Ethereum is full of ponzis, is that a problem?

Charles Ponzi

Ethereum is being used as a platform for a bunch of ponzi schemes. Is this an indictment of the system; or is it a sign that it is generally working?

For those who aren't familiar with it, Ethereum is often described as a distributed computer. A network of independent and anonymous nodes keep the system running, and on top of it developers can write smart contracts and distributed apps, known as Dapps.

If you go to dappRadar, you can see what sort of apps are currently active on Ethereum. There are casino apps, including vDice, Etheroll, EOSbet. There are a bunch of distributed cryptocurrency exchanges, like IDEX and ForkDelta. And a whole range of games, the most famous of which is probably CryptoKitties.

There are also a collection of ponzis and pyramids. At the time of writing, PoWH 3D was the largest with around 4,500 ETH committed ($2.3 million). There is a gang of other smaller copycat ponzis including EthPhoenix, Proof of Community, Gandhigi, POWM, Proof of Fair Launch, Proof of only Hodling, Revolution1, and more.

Nouriel Roubini mocks the collection of apps built on Ethereum:

Indeed the top DApps are Ponzi/Pyramid Schemes, silly or casino games... what a brilliant success for Ethereum after raising $10bn of funds form clueless investors! https://t.co/bSafbhqvYO

— Nouriel Roubini (@Nouriel) May 25, 2018

Roubini has a point. We've been told that cryptocurrencies like bitcoin and Ethereum were supposed to deliver the unbanked, protect Venezuelans from inflation, help end dictatorships, destroy the banking cartel, take over online commerce from Visa and MasterCard, and undo insidious money transfer businesses like Western Union. But all it's given us are a bunch of games and ponzis. Hardly world changing stuff.

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I'm going to try and provide a qualified defence of Ethereum's ponzis. First, I'm going to draw a distinction between ponzi games and ponzi schemes. Let's start with the former. Like a poker game or a lottery, a ponzi game is a zero-sum financial game. Whereas lotteries reward whoever happens to have the winning set of numbers, ponzis reward early birds at the expense of late comers. An honest ponzi game is transparent about this. It doesn't try to camouflage itself as win-win investment opportunity, but flat-out declares that participants can only win if someone else joins the game.

Ponzi games are maintained by an administrator. Their job is to diligently distribute all of the incoming money from new entrants to old entrants. Just like a poker dealer gets a bit of the poker pot, the ponzi administrator gets to take a small cut to compensate them for their time and effort.

Ok, now let's do ponzi schemes. A ponzi scheme is a bastardized version of a ponzi game. First, it isn't transparent. In order to recruit more entrants, a ponzi scheme will market itself as an investment—say a high-yielding everyone-wins-game—not a zero-sum game. As for the administrator, rather than paying out each cent of the late money to the early entrants, he/she is likely to perform what is called an exit scam. This involves fleeing with a large chunk of the funds that are due to game players, thus bringing the game to an early end.   

As I suggested here, the public has an ever-present demand to play ponzi games. This may seem odd, but it's no different from the public's demand to play poker or lotteries. For many people these games are a fun escape from reality, a chance to fantasize about making a big win. Given a demand for ponzis, the world is probably better off with more of the game type and and less of the scheme type. Ponzi schemes hurt people, honestly run games don't. Which is where Ethereum comes in. It seems to be pretty good at providing honest ponzis.

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It's worth exploring Ethereum's largest ponzi, Proof of Weak Hands 3D (PoWH 3D), which at its peak on April 3, 2018 had a pot of 16,000 ETH, around US$6.4 million. It has since been depleted to 4,500 ETH as depositors are in full flight.

PoWH 3D isn't structured like a traditional ponzi game. With a traditional ponzi, players buy in at say $1 and cash out at $1 (assuming there is still money left). Before cashing out, they are paid a steady stream of funds from the pot, until the pot is all used up.

With PoWH 3D, the ponzi token has a floating price rather than a fixed one. To begin playing, a participant needs to own some of the already-existing Ethereum payment medium, ether (ETH). By sending some ether to the P3D smart contract (more on smart contracts later), the player get some P3D tokens. The smart contract determines the price at which the purchase is made. For every token purchase the contract will raise the price by a marginal amount, and for every token sale (i.e. sending tokens to the smart contract and getting ether back) the price will be reduced.

So while PoWH 3D is no doubt a version of a ponzi, innovations like the fluctuating price probably make it more fun to play than the traditional type. Below is a chart showing how the price of P3D tokens has behaved over the last few months:

Source

In addition to the floating price mechanism, all purchases of P3D tokens incur a 10% tax. This tax gets distributed to all existing token holders. So if you were to buy ten ETH worth of tokens, one ETH of that would be automatically sent to everyone who is already in the game. The same goes for a sale. If you want to cash in one P3D token, for instance, and the price is 1 ETH, you only get 0.9 ETH, the remaining 0.10 going to all remaining token holders. So the "strong hands", the ones who keep holding, are provided with a constant stream of ether from the "weak hands."

The game is implemented via a smart contract, a bit of code running on top of Ethereum. The advantage of running a ponzi game using a smart contract is that everyone can see the code, and thus understand the rules of the game. Even if a would-be player can't understand the code, they can always find someone who can. The point is, Ethereum ponzis are auditable. And since the code can't be changed, all game players are assured that the rules of the game will stay the same. (The caveat here is that the code can't be buggy; if it is, the pot might be drained by an attacker.)

Proof of Weak Hands 3D is based based off an idea called Ponzi Token, conceived by Jochen Hoenicke in 2017. Writes Hoenicke:

"This is a Ponzi Token. Early investors are paid by the fee later investors pay. All in all it is a zero-sum game. This means, if you make money using the token, then somebody else loses money. If you don't understand this, it is much more likely that you are the one who loses money, in the worst case, your whole investment." 

That's an admirable amount of transparency for a ponzi scheme, don't you think?

So Roubini's derogatory reference to Ethereum ponzi schemes needs to be asterisked. People like to play poker and other zero-sum games like ponzis. PoWH 3D and its many different versions (Revolution1, EthPhoenix etc) fill this need. They aren't "schemes" as I earlier defined them. They are ponzi games. Because they are implemented transparently as smart contracts, they can't be disguised as an investment. Nor can the administrator perform an exit scam. So these are safe, perhaps even innovative, zero-sum games for gamblers to participate in. They're certainly superior to the alternative: scummy underground ponzi schemes.

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In the U.S., the SEC has declared all ponzis to be fraudulent. So any ponzi game has to go underground lest it be pursued by the law. And that's exactly when ponzi game administrators are most likely to go rogue and set up an exit scam. When a business is driven underground, the typical trappings of a legitimate commercial entity—a fixed place of doing business, advertising, and branding—are no longer present. So the standards of doing business are lower than they would otherwise be. This means that fly-by-night operators will find it easier to introduce dangerous ponzi schemes, say like Sergei Mavrodi's MMM.

As a decentralized system, Ethereum can't be shut down by the authorities. Nor can the authorities request that certain Dapps be disabled. So legitimate ponzi game administrators can safely re-establish a fixed-place of doing business—on the Ethereum blockchain—without having to fear incarceration. And instead of laying low, they can advertise and brand themselves. A non-sleazy alternative emerges. 

In some sense, Ethereum may be playing a role here that is akin to those charities that provide free needles to drug users. Both drug usage and running a ponzi are punishable offences. Since criminalizing drugs doesn't stop usage, perhaps the best we can do is provide a safe environment for drug users, say by offering free needles and a medically-supervised place to shoot up. This reduces the harm that drug users do to themselves and society. Likewise, Ethereum provides a safe haven for ponzi players to congregate, hopefully displacing some of the more dangerous underground fly-by-night operations that would otherwise attract, and hurt, players.

Providing the world with an open backup platform seems to have some value. Sure, it would be nice to see something more substantial than ponzis and games cropping up on Ethereum, especially given the massive amounts of electricity being sucked up by these distributed systems.

On the other hand, if Ethereum Dapps are a symptom of crackdowns and prohibitions, maybe we should be happy the network doesn't seem to be getting much use, apart from a few games and ponzis—a lack of Dapps might indicate our society is (still) fairly free. Maybe Ethereum is sort of like a fire extinguisher. Just because a fire extinguisher spends most of its time in a closet unused doesn't mean that it is useless. There are certain moments when it could save our lives.     

A tax, not a ban, on high denomination banknotes

Ken Rogoff has famously called for a ban on high denomination banknotes in order to help combat tax evasion and hurt criminals. But rather than banning notes, why not implement a market-based approach such as a tax? Among other advantages, a tax leaves people with flexibility to determine the cheapest way to reduce their usage of the targeted commodity. This is how society is choosing to reduce green house gas emissions. So why not go the tax route for banknotes too?

My recent post for the Sound Money Project on pricing financial anonymity delves into this idea. The anonymity provided by banknotes is both a "good" and a "bad". People have a legitimate demand for financial alone time; a safe zone where neither their friends, family, government, nor any other third-party can watch what they are buying or selling. These days, cash is pretty much the only way to get this alone time.

But cash's lack of a paper trail can be abused when it used to evade taxes. The resulting gap in government finances forces the honest tax-paying majority to pay more than their fair share for government services. This state of affairs isn't just.

One way to fix this inequity is to raise the price of banknote usage high enough so that it includes the costs that tax evaders impose on everyone else. A tax on banknotes, call it a financial privacy tax, can do this. It internalizes the externality, or the harm done to others. 

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Interestingly, financial privacy taxes already exist. For each banknote that it has issued, a central bank typically holds a risk free interest-yielding asset in its vault. In a free market, this interest would flow through to banknote holders, say by the implementation of note serial number lotteries. Rather than allowing the interest to flow through, however, the central bank withholds it. The amount it withholds constitutes the financial privacy tax.

In Canada, for instance, the overnight risk-free interest rate is currently 1.25%. The yield on banknotes being 0%, the Bank of Canada is withholding $1.25 in interest payments for each $100 bill held. So a note-using Canadian is effectively being taxed $1.25 year for each $100 worth of financial privacy he or she chooses to use. Anyone who wants to avoid the tax need only deposit the note into a bank account and earn 1.25% per year.  But once they do that, they will be giving up their privacy.

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Modern taxes on banknotes aren't consciously designed as financial privacy taxes. By that I mean, it's not like central bankers have sat down at a conference table and thought long and hard about the costs and benefits of anonymity only to settle on the most appropriate level for the tax. Rather, the size of the tax has been arrived at by accident. Historically, central bankers have simply assumed that it was technologically impossible for banknotes to yield anything other than 0%. (Fully adjustable interest rates on notes, both positive and negative, are actually quite easy to implement, as I'll show). Which means by default, the privacy tax has always been at least as large as the foregone overnight interest rate.

The overnight rate is in turn a function of an entirely different thought process: monetary policy. Central bankers ratchet the overnight rate up or down in order to to hit their chosen inflation target. The problem with this setup is that two separate decisions have been jumbled together. The level at which the central bank sets its financial privacy tax has become the ill-conceived byproduct of its chosen macroeconomic policy.

Here's an example of this muddle. If the Bank of Canada decides to tighten monetary policy tomorrow by increasing its interest rate from 1.25% to 1.5%, it has simultaneously made an entirely separate decision to increase the privacy tax on banknotes by 0.25%. But whereas the monetary policy decision is guided by plenty of data and number crunching, the increase in the privacy tax is purely arbitrary—no thinking has gone into justifying an increase. It's a fait accompli.

Or think about it from another angle. Say that the Bank of Canada has determined that it is appropriate to increase the financial privacy tax by 0.25%. Using its current toolkit, the only way it can accomplish this is by increasing the overnight rate by 0.25%. But this tightening of monetary policy could potentially send the entire economy into a tailspin, all for the sake of satisfying an entirely different policy goal, that of setting the appropriate tax on privacy.

There's no reason that the two decisions can't be split up. The tool that would allow central bankers to do this is the ability to pay positive and negative interest rates on banknotes. I talked about note serial number lotteries as one way to pay positive interest here. Later on in this post I'll discuss a way to pay negative interest. To see how these tools could successfully split the monetary policy decision from the privacy tax decision, let's return to our previous example. If the Bank of Canada were to increase the overnight rate for monetary policy purposes from 1.25% to 1.5%, but it did not want to alter the financial privacy tax, it could simultaneously increase the interest rate on banknotes from 0% to 0.25%. The original 1.25% privacy tax stays intact. While the owner of a banknote is now forgoing the 1.5% overnight rate, he or she is also collecting 0.25% in interest.  

Conversely, these tools would allow the privacy tax to be increased or lowered without requiring a potentially damaging change in monetary policy. Using our example, to increase the privacy tax from 1.25% to 1.5% per year while keeping monetary policy constant, for instance, the Bank of Canada would move the interest rate on banknotes from 0% to -0.25% while keeping the overnight rate at 1.25%. So a banknote owner is now taxed 1.5% per year, of which 1.25% is due to the forgone overnight rate while the other bit is the 0.25% negative interest rate. This has been accomplished without any tightening or loosening of monetary policy.

So there you go, the monetary policy decision has been split from the privacy tax decision. The advantage of having the ability to split up these two thought processes is that it is now possible to think long and hard about what the proper privacy tax rate should be.

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One question we might ask is if the current financial privacy tax on banknotes is sufficiently high. Remember, the problem we are trying to solve is that a small group of citizens are not paying their fair share of income taxes by taking advantage of the untraceability of banknotes. The 1.25%/year financial privacy tax on banknotes that is currently being imposed by the Bank of Canada may not be enough to recoup the damage that this untraceability is doing to everyone else. Maybe we need a 2% tax on banknotes, or 5%, or 10%.

Say we increased the Canadian financial privacy tax rate from 1.25% to 5%. (For now let's not be too concerned about how the tax gets levied. I'll get into that later). One unfortunate side effect is that licit users of banknotes—the unbanked and those who want financial alone time for reasons other than evading taxes and crime—would be caught up in a tax net that is intended for illicit users. This doesn't seem very fair. Might there be a finer sorting mechanism that allow us to tax crooks while letting non-crooks through?

In his controversial book on banning high-denomination notes, Ken Rogoff has proposed exactly this sort of fine sorting mechanism. Based on the assumption that criminal usage of bills is largely confined to high-denomination note, he proposes that only $100s, $50s, and maybe $20 bills be banned. We are interested in a tax in this post, of course, not a ban. But if Rogoff's assumption about criminal usage is right, then a graduated tax on banknotes might be a better option than a flat tax, with higher denominations facing a more aggressive levy than low denomination notes.

All central banks currently tax the full range of banknote denominations at the same rate. In Canada's case, the 1.25% tax rate that is currently applied to a C$1000 bill (yes, we have them in Canada, see top) comes out to the same amount incurred by one hundred $10 bills: $12.50 per year. But a $1000 note is far better for evading taxes because it contains more anonymity services per gram than a $10 note. After all, a bag full of tens is bulky and visible, an envelope with a few $1000 bills isn't.

Given the outsized anonymity provided by the $1000, perhaps we should keep the 1.25% tax rate on $10 bills but boost the tax rate on $1000s to (say) 12.5%. A tax evader who holds a $1000 bill would now incur a tax of $125 instead of just $12.50 while a regular Joe with just a few $10 bills would see no increase in banknote-related taxes. (Heck, it might even be a good idea to reduce the tax on small notes to zero.) By boosting the tax on high denomination banknotes, the Bank of Canada enjoys a larger revenue stream than before. Which means that at least some of the revenue gap due to tax evasion can now be plugged, thus fixing some of the damage inflicted on honest tax payers.

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How would we go about increasing the financial privacy tax on high denomination notes?

Central banks currently have a policy of maintaining perpetually fixed exchange rates between various note denominations. Your $10 bill is always convertible into ten $1 bills, and your $100 into ten $10 bills. But this needn't be the case.

To implement the tax, central banks would begin to vary the exchange rate between banknotes. Let's take the U.S. as our example. Instead of redeeming the $100 bill at par, the Federal Reserve would slowly reduce the rate at which it redeems the $100 over time. This ratcheting down of the price of $100s would be passed off to the cash-using public in the form of a capital loss, this capital loss functioning as a tax. (For those with long memories, this is basically Miles Kimball's crawling peg idea, applied to the idea of financial privacy rather than evasion of the zero lower bound).

Let's work through an actual example. Say that the Fed wants to impose an extra 5% financial privacy tax on the $100 bill, but not on other bills. It sets December 31, 2018 as the last day that it will redeem a $100 bill for either: a) $100 worth of central bank deposits; or b) $100 worth of bills in $1s, $5s, $10s, $20s, and/or $50s. On the first day of the new policy—January 1, 2019—a $100 bill can be redeemed for a tiny bit less, say $99.93. Daily reductions continue so that by the end of 2019, the Fed will have scaled its redemption rate back by 5% to $95.

This means that if you deposit a $100 banknote at your bank on December 31, 2019, your bank in turn depositing said note at the Fed, the Fed will credit the bank with just $95 in deposit balances, not $100. In anticipation of this, your bank would have only credited you with $95 when you initially deposited the note. Voila, a financial privacy tax. Everyone holding a $100 note for any period of time will have incurred an 5% annualized tax. But if you hold twenty $5 bills, the tax is avoided.

Continuing with our example, by the end of 2020 the Fed's redemption rate will have declined by another 5% to $90.25. And by the end of 2021, the $100 would be worth $85.74, and on and on.

At some point things start to get a bit silly. By 2031, the market value of the $100 will have fallen below the $50 bill, and by the the first decade of the next century it will be worth less than the $1. To prevent this inversion, the Fed will at some point—say in 2026—demonetize the old issue of $100 bills and introduce a new $100 bill, resetting its market value at $100. The whole process of steady reductions starts anew.

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This post has been a heavy one, so I'll just quickly summarize it before signing off.

The anonymity provided by banknote is often abused, but rather than banning notes why not tax the abusers? We wouldn't have to start from scratch. Banknotes yield 0% when overnight rates are positive, so society is already imposing a financial privacy tax of sorts on notes. Unfortunately, central banks set the privacy tax arbitrarily, as the unplanned by-product of monetary policy. New tools for increasing /decreasing the return on banknotes could facilitate a separation of the two decision-making processes. These tools could be used to set a higher tax on large denomination notes while leaving smaller notes untaxed, the true costs of anonymity being recognized for the first time.

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P.S. If you're interested in this topic, David Birch has a good post on Austin Houldsworth's Crime Pays System or CPS. It's sort of tongue in cheek, but also quite relevant:

"During this talk, ‘Mr Rogers’ proposed the Crime Pays System, or CPS. Under this system, digital payments would be either “light” or “dark”. The default transaction type would be light, and free to the end users. All transaction histories would be uploaded to a public space (we were of course thinking about the bitcoin blockchain here), which would allow anybody anywhere to view the transaction details. This type of transaction is designed to promote an environment of social accountability.

The alternative transaction type would be dark. With this option, advanced cryptographic techniques would make the payment completely invisible, leaving no trace of the exchange, thus anonymising all transactions. A small levy in the region of 10-20% would be paid per transaction. The ‘Dark Exchange’ would therefore offer privacy for your finances at a reasonable price.

The revenue generated from the use of this system would be taken by the government to substitute for the loss of taxes in the dark economy."

Another worthwhile source is Josh Hendrickson's recent paper "Breaking the Curse of Cash" (written along with Jaevin Park). It's a pretty technical paper, but it explores a model in which coins and paper money circulate, but coins are a burden for illegal traders to use because they make noise, leading to detection.

"If illegal traders impose an externality on society,  the government can generate seigniorage from the illegal traders by setting low rate of return on paper money and providing transfers to legal traders by setting high rate of return on coins. Then the amount of illegal trade is reduced while the amount of legal trade increases. This is a standard solution to an externality problem."

A case for bitcoin

Mavrodi "biletov"

In this post I'm going to outline a case for bitcoin. I still think bitcoin is a bad medium of exchange and a rubbish store of value. It's just too volatile and unhinged, and it'll always be that way. But bitcoin still has an important role to play... just not the role that most people assume.

Sara Hess and Eugene Soltas recently published a fascinating article on the life of Russian ponzi-scheme architect Sergei Mavrodi, who passed away last month. I found it interesting that in the latter part of his career, Mavrodi openly advertised that his schemes were pyramids, yet people still bought in.

Ponzi-schemer Sergei Mavrodi clearly advertised MMM's risks and promised nothing in return, yet still people bought in. If he didn't trick people into joining, maybe society genuinely needed him to manage ponzis? https://t.co/5RAzDFvTgx pic.twitter.com/pUghQJQB00

— JP Koning (@jp_koning) April 26, 2018

This got me thinking. I've always sort of assumed that ponzi schemers were just con men who fooled innocent people into giving up there money. But even after Mavrodi lifted his skirt and told the truth, people still flocked to join his schemes. Maybe there is a constant demand on the part of willing and informed individuals for ponzis. Which would mean that folks like Mavrodi aren't just conmen. Rather, society genuinely needs them to manage ponzi games.

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We already knew that anyways, you might say. After all, Las Vegas exists, right?

The role that lottery and casinos operators play is certainly similar to that played by ponzi schemers. People take joy in gambling, and lottery operators and croupiers make sure these games run smoothly. Ponzis, lotteries, and poker are all versions of a zero sum game. If you win $10, it's only because someone else who was playing the game lost $10. Zero sum games are different from win-win games, say like stocks, bonds, and other liabilities including banknotes. Someone doesn't have to lose $10 on Google shares for you to be able to make $10 on Google. The underlying business generates income from its customer base and this provides each and every shareholder with a return.

What differentiates one type of zero-sum game from another is the rule used for redistributing money from losers to winners. Ponzis and pyramids are early-bird zero sum games: the jackpot goes to the earliest entrants and is funded by money provided by the latest entrants. A lottery, on the other hand, awards a randomly chosen participant with everyone else's money. Being the last buyer of a lottery ticket provides one with the same odds of winning the jackpot as the first buyer.

The coexistence of different types of zero sum games indicates that while the public has an ongoing demand for the chance to win jackpots, it also values the way those jackpots are rewarded. Perhaps a ponzi provide a different set of psychic returns than other zero sum games; getting in line early and looking back at all the late comers may offer a sense of satisfaction that a lottery can't provide.

Society has typically legalized lotteries while criminalizing ponzis and pyramids, although in Mavrodi's case there was some ambiguity since he cheekily advertised them as ponzis rather than trying to deceive the public. Luckily for authorities, ponzis and pyramids are easy targets. They have central points of failure. An administrator needs to collect money from new entrants and then pay it out to older entrants. So there is a physical entity with an address that can be sued by unhappy participants or pursued by the authorities.

Because they are illegal, ponzis have been driven underground. Unfortunately, the delegitimization of markets can have perverse effects. For instance, street drugs are often mixed with dangerous contaminants, say like how heroin is laced with carfentanil, an elephant tranquilizer. If the drug market were brought into the open, it could be that producers would be pressured by market forces to provide a purer product and fewer users would die from accidental overdoses.

The same argument applies to ponzis. Those who play them have to rely on fly-by-night operators who may abscond with the funds at any moment, the ponzi collapsing before reaching its natural end. If ponzis were legitimized, it would be much easier to have a transparent and well-run ponzi market.

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Like ponzis and pyramids, a chain letter is an early-bird game, a type of zero-sum game that use entrance order as its redistribution rule. And like ponzis and pyramids, they are illegal. The Circle of Gold chain letter that began in San Francisco in 1978 and spread to the rest of the U.S. through 1979 and 1980 is a good example of the genre.

In brief, I buy an existing copy of the letter from you for $50, and simultaneously mail $50 to the name at the top of the list, for a total outlay of $100. I then make two copies (removing the name at the top of the list an inserting my own at the bottom) and sell them for $50 each, for a total of $100, thus breaking even. By selling the letters directly rather than sending them via the mail, presumably I avoid mail fraud. The buyers in turn make copies and sell them on, the chain continuing. Once my name starts arriving at the top of the list the money will pour in. The letter exhorts recipients not to break the chain.

HODL is similar to the "DO NOT BREAK THE CHAIN" exhortations commonly found on chain letters. They're not wrong—if the chain holds, the money keeps flowing! https://t.co/Ha0qaJGWsC pic.twitter.com/xcgpW1OV25

— JP Koning (@jp_koning) December 22, 2017

Whereas a ponzi relies on a central node—or operator—for managing the game's flow of funds, a chain letter decentralizes the role of operating the system. Any participant who has bought a copy of the letter is delegated the job of faithfully modifying their version of the ledger (by removing the name at the top and inserting theirs at the bottom), sending the $50 by mail, and then passing the updated ledger on. Lacking attackable central nodes, chain letters are more difficult for the authorities to shut down than ponzis.

There are still a few key flaws with a chain letter. The first is that everyone who joins the chain letter needs to leave their physical address. And so it is possible for the authorities to target participants by getting a copy of the chain letter, visiting their home, and shutting it down that way. To avoid this risk, many would-be ponzi players will probably choose not to play.

The second flaw is that chain letters are not secure. Each participant has an incentive to mis-copy the list and put themselves at the top, thus cutting into the queue. This lack of credibility hurts the chain letter's ability to propagate.

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All of which gets me back to bitcoin.  Bitcoin is not a win-win game. It is a zero-sum game that uses entrance order as its redistribution rule, or an early bird game like a ponzi, pyramid, or chain letter. The only way to get ahead is if a subsequent participant buys one's bitcoins at a higher price.

But bitcoin brings a few unique features to the table. To begin with, Bitcoin is decentralized. Rather than a lone administrator like Sergei Mavrodi handling the scheme, the ledger is maintained by a disparate set of nodes. This makes bitcoin much harder to shut down than a ponzi.

Chain letters are also decentralized, but Bitcoin doesn't inherit the weaknesses of a chain letter. Although there are many different copies of the bitcoin ledger, these copies are constantly being checked against each other to ensure that they are all in sync. This means that—unlike a chain letter—there is no way to budge in line, say by re-writing the bitcoin ledger in one's favour. And this improves the durability of bitcoin.

Before I bring this all together and make my case for bitcoin, there is one other early bird game I haven't got into yet: the speculative bubble.

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Unlike chain letters, ponzis, and bitcoin, which are pure early bird games, bubbles occurs on the back of an already useful asset, say like a stock or commodity. During the late 1990s internet mania, for instance, the return on an internet stock could be decomposed into two components: a fundamental component and a zero-sum game that was being played on top of the stock's fundamental value. Those playing a zero sum game by purchasing internet stocks didn't give a damn whether the underlying internet business made sense. No, they were betting that a late-comer would arrive to take the stock off their hands at a much higher price.

To a fundamental investors (say like Warren Buffett), zero-sum game players are a nuisance. The zero sum game that they are playing adds a wasteful premium to stocks, pricing fundamental investors out of the market. At the same time, zero sum game players are probably just as annoyed by the fundamental component of the asset they are buying and selling. Its presence dampens the jackpot that they stand to win.

Prices provide useful signals to society. A zero-sum game that runs on top of an intrinsically valuable asset like a stock or a commodity distorts that signal. This can lead to wasted resources. Producers who decide to add capacity—say a new production plant—in response to a commodity's high price may only be reacting to the transitory mood changes of those playing that commodity's attached zero-sum game, and not a fundamental need for new supply.

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So having said all that, let me finally make my case for bitcoin. Bitcoin shouldn't be categorized along with monetary instruments like bank deposits, coins, and banknotes. Nor does it belong in the same category as win-win games like the stock and bond market. No, bitcoin should be grouped with other zero-sum games such ponzis, pyramids, speculative bubbles, and chain letters.

But this isn't necessarily a bad thing. It should be embraced.

City planners build bike lanes in order to prevent the dangerous mixing of cars and bikes. Likewise, if people who are playing zero-sum games on top of regular stocks and commodities can be diverted into bitcoin (and other pure early bird games like ponzis) instead, maybe that would make for a more ordered financial system. Early-bird games that are played on top of useful assets taint their price, and thus play havoc with the signal this price provides. But bitcoins, ponzis, and chain letters have no use as commodities, so there is no underlying real good that can be contaminated by the presence of zero-sum game players.

When criminalization drives ponzis underground, the supply of trustworthy ponzis shrinks and the supply of untrustworthy ones increases. Bitcoin has a role to play here. It is an open system. The set of rules that governs it are automatic and available for all to see, unlike the closed books of a ponzi administrator. There is no way for the system operator to abscond with everyone's funds. So bitcoin is a safer zero-sum game than an illegal ponzi. If people have a genuine need to play zero-sum games, shouldn't they at least be able to play a good one?

Is bitcoin expensive? Sure. Lots of electricity is required to ensure the integrity of bitcoin. But if bitcoin has managed to displace a bunch of poorly-run underground ponzis and pyramids, as well as reducing the signal-destroying participation of zero-sum game players in traditional financial markets, maybe the expense was worth it.