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D. Carlton Rossi


              Blockchains and Cryptocurrencies

Your attention may have been diverted in anticipation of the Brexit vote whereby Britain would decide if it would remain in the European Union of 38 states. At the same time, a meeting of 90 central banks was hosted around June 6, 2016 for three days by the World Bank, IMF and Federal Reserve with regard to blockchain technology.

This technology was derived from the Bitcoin platform. For those who are unfamiliar with Bitcoin it is difficult to find a comparison except to say that it resembles a personal barter system in terms of services. It is popular among the underworld and those who wish to remain under the radar. Understandably, the technology underlying Bitcoin may be held suspect because no one knows the identity of the designer whose pseudonym is Satoshi Nakamoto. It is conceivable that a system could be designed so that it could be easily hacked by the designer.

It is not surprising that the Federal Reserve is interested in blockchain technology. The Federal Reserve may be best known for low interest rates through quantitative easing. However, it deals extensively with bank settlements. As the central bank of the United States and private company it acts as a clearing house for financial settlements.

The Ethereum blockchain technology is a public blockchain platform with programmable transaction functionality which allows peer-to-peer contracts. It can be used by cryptocurrencies or other applications. Also, Java-like script programs like the DAO can be programmed to executable byte code.

It appears that central banks are on the verge of adopting negative interest rates. One of the main problems to implement this strategy is the presence of cash. As has been pointed out earlier by the author there will be a tendency for individuals simply to horde cash in a negative rate environment in order to avoid what amounts to a tax. This is defined as the Zero Lower Bound (ZLB) problem by Haldane who is a member of the Bank of England’s Monetary Policy Committee.

By processing transactions through an open decentralized blockchain program there is the potential to eliminate cash. This technological tactic is intended to avoid the hoarding of money (capitalism without capital) and to promote spending--thus triggering inflation. However, what discourages hoarding of cryptocurrencies? It may have to be a tax (or its equivalent).

It seems one has to clarify the meaning of “decentralized” since “central” banks are experimenting with their own applications. It seems decentralized is used in the sense that the currency is virtual and can be anywhere or everywhere.

One cannot avoid the conclusion that all is an experiment outside the realm of conventional monetary theory and practice. The elimination of gold and the attempt to eliminate paper currency is an experiment. The adoption of programs based on cryptocurrencies is an experiment. In fact, Buterin has admitted that the cryptocurrency application of the Ethereum is an experiment which may implode. The imposition of negative interest rates is an experiment. The impression of all this experimentation is that the mice (central bankers) are running people through the maze as was depicted in Hitchhikers Guide to the Galaxy.

It may be appropriate to mention the “Ether” which is the basic unit of Ethereum. Originally, in Greek, it meant “pure air” or that breathed by the gods. It was difficult for scientists or philosophers to define it; although, it generally represented the fifth element. Issac Newton was perhaps the most famous scientist with a hidden agenda as an alchemist to consider the ether. Of course, one of the aims of alchemy was to turn lead into gold. He was unsuccessful in this daydream. His scientific endeavors had used the concept of “ether”, but advances were difficult, so his choice (loosely speaking) was either ether or logic. It seems he rejected ether and developed the laws of physics and calculus.

Newton though is known for something else. He was Chancellor of the Exchequer. He used gold rather than ether to back the currency. As a result of a stable monetary system the British Empire thrived for 300 years.

The developer of the Ethereum platform is known. It was a nineteen year old Canadian by the name of Vitalik Buterin who had emigrated from Russia. Currently, he resides in Switzerland. He is learning Mandarin. Ming Chan is the Executive Director at the Ethereum foundation.

Basically, the program was crowdfunded—by the people, so to speak. It was the most successful crowdfunding program in history. But who really were these people? While the designer is known the people are not known—partially due to privacy issues. In addition, who purchased 25% of Buterin’s ETH (Ether) holding in April? Were the proceeds invested in Bitcoin? Furthermore, was the holding sold prior to June 17?

The symbol adopted by the Ethereum platform is a pyramid sitting on top of the base of another pyramid. While the poet hasn’t drawn this I’mage it is nevertheless familiar to him. The reason is that he was asked to correct a translation of a document. He needed clarification on the exact shape of the pyramid of Emperor Qin Shi Huang since the description baffled him. An expert was therefore consulted. It is an image similar to Ethereum’s. The original mound was 76 meters in height at Mt Li, Lintong. While excavations have not been made at the location it is believed by at least one expert that there is an inverse pyramid below it.

Who is Qin Shi Huang? You know him because he ordered an army of terracotta warriors for the afterlife. He built the Great Wall with conscripted workers. He also buried alive 460 Confucian scholars and burned Confucian books—particularly the Book of Songs and Classics of History. His dynasty was overthrown in a peasant rebellion.

His name, Huangdi, was a derivation. It came from the Three Sovereigns and Five Emperors. However, he also appropriated it from the name of the Yellow Emperor who had united the tribes and whose cult was popular.

In terms of philosophy, he was a Legalist which justified strict central control. It meant Rule by Law rather than Rule of Law. He eliminated the Hundred Schools of Thought which incorporated Confucianism. No opposition was tolerated.

He may have followed Daoist astrology since he was interested in the five elements. Incidentally, Daoist temples seem to have been spared in terms of banning or burning of books. He was born under the sign of water. This may explain why he took mercury pills and why a river of mercury ran through the underground of the tomb. Mercury was intended to confer immortality; although, it also hastened his death at the age of 39. The Qin Dynasty was short-lived, too.

The Ethereum platform is a virtual machine that uses the DAO. According to the Ethereum Foundation “A blockchain program is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference.” Confidence in the DAO may have generally been inspired by religious overtones of the DAO and the faith and fervor of appish acolytes.

However, confidence was misplaced when the DAO was hacked on June 17th. Surprise! Surprise! Why is it a surprise since it had been reported that Buterin collaborated with hackers to design the DAO. It has also been said that the security flaw may have been known before it was hacked. No one knows who hacked the system, but one can say with confidence that it was a hacker. The hack of the DAO might have proven embarrassing to the central banks except for the fact that it seems to have been mysteriously underreported.

The DAO blockchain was launched on July 30, 2015. On June 17, 2016 it crashed. Next generation smart contracts did not last a year let alone a generation—even in computer terms. The price of Ether dropped from $21.60 to $15.

Which hackers might have had financial motive to bring down DAO? Perhaps they were hackers of Ethereum’s rival or Bitcoin. It may also have been a hacker with mixed loyalties to Bitcoin and Etherium. The date of June 17 may not have been a coincidence.

The Bank of Canada announced on June 15, 2016 that it was developing its own version of the Canadian dollar based on blockchain technology. It is called CAD-coin. Other Canadian banks including a consortium called RC3EV were to participate. It would run on The Jasper Distributive Ledger Settlement Program. A scheduled speech by Bank of Canada senior deputy governor was set for June 17.

D. Carlton Rossi