmative misrepresentations about my investment returns. I have misappropriated funds from one client’s account to another (civil theft) - for me to take any money out of this scheme for myself, I’ll have to commit more civil theft. All those individual actions expose me to a host of charges, typically mail fraud, wire fraud, and civil conversion/theft.

Consider now my crypto scheme. I don’t accept deposits of dollars. I sell AlBabyCoins (ABC) on the open market. I offer them at an initial price of $10 per ABC. People are interested in buying these ABC’s because of the deFi investment opportunity I also offer - you can lend me 10 ABC, and I will pay you 0.1 ABC in interest per month. 100 people sign up. So the coin has $10,000 in liquidity, and there’s initially 1,000 ABC tokens in the deFi bank. After six months, all their accounts show that they have 10.6 ABC in them. Someone comes and wants to withdraw all his money, and I give him 10.6 ABC tokens.

Unlike a Ponzi scheme, though, everything I’ve done here is accurate - because I’ve minted an extra 60 ABC and given it to the deFi institution. All the deposit statements reflect the correct number of ABC in each account. When my first person cashed out, I didn’t have to move assets from anyone else’s account. And for me to suck liquidity out of this scheme, I don’t have to take any assets from anyone’s account - I just mint myself some more ABC, and sell them to the deFi at the going rate.

As long as this keeps going, and people keep signing up to get this amazing 12% yield, everything is fine. Not because I need later investors to provide the funds for early-investor withdrawals, like a classic Ponzi scheme. I’m not doing that. I just need those later investors to maintain my exchange rate. All of my accounts are denominated in ABC - and I’ll keep getting more investors as long as the exchange rate stays close to (or above) that $10 per ABC.

This all falls apart when my ABC currency devalues. You get a small run, and a bunch of folks pull out of my deFi and sell their ABC for dollars. The exchange rate starts to drop - so while everyone has their 10.6 (or whatever) ABC in their accounts, the dollar value of those holdings plummets.

But I haven’t committed any actual fraud crimes. I always honestly (and accurately) reflected everyone’s deposits, I never moved money between customer accounts, and I only bought and sold ABC at market rates. I engineered massive inflation in my native “currency,” which completely devalued it down to zero - but I never promised anyone that I wouldn’t, and they never asked. Because blockchain.

Everyone got exactly what they bargained for, your honor. Shame the price of the currency collapsed, but I always disclosed that this was a speculative investment, and just like baseball cards or oil or any other commodity, I don’t get to decide the market price of the ABC tokens that are bought and sold at arm’s length on the open market.

Albaby

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Attracting people to perform tasks does not seem like a good idea for a game.

It works well with Intuit’s Quickbooks ProAdvisor.

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It is a confidence game, and they are both the con man and the mark.

I do not agree with that but the analogy can be made to trading for goods and services in dollars.

The people building out Web3 are building businesses. New businesses are high risk.

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another thought…

Read in the NYTs and opinion piece today on the success stories involving smartphone apps. Not Google or Amazon well before 2004’s iPhone. But after the introduction of the iPhone only one company has been a massive success, Meta with FB and IG constantly changing for the times.

The rest have come and gone or like Twitter are not really mega hits.

TikTok might be next on that list of mega hits.

Point being the riskiness of new businesses.

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Some of you want to know more about what blockchain is.

Listen to the current head of the SEC Gary Gensler teaching at MIT. I believe this is from 2017.

https://ocw.mit.edu/courses/15-s12-blockchain-and-money-fall…

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Sorry, you can only recommend a post to the Best of once

I don’t think white supremacy, abortion, or LGBTQ issues are the problem in and of themselves. CNN had a show last week about a couple of West Texas oil billionaires who were using the social issues to reshape Texas to advantage their book of business.

Their strategy is keep the electorate focused on the social issues while they pick everyone’s pocket.

You nailed it! It’s all about the benjamins.

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because I’ve minted an extra 60 ABC and given it to the deFi institution.

Everything you say is accurate, but you’ve omitted the fact that in order to mint another 60 cryptocoins I need to mine the block chain. That is an expensive operation, isn’t it? And it costs real money, in most cases, since the electric company and the computer companies don’t want my cryptocoins, even if the human minors will accept crypto.

So I have to keep selling crypto for standard currency in order to create crypto, which makes the scheme even worse, doesn’t it?

It all strikes me as a very bad idea.