Cryptocurrency in the 2020s

Why do you think that the state that accepts you would give you anything like the market exchange rate for the cryptocurrency to their currency?

The only way would be if they had a competitive internal market for purchase of cryptocurrency, but it's not at all clear that would be the case, since in this situation, you would need asylum (a service they would be providing to you) more than they need your cryptocurrency. That would come at a price.

You could try to play these countries off one another to get the best possible exchange rate, but really, you'd have to be stupendously wealthy in crypto before those countries would begin to care enough to offer you any kind of deal.

You won't want to open up a payment channel to them, but you don't need to. You just need an already open payment channel to someone who is, or (more importantly) there is some route of payment channels between you and them through any number of intermediaries.

There won't be a way to enforce KYC on the network itself, and you don't need trust for this to work.

But because of the inherent cost / time / complexity reduction benefits of just maintaining big channels between large entities, normal people and businesses will inevitably be incentivized to just work through banks to do this. The banks can just hold all their money and handle keeping the channels between themselves open and funded.

And that's where I think you're correct. It leads to a world where KYC can be required easily because the vast majority of legitimate use cases will be through centralized endpoints.

That's conventional wisdom and applicable in lots of other places, but not in cryptosystem design. People have to accept that cryptosystems in general and cryptocurrency in particular are different domain from most other software engineering they're used to.

Any single error or bug can result in the complete compromise and failure of the entire system. The old rules of calculating acceptability of risk and errors based on whether they enable more value creation than they put at risk, no longer apply, because any/every error can result in total loss.

I believe different world views on this issue is one of the root causes of the schism in Bitcoin.

>The funny thing is, the inaction of the Bitcoin devs have made it fail at one of the core features of money. You cannot consider it to be acceptable, as fees are so expensive they price out a lot of people. Money should be easy to move around, and you should be able to buy large and small things with it.

That's a "nice to have" for sure, but not at the risk of a Global Financial Crisis style event happening to Bitcoin itself. The prudence of the Bitcoin devs has made it succeed at avoiding that so far.

>Yet this is somehow preferable, because doing otherwise would make Bitcoin "fail at sound money", whatever that means.

There's no need to be confused about that term, it has a simple, clear and easy to understand meaning. Sound money is money whose supply and value is both transparent and un-manipulatable.

When you choose to store savings in that currency, you know how it works, and you know it can't be changed in the future (to either your detriment or benefit). Sound money is a social contract that can't be broken or reneged.

By way of counter-example, in the GFC, the US Fed pumped up the money supply to prevent the failure of the banking system, risking devaluation of dollar-based savings and hyperinflation to the detriment of everyone else.

For another counter-example, the US Govt's inability to control its deficit and debt may one day result in it having to monetize the debt (print more dollars to pay for it), devaluing the dollar and dollar-based savings, and harming global confidence in the dollar as a reserve asset.

Cryptocurrency as sound money is a hedge against that, and that's the ultimate killer app. But if you lose enough decentralization, you lose this characteristic of it. Then its worthless, regardless how good of a payment system it makes.

And it will never be better than Paypal and other centralized payments services at merely transferring money quickly and cheaply, so if it has no other value proposition like sound money then its worthless.

Let's say Bank A loans $1000 to a customer. It creates a $1000 bank deposit in that customer's account. On the balance sheet it looks like this:

Bank A:

(Asset) Loan to customer of $1000

(Liability) Bank deposit in account of customer $1000

Bank A created the $1000 at will out of thin air. This is how it happens most of the time.

> I assumed you meant manually. This method isn't possible to automate under PoW, because any such actions require global time, but PoW is what provides time itself, creating a contradiction. What this means in practice is network splits.

I don't think you need global time to do this. More on this later in this post.

> as what would happen is nodes that were online and observed the situation would follow one chain, but everyone else that joins later wouldn't be able to confirm that censorship actually happened, and follow another. If you have a solution that solves it, you solved the fundamental problem - absolute order - some other way and PoW becomes completely superfluous.

This situation resolves itself naturally via the mechanism I proposed.

Let's follow the scenario you propose and see how it resolves. The following events happen in this order:

1. The Chinese government decides to censor transactions from a certain address, refusing to accept blocks which include transactions from that address.

2. A transaction from that address is broadcasted.

3. Chinese miners mine 5 blocks that don't contain the transaction. Nodes which have been on the network the whole time notice the censored transaction, and go to the next-longest chain, creating a fork.

4. A new node joins the network. From the new node's perspective, there are two chains, but the Chinese one is longer so you go with that. However, you still have the signed transactions from the shorter chain, and your node notices that the Chinese chain doesn't contain some of those transactions. At the time of joining, as far as you know, that transaction simply hasn't been included in the longest chain yet.

5. Chinese miners mine 5 more blocks that don't contain the transaction. The newly-added node now notices the censored transaction, rendering the current chain invalid, and goes to the longest valid chain, which is the one everyone else was on. Consistency achieved.

The implication of this solution is that when you join the network, you now have to wait for 5 confirmations to ensure none of the transactions you have are being censored in the longest chain (i.e. it takes 5 confirmations to know that the longest chain is valid). Which is certainly an important implication!

Note that absolute order doesn't matter here. We don't have to know the order of the transaction, only that it has existed for some number of blocks without being included in the chain.

> Then there's a problem of: what happens when there are contradictory transactions on two different chains at once? How do you decide which one is valid? This gets complex very fast.

The way you've worded it, that's not really all that complex--that's the same as a double spend, and it's resolved the same way any other contradictory transaction is resolved: follow the longest (valid) chain (where part of the definition is "valid" is "containing all transactions I've had for 5 confirmations").

However, I think you might have left out part of what you meant here, so I'll try to explain what I think you're hinting at. There's a sophisticated way for China to hide their attack. It works like this:

1. The Chinese government decides to censor transactions from a certain address, refusing to accept blocks which include transactions from that address.

2. A transaction from that address is broadcasted. We'll call this the censored transaction.

3. Non-Chinese miners mine a block that includes the censored transaction. This becomes the root of what we'll call the censored branch.

4. Chinese miners ignore the mined block that includes the censored transaction, and mine a block which doesn't contain the transaction. This block becomes the root of a branch we'll call the red herring branch. In that block, they include a transaction which they never broadcasted to the network. We'll call this the red herring transaction.

5. Due to superior Chinese mining capability, the red herring chain quickly becomes longer. However, after 5 confirmations, the network notices the censored transaction isn't being included in the red herring chain. So they invalidate the red herring chain and go to the longest valid chain, which is the censored chain.

6. 4 more blocks are mined on the censored chain.

7. A new node joins the network.

8. At this point, the censored branch doesn't include the red herring transaction, and the red herring branch doesn't include the censored transaction. So our previous resolution strategy doesn't work, because we don't know whether it's the red herring transaction or the censored transaction that's being censored.

First, I want to say, this is a really sophisticated attack and I want to congratulate you for coming up with it.

Second, I think this problem can be solved by sweeping up ALL the transactions in EVERY block you receive, even if they are in blocks which haven't been confirmed, and treat them as if they were broadcast to you on the network. This way, the red herring transaction gets included into the censored branch. This gives us a new resolution:

1. The Chinese government decides to censor transactions from a certain address, refusing to accept blocks which include transactions from that address.

2. A transaction from that address is broadcasted. We'll call this the censored transaction.

3. Non-Chinese miners mine a block that includes the censored transaction. This becomes the root of what we'll call the censored branch.

4. Chinese miners ignore the mined block that includes the censored transaction, and mine a block which doesn't contain the transaction. This block becomes the root of a branch we'll call the red herring branch. In that block, they include a transaction which they never broadcasted to the network. We'll call this the red herring transaction.

5. Due to superior Chinese mining capability, the red herring chain quickly becomes longer. However, after 5 confirmations, the network notices the censored transaction isn't being included in the red herring chain. So they invalidate the red herring chain and go to the longest valid chain, which is the censored chain.

6. A new block is mined on the censored chain. Since we've swept up all the transactions from the red herring chain, this block includes the red herring transaction.

7. A new node joins the network and assumes the red herring chain is the longest valid chain.

8. After 5 blocks, the new node sees the red herring chain does not contain the censored transaction, invalidates the red herring chain, and goes to the longest valid chain, which is the censored chain. Consistency achieved.