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How far can the government track you with crypto? or, an intro to privacy coins

tl;dr to the ends of the earth, assuming you interacted with a CEX (Centralized EXchange). No, CoinJoin doesn’t help. Bitcoin wasn’t made for this, just use a different chain if you want total privacy.

Due to the sideways price action, I have recently started chopping up carrots and onions and storing them in my fridge. This is from a Youtube channel called Wok With Tak and he talks a lot about his FAST cooking system which is a mindset that makes cooking everyday not a chore:
1. F: always try to combine flavours together, makes cooking fun
2. A: chop up all ingredients in advance, right when you get back from the supermarket, so cooking is just heating things up
3. S: stir fry in a wok
4. T: Think in templates, not recipes. For example, frying aromatics in oil for flavour -> heat up main ingredients, making allowances for whatever special treatments they need -> make up any seasoning mix to add twists to the flavor just before serving.

Yes, that’s a head and shoulders pattern! Tom Bulkowski explains

Market Situation

The head and shoulders pattern usually breaks down bearish.
Crypto media says bullish indicators are here, institutional money is building up positions at this price range, we’ll be going up again.
Mainstream media (I don’t follow it) is talking about energy consumption, El Salvador, and useless things like Tesla/Elon Musk.

Overall, because everyone expects it to go up, my gut feeling is it will go down. The plan is still the same: look for new projects that haven’t gone up at all this year.

Privacy Coins

Chainalysis is a company that earns big bucks from the US government to track cryptocurrency flows. Their tools are used from IRS “we see you” to tracking crypto scams, Lazarus Group (a hacking group thought to be North Korea’s way of getting money despite all those sanctions), and Middle Eastern Jihad groups seeking donations in Bitcoin.

What do they think about…

Monero

Interview with former Chainalysis employee: very good design, few flaws that can be used only on targeted individuals

Chainalysis webinar on privacy coins: jump to 44:25, where the guy says “converted into Monero… and from there… who knows?”

Dash

CoinJoin, which, if you watch their webinar on privacy coins, you can see they’ve cracked.

Zcash

Zcash has zkSNARKs, which are the state of the art. Unfortunately shielded addresses are opt in only, which means most people won’t turn it on, which means if you use shielded transactions, you’ll stick out like a sore thumb.

Grin/BEAM (Mimblewimble)

He didn’t talk about it at all (too few users actually use it), but the unique thing about Mimblewimble is that it actually throws away information while still being able to prove that all transactions were valid (this also keeps the blockchain size down). As such, I’d expect it to be a fundamentally harder nut to crack.

Privacy techniques you can rely on

Privacy by default: private balances, transaction flow must be enabled by default for all its users, because anonymity is a huge part of privacy too.

Zero knowledge proofs: since the 80s, it has been theoretically possible to prove that a computation was done correctly without actually computing it yourself. Let the big brain Vitalik Buterin tell you how it’s possible.

Mimblewimble (whitepaper): instead of transactions being inside blocks, we imagine a block as one large transaction.

I call my creation Mimblewimble because it is used to prevent the blockchain from talking about all user’s information [7].

Tom Elvis Jedusor

All of these were originally proposed as improvements for Bitcoin, and as stated in the whitepaper, Mimblewimble is simply some of those improvements combined together. Oh well.

Monero is still relevant

Unlike Bitcoin, Monero will always be a probabilistic analysis problem

CipherTrace-Dave

Although Monero has none of these improvements (it predates them by quite a bit), it is where all the privacy freaks gather. They’ve gone to extreme lengths to keep mining decentralized, and to keep Monero private despite old tech and the US government offering up to 1.25 million USD to crack it. And it’s on every exchange.

As far as I can tell, Chainalysis and Ciphertrace are just using already known weaknesses, and can only target individuals, not mass surveillance.

Although the US government is very motivated to crack it, If you stay smart and don’t expose information through other means, Monero is good enough.

Funny how ‘good enough’ wins.

p.s. if you have a US passport you might wanna give it up. Quite frankly their policies strike me as antagonistic and rent-seeking. Other countries aren’t quite so shameless in their money-grabbing.

Compound Finance “Soft Fork” scam email

Beware of emails with these titles:
Compound Protocol Soft Fork User Walkthrough
Compound Cross-Chain Compatible Soft Fork Walkthrough
networkcompound@substack.com
compoundnetwork@substack.com

And apparently there are more variations.

This very convincing email is targeted at crypto savvy people. But a ERC20 doesn’t ‘soft fork’, nor does it need to be ‘upgraded to be cross chain compatible’.

According to Etherscan, one of the scam contracts is still receiving txs up to this day. Hopefully these txs are all pending because the guy canceled his transaction (you can do that by submitting another tx with the same nonce but a higher gas fee)

I teach you to build a blockchain

This is a long read, but at the end of it, you’ll know enough to not be lost.

Market update: now everybody’s wondering if the bull run is over. Bitcoin only doubled its price from last ATH, and the whole thing only took 3 months, so I didn’t think it was over already. Nevertheless, the charts don’t seem to be optimistic. Oh well! The word on the street is “get back to work you lazy programmers you haven’t made it yet”

Accounts

We start with asymmetric cryptography, an old (but still mindblowing!) invention from the 1970s. Two large numbers, related to each other somehow (exactly how? Don’t ask me but there are many ways for that). One of these numbers can be calculated from the other, but the other way around is very difficult,impossible. Let’s call one the private key (because you should keep it secret), and the other the public key (because you should tell the world that this is your public key).

Useful properties:

The private key can be used to calculate the public key, but not the other way round.

The public key can be used to encrypt information, and only the private key can decrypt it.

The private key can be used to sign information, and everyone with the public key, signature, and the original information can be sure that it was you (or whoever had the private key) who signed it.

An account on a blockchain is simply the private-public keypair. Your address, however, which is used to let people send coins to you, is derived from the public key.

(the keys are actually numbers, but they’re so large we have to use the alphabet to represent them. The alphabet has, what, 26 characters? 0-9 is only 10)

Transactions

Transactions. Sign a message with your private key saying that you want to send 10 BTC to someone else, and given your public key, anyone can verify that it was really you. A transaction needs to refer to some previous state, that is, Alice can only send 10 coins to Bob if she has more than 10 coins in the first place.

But what is the ‘true’ state? Transactions are coming in all the time, what if some contradict each other? You have to process them in batches: blocks!

Blocks

Blocks are just batches of transactions, and they refer to previous blocks. That’s why it’s a blockchain!

To prevent people from spamming the network with too many transactions, let’s introduce a fee: it costs some (very small amount of) Bitcoin to send Bitcoin around.

Why would someone want to spam the Bitcoin network? People who want to see it fail, perhaps, or who only want their transaction to be processed.

Decentralization

Speaking of people who hate Bitcoin: countries with their own currencies hate competing currencies. Think about it – a community living in your country, using their own coin. Economically they don’t really care about the larger organism (the country), they have their own blood circulation. That’s exactly like a cancer tumor! That’s why the Wörgl Experiment was shut down quickly in Austria, even though it was necessary for the community to start working again.

If you’ve never heard of a community currency before, it’s useful when the national currency is useless. Imagine A is a master house builder, but he’s just sitting around (because he’s jobless). B wants A to build a house. But they’re both poor, they have no Euros, and Euros are needed to buy food and everything. So nothing gets done, there is no economy.

The solution to this comes in two forms:

a. B barters with A: he will give A something he wants, and A will build him a house. More likely B can’t give A everything he wants.

b. They (and the farmers in their town) agree to use a new coin, not the Euro. Because everybody has some of this new coin, they can start working for each other again.

Suppose your hand is prickling – no fresh blood is coming in from the rest of the body, so everything stops working. Now imagine if your hand said ‘fuck it, I’m going to circulate my own blood, oh and I need to grow some lungs’. it’s a bit like that…

To make sure the system is resilient and can’t be brought down by adversaries, we need to make it decentralized, or distributed. Everybody around the world should run the Bitcoin program on their computers. Their computers would gossip to each other about the latest valid transactions and latest blocks, and hopefully agree on which latest block is ‘the truth’. Information takes time to travel through the network, so not every computer can have heard of every transaction, but that’s just how gossip works in real life.

Easy Things Aren’t Worth Anything / Incentivization

OK, we can’t ‘hope’ for a bunch of computers to agree on anything. Any computer can make a block out of valid transactions. Whose do we choose? We have to make it difficult. But how can we make an easy task difficult?

Proof of Work: make an arbitrary puzzle, involving the block, that requires lots of computing power to solve. The solution that must have (statistically) taken more computing power to solve is the winner, and is the new ‘truth’. This process starts all over again every time a new ‘true’ block comes out.

Proof of Stake: to propose a block, you must first put up lots of coins at stake, so that if you misbehave, the system can take those coins away (or just say they no longer exist). Then your computer will be randomly chosen to propose a block, and other computers will say “that looks good to me”. If you propose a bad block or if others vote for a bad block, they will lose some, or all, of their staked coins.

(Ethereum 2.0 version)

So we’ve made a simple task (proposing a new block of transactions) difficult. Why would anybody be motivated to do this though? Why would anybody run the Bitcoin software? Let’s make a rule saying that whoever finds a new ‘true’ block can create 50 new Bitcoin for himself, out of nothing.

(Bitcoin twist) Bitcoin is supposed to be like gold – that is, something with a limited supply. That is, whereas governments can suddenly create as many dollars as they need (which they did, to fund COVID relief, and the US to pay for World War 2), nobody can do that for gold. There is only so much gold on Earth, and gold mining output is relatively constant. So there’s an additional rule that every 4 years, the new block reward is halved from 50 Bitcoin to 25, 12.5 , 6.25 and so on. Only 21 million Bitcoin will be minted.

Theoretically, Proof of Work means anybody can participate in making a new block as long as they have a working computer. In practice, people with money buy up lots of computing power and find cheap electricity to power it. Nevertheless, it was chosen because it was simple and Bitcoin was made by libertarians who didn’t want another system where the rich get richer. Also, they wanted everybody to have a chance to get some Bitcoin, because then they would use it.

Proof of Stake came about because someone thought it’s silly to spend so much electricity solving an otherwise useless puzzle. The problem is you still need to make it difficult to make a block, and you still need to punish bad actors. So we’re back to the rich (or early adopters) get richer. Remember that every time you hear the “Bitcoin uses so much electricity” argument.

Nothing is free!

By now you should have noticed that if you have enough money, you can buy a lot of computing power and control a Proof of Work blockchain, because now you can write history (create most of the new blocks). Same with Proof of Stake, except that you buy lots of coins, which is arguably even easier! This is called a 51% attack.

But if you actually did execute a 51% attack, nobody would believe in the coin anymore and its price would go down. The community would make another coin and start using that instead.

After all, the point of a blockchain is that it’s ‘neutral’, that control over who gets to decide ‘the truth’ is decentralized. If it weren’t decentralized, we might as well go back to using a database on someone’s server.

Congratulations

You now have a system that is distributed and not controlled by evil, corruptible humans, and we have set incentives up so that it is more profitable to follow the rules than to attack the system.

What if you could run a government on this?

Audius: a pretty good decentralized Spotify

note: apparently archive.wakarimasen.moe (4chan archive) that was linked in the last newsletter can load ad scripts that hijack Chrome to show you really invasive ads. Like ads that trick you into thinking Windows is telling you you have viruses, getting you to install some shady malware.
People, please. If you wouldn’t have unprotected sex, don’t browse the internet without protection either.Install uBlock Origin at the very least (Chrome version). It’s the best community supported adblocker out there. Yes, that means no more Youtube ads.
As a side note if your computer has malware, they can log what you type on the keyboard and steal your crypto. Not cool.

I really don’t want to be like those guys on Youtube who just shill a coin with a big green candle on their thumbnail and 😱 😱 but since readers have been begging me to, I hope you can learn how to evaluate projects by reading my cryptocritique.

if i ever start a youtube channel this will be my thumbnail

What They Do

Spotify, but with tokens to decentralize governance power. This means instead of being a big evil platform whose rules you have to follow, you actually have a vote. Artists actually make no money from Spotify. It’s widely accepted that Spotify is just for gaining publicity.

Artists can use the AUDIO token to propose/vote on changes to Audius and decide what to fund with community grants.

The whitepaper says this should solve the following issues:

We see a number of specific challenges faced by artists and fans today:

  1. There is little to no transparency around the origins of artist payouts (e.g. number of plays, location, original gross payment before fees)
  2. Incomplete rights ownership data often prevents content artists from getting paid; instead, earnings accumulate in digital service providers (DSPs) and rights societies
  3. There are layers of middlemen and significant timedelay involved in payments to artists
  4. Publishing rights are complicated and opaque, with no incentives for the industry to make rights datapublic and accurate
  5. Remixes, covers, and other derivative content are largely censored due to rights management issues
  6. Licensing issues prevent DSPs and content from being accessible worldwide

Economic Model

Remember that token economies enable a lifeform. This life form wants its components (artists, playlist curators, listeners, infrastructure) to interact in such a way that they generate value for each other and thus the lifeform itself. Additionally, no particular actor should have too much power over the others.

Such an organization was first described as a Continuous Organization here.

So does Audius really achieve this?

The Audius platform token ($AUDIO) is used in three core ways:

Security – Stake $AUDIO to run nodes that secure the network.

Feature Access – Hold $AUDIO to unlock features and exclusive content.

Governance – Use $AUDIO to vote and propose protocol changes

AUDIO token is used to get people participating and doing stuff on the platform
hmm, doesn’t seem like I get so much more? a good start though
Alina Baraz dips her toes in the water
despite being one of the first and most prominent investors, deadmau5 only has 9 tracks?
Masego is a bit more enthusiastic
governance proposals haven’t been very controversial so far

It’s fair to say Audius is still fighting for traction and has to figure out how to create a more addictive economy with its token. Nevertheless, it is the only such project with so many big names and publicity. Other projects haven’t even gotten so far, or even made a halfway decent whitepaper (looking at Rocki).

Technical Competency

Can these guys really deliver on their promises?

Back in the day there were many shitcoins that just copied Bitcoin’s source code and changed a name or number. Being the first of its kind, Audius has no such luxury. The code looks professional and well organized. Real thought went into this, and there’s even documentation about the high level architecture.

My only concern is that running the Audius infrastructure itself means you have to stake at least 200,000 AUDIO. Even before the bullrun this year, 1 AUDIO was 0.29 USD, so that’s a lot of money.

To me this sounds like the people who run the infrastructure have a disproportionate amount of power over everyone else, if they’re giving out 100 AUDIO rewards.

Trading Outlook

No need to pay much attention to the technical indicators

If you’re going to use USD to buy AUDIO: the coin still has a ways to fall, plus it hasn’t seemed to receive the mainstream recognition that BTC has, so even if the bullrun picks up again, there is no guarantee that AUDIO will follow suit.

Verdict: too dangerous to go in right now. Wait for it to hit the floor.

AUDIOBTC: same verdict as AUDIOUSDT, except your max gains are only 2-3x, not 20x in AUDIOUSDT (because relatively unknown coins go up as Bitcoin goes up, compounding their gains).

Conclusion

Audius is a legit project in its early stages. Keep it on your watchlist and look for a good time to enter. Highly correlated with BTC, so your BTC gains might be disappointing.

Market Overview and Next Steps

My aim is to transform all of you into crypto experts.

The last issue was about why decentralization (of power) is important.

This issue is a general market overview.

The Story So Far

crypto has just dumped. There are many theories out there, but here is one anonymous guy’s post on 4chan by (supposedly) the perpetrator. It has since been deleted but here’s an archive

Another Youtuber got it right.
His Wyckoff Distribution fits the pattern a bit too well, so I wouldn’t believe in it too much, but the theory of Wyckoff’s Composite Man is useful. Always assume someone is out to get you, because when it comes to money, that’s true.

Who might that be, you ask? Subscribe to BowTied Bull they have a good understanding of high finance. Not an affiliate link, they don’t even know I exist.

Overall sentiment is still bullish, because the last bullrun was comparatively short and the dump was artificial. Expect normal people to hesitate a bit, which is a good chance to accumulate.

Market Overview

BTC: just dumped, good time to accumulate. Expect conservative next target of 70,000 USD.
ETH: grew much bigger this bullrun, what with DeFi and NFT sectors helping it. Has trouble servicing this many users, causing transaction fees to balloon up to 200USDT at times. This scares away new users who don’t have that much money. Although Layer 2 scaling solutions are coming like Polygon/MATIC (they just batch up transactions and periodically report back to Ethereum), they don’t know about each other.

Explained simply: you have 1 blockchain that has 1 truth (Ethereum, let’s call it Layer 1). Since it’s not fast enough you start other blockchains (call them Layer 2) that batch transactions up and submit a summary to Layer 1 periodically. Problem is of course keeping things in sync, because there are multiple Layer 2 blockchains, and they don’t know what happened within each one. And they report to Layer 1 only periodically.

This was known a long time ago but Ethereum’s upgrade to make it faster (ETH2) is late. So this year some Ethereum competitors have eaten its lunch. We talked about decentralization last issue and why it’s important (like Bitcoin community, Ethereum people value decentralization as an ideal). These new projects don’t value decentralization as much.

BSC (Binance Smart Chain): an Ethereum by any other name, but controlled entirely by one company (Binance). Gained a lot of traction because it’s well integrated with Binance and transactions are cheap.
SOL (Solana): Haven’t heard of it before but apparently it has gained some traction. Of course it is faster than Ethereum and perhaps easier to program for. But there are many projects with such features, so I don’t know why this one got more traction. Most of the tokens are owned by early investors and founders (an exception for the crypto space, but becoming more common these days)

Ethereum competitors that made big noises in 2017, 2018 have not been as successful as BSC.
NEO: remember? lol
TRON: lollol.
XTZ (Tezos): real work going on, but still haven’t heard of anybody building on top of it
EOS: along with Tezos, one of the richest competitors. looks like money can’t buy everything
ADA (Cardano): founder Charles Hoskinson has a very successful Youtube channel, so it wasn’t so affected by the dump. However, nobody’s actually building anything on top of Cardano (check their forums and smart contract dev subforum)
ALGO (Algorand): I know it works, but is anything running on it?
AVAX (Avalanche): made a good splash this year with Pangolin, their answer to Uniswap. But they have to do more than that.
AE (aeternity): used to work there, sad story.

And these were just the legit projects with hardworking, very smart people behind them (including me!).

Overall ETH is facing competition, but still is a long way from getting displaced. The Satoshi Nakamoto = God; Vitalik Buterin = Jesus meme is still true.

Action Steps
Since the market just dumped, we have a 2nd chance at entry. Look for coins that have been flat (still relatively cheap) the entire time. The market only pays attention to coins that have pumped. We are going to go early into cheap coins. Since we know that DeFi is going to be big, look for flat coins in DeFi. For more suggestions and a different take, try BowTiedBull’s article.

Important to make sure they’re legit. Rule: if any project advertises how much money it can make you instead of how it’s going to change the world/why there is a place for them in the world, it’s a scam.

Why you shouldn’t sell when the price dumps

You might be wondering, why does crypto/blockchain matter, besides potentially making me rich? Didn’t it just dump horribly, like 50% in a day?

Well, that was a coordinated shakeout. But more on that later. If you care to DYOR, it’s out there. Look I even gave you a link ffs just click on it.

Throughout history people have banded together to solve problems larger than themselves. Back then there were tribes, today they are companies, nation states.

Crypto lets us create organizations, organizations of anonymous people distributed all over the internet, coordinated by the coin, directed by the coin’s economics.

It’s like a company, but a normal company doesn’t have its own coin – they have shares, but only the top brass in the company have shares and can profit from them.

Imagine a company where even the janitor, the security guard are paid in shares, and they hold shares. Yes, even the lowliest of jobs! (I’ve only seen an enthusiastic janitor once, and it wasn’t because of his job)

(let’s call ‘shares’ coins/tokens from now on)

Within a company and outside it there are different roles. We can program the tokens and design the company’s internal economy to balance the different roles within our company. No longer will some central authority tell anybody to do something – people, motivated by the greed to earn tokens, and to increase the value of the tokens they already own, will naturally step up to do the work.

bottom up emergence, not top down direction

A body is made of millions of cells, all coordinated and nourished with blood. So it is with countries and their currencies, and crypto projects and their cryptocurrencies.

Bitcoin is a money that is not under the control of any country or government. Even though it is digital, it is scarce – only 21 million BTC will ever exist.

Even as governments try to ban and control it, people around the world constantly step in to keep Bitcoin running, thriving, evolving, changing, thanks to Satoshi’s economic genius that uses the individual’s greed for the good of all mankind.

Ethereum is a computer that is not under the control of any country or government. Anyone can upload programs to it and run them – although it costs ETH to run them. And of course, since it’s a general purpose computer, you can make your own coin on it, without having to write your own Bitcoin. There’s already a standard for how such programs should be written – ERC20. (not the last time you’ll hear that term)

(let’s call programs that run on decentralized computers like Ethereum ‘smart contracts’. Why smart? because unlike a contract, a useless piece of paper, the smart contract is a program and can do something)

A store of value that is, for the first time, virtual and digital yet independent of any single entity’s control. Platinum/gold, but more convenient. Uncensorable.

(governments and rich people are busy collecting it to add to their reserves, just like gold.You should too)

A general purpose computer that, by being decentralized and uncensorable itself, is an ideal platform for launching other decentralized projects.

One human making the decisions, or even a group of humans (governments), is a weak point, for power corrupts, and humans can always be bought out. The solution is to let ourselves be governed by algorithms, either entirely (Bitcoin) or partially (most projects these days).

Don’t like it? We can always choose to follow another algorithm. The masses have power once again.

This is why decentralization (of power) is important. We’re talking about a rebalancing of power. It would behoove you well to understand this new world, and not just think about your money.