Austin Vernon on El Salvadoran bitcoin acceptance, from my email
Sent this to [redacted, a man of substance] yesterday. LN = Lightning Network, Bitcoins layer 2 scaling solution based on channels:
As far as I understand it, everyone using LN in El Salvador has primarily been using Strike. Classic crypto conundrum in that they had to centralize to get it to work. There is a Twitter thread with the CEO where he shows they had to block their software using most non Strike LN nodes because there were so many failed payments.
https://mobile.twitter.com/JackMallers/status/1291403528116883456
https://strike.me/faq/howitworks
Also looks like you submit USD and they have some kind of centralized payment system to manage the transactions to the Bitcoin layer 1 chain.
I imagine this is a big improvement for people in El Salvador and I’ve heard Strike has already been popular, but I don’t see it as what is being touted as.
Additionally to the email above:
There was an out at the end of the law that says you don’t have to accept Bitcoin if you are too poor. But a basic smartphone with the app means you can accept it. There is a small town where a donor gave the town Bitcoin and forced them to use it as currency and even started doing a private UBI in Bitcoin. Some of the stores started taking it. Strike is only available in the US and El Salvador. So in a truth is stranger than fiction, the idea probably got jumpstarted by a surfer that loved both a beach town and bitcoin. Helps that El Salvador uses the dollar. The legislators would just have to drive to the town to see how it works rather than read about it.
To me this is more like a new kind of bank than some decentralized currency takeover, because Strike is relatively centralized. Being like a bank probably implies some of the same advantages and vulnerabilities of a regular bank. The PR is nice! Not having to get cash at a Western Union that might be far (and where you can get robbed) could have more impact than cheaper fees. It will be a few years before the technology exists to do this in a more decentralized way. Interesting nonetheless.
Not that there’s anything wrong with that…
…democratic rule and high state capacity combined produce higher levels of income inequality over time. This relationship operates through the positive effect of high-capacity democratic context on foreign direct investment and financial development. By making use of a novel measure of state capacity based on cumulative census administration, we find empirical support for these claims using fixed-effects panel regressions with the data from 126 industrial and developing countries between 1970 and 2013.
Here is the paper by Mart Trasberg and Hector Bahamonde, via Kevin Lewis.
Thursday assorted links
1. Is this possible?: “Criminals may have stolen as much as half of the unemployment benefits the U.S. has been pumping out over the past year, some experts say.”
2. When should ngdp be unstable?
3. Is Nero underrated? (New Yorker)
4. Sixty times the speed of sound? (USS Princeton radar team and pilot source, also a good presentation of the multiple data sources which are neglected by West and PewdiePie.) And here is the common briefing message given to the ex-presidents.
5. Where are the Chinese elephants going and why?
6. Darrell Duffie argues for CBDC.
7. Kristof on the new Claudia Goldin book (NYT).
The coming regulation of bank crypto
A $100 exposure in bitcoin would result in a minimum capital requirement of $100, Basel said. The standards would apply to assets created for decentralised finance (DeFi) and non-fungible tokens (NFTs), but potential central bank digital currencies were outside the scope of the consultation, it added.
Here is more from the FT. While that is an entirely understandable move, the net result will be to hinder the incorporation of crypto into the traditional banking system, and speed the growth of non-bank crypto institutions. How they will try to regulate those is of course the more important question.
DeFi is the killer app for crypto
That is the topic of my latest Bloomberg column, let me just give you one segment from the end:
And if the question is whether crypto is good for anything, there is now at least one clear answer: Crypto enables DeFi. You don’t have to like every consequence of that reality, but a reality it is.
You could say that crypto is a Trojan horse of a new and quite different financial system. If you have ever dealt with U.S. banks, and suffered through their bureaucracy and mediocre software, you might conclude that they are ripe for disruption. Banks in other countries may be even more vulnerable.
Obviously, as DeFi grows, questions of government oversight and control will come to the fore. Still, it seems unlikely that DeFi institutions will be regulated out of existence. DeFi can be run on platforms outside of the U.S., and American and European regulators cannot shut it down any more than they can prevent me from placing an online bet on a Mexican soccer game.
Keep in mind that significant swaths of the developing world currently use micro-credit, where borrowing rates of interest are often 50% or 100% on an annualized basis. It is likely that some of those countries will experiment with DeFi as an alternative method of credit allocation, regardless of whether those new institutions satisfy U.S. regulators in every regard.
If you are baffled by a lot of DeFi, well … welcome to the club. The confusing and ever-changing nature of DeFi helps explains why the prices of crypto assets are so volatile. If DeFi lies in part behind the demand for crypto, and you don’t know exactly where DeFi is headed, the future for crypto is also highly uncertain. It is very unusual to have such a highly visible window on what is essentially the value of a bunch of startups.
Recommended, and here are some earlier posts by Alex on DeFi. And here is a new essay on DeFi.
Bitcoin as legal tender in El Salvador
Here is FT coverage, I still feel I don’t know the whole story, but bitcoin will be legal tender and furthermore:
The government will set up a trust at the Development Bank of El Salvador to enable automatic conversion of bitcoin to dollars. The law will take effect 90 days after its publication in the official gazette.
“The entry of bitcoins will be equivalent to an increase in the country’s monetary supply, which will temporarily boost El Salvador’s economic activity, but will also pressure inflation higher and with that, interest rates will rise,” Gabriela Siller, head of economic analysis at Banco Base in Mexico, said in a note to clients.
Here are a few observations:
1. El Salvador already uses the U.S. dollar, so there is not much loss of monetary sovereignty here.
2. Maybe the easing into bitcoin is intended to lower the cost of sending remittances from the U.S., which are fundamental to the El Salvadoran economy? According to the FT, remittances are about one-fifth of gdp, and transfer charges can be steep.
3. Is this all just?: “You don’t have to move to Puerto Rico to avoid capital gains tax, you can just invest in El Salvador! We’re going to precommit to accepting your bitcoin so you will plan around that.”
3b. Isn’t it suspicious that their legislature approved the legal tender law by such an overwhelming margin? Is it that they all have read and digested so many Medium crypto essays? Or do they just see this as “a deal”?
4. I don’t see why this should increase price inflation in El Salvador. Prices are denominated in dollars, and El Salvadorans, or for that matter visiting tourists, already had the option of converting their crypto into dollars before buying more pupusas.
5. Even in the United States the retail demand for bitcoin transactional use has been quite low. Making merchants in El Salvador take bitcoin seems like a PR move to me. What does it mean to make a low-tech merchant in the countryside “take bitcoin”? How is he supposed to take it? Do the abuelas in the market have to set up Coinbase accounts?
6. Could this be a transitional or bridge move to ease El Salvador away from the U.S. dollar and to replace it with a native currency?
7. Is the increasingly authoritarian government of El Salvador looking to PR moves to boost its international legitimacy?
8. Given all the surrounding publicity, it does seem that “they really mean it,” and the government will try to “get something” out of the initiative.
I will keep you posted as I learn more. But as a general rule, if Central America is the laboratory for your ideas, beware before leaping to conclusions too quickly! At the very least do go visit the country you are wondering about, and, in trying to understand the equilibrium, have the country more prominent in your mind than the innovation.
The IRS tax data leak
Sometimes I wonder if I should blog on topics where I feel most of you already know what I think. I’ll just say this. The information was stolen illegally, yet on Twitter so many intellectuals were crowing about the disclosure. (Did some of those same people condemn the theft from Biden Jr.’s laptop? How many of them, in other contexts, will defend strong rights of privacy? I guess that right is for everyone except rich people who create a lot of jobs and output.)
ProPublica acted unethically, and in fact nothing fundamentally new or interesting or surprising was learned from their act as accessory.
The real story is how the numbers were obtained, and here I fear the worst. A single rogue agent can’t just pull up the files of rich people on demand, as I understand the system (if so, Trump’s return would have leaked a long time ago). So this was probably a coordinated effort of some sort, is it crazy to suspect the Russians having some role in it? Who else has the will and ability? (China has the ability, but the “coddled rich people” meme is not one they are looking to push.) What other breach of national security has occurred in the process of unearthing this information? How was it done? Are conspiracy theories becoming more true these days?
It is stunning to me how little consideration these issues are being given and how poorly so much of our MSM has performed.
Wednesday assorted links
1. The case for zoonotic origins.
2. What don’t we know about Long Covid?
3. Ohio sues to have Google declared a public utility.
5. Hester Peirce on crypto (FT).
6. “Progressive taxation underperforming Biden by 12 percentage points in Illinois not paint a particularly rosy outlook with respect to the political feasibility of approaching Western European levels of taxation.” Link here.
Houellebecq on the fall of France?
Here is the UnHerd essay, here is one excerpt:
No, we are not really dealing with a “French suicide” — to evoke the title of Eric Zemmour’s book — but a Western suicide or rather a suicide of modernity, since Asian countries are not spared. What is specifically, authentically French is the awareness of this suicide. But if we consent to set aside for a moment the particular case of France (and really it would be wise to do so), the conclusion becomes crystal clear: the inevitable consequence of what we call progress (at all levels, economic, political, scientific, technological) is self-destruction.
And:
The 45% of French people who believe, on the other hand, in impending civil war help to show (and it is almost sweet) that France remains a nation of braggarts.
It takes two to wage war. Are the French going to take up arms to defend their religion? They haven’t had any religion for quite some time; and in any case, their former religion is the sort where you offer your throat to the butcher’s blade…
Europe seems to me to be at a crossroads. Reading Pascal helps me a lot: but, like him, I see “nothing but cause for doubt and anxiety”.
Interesting throughout.
High discounts and high unemployment
Unemployment is high when financial discounts are high. In recessions, the stock market falls and all types of investment fall, including employers’ investment in job creation. The discount rate implicit in the stock market rises, and discounts for other claims on business income also rise. A higher discount implies a lower present value of the benefit of a new hire to an employer. According to the leading view of unemployment—the Diamond-Mortensen-Pissarides model—when the incentive for job creation falls, the labor market slackens and unemployment rises. Thus high discount rates imply high unemployment.
That is from Robert E. Hall, published 2017.
Should gambling be functionally separate from professional sports leagues?
In my latest Bloomberg column I consider the NBA:
A conservative estimate is that sports betting in the U.S., both legal and illegal, amounts to about $150 billion a year. How much of that is on basketball is an open question, but the NBA generates about $8 billion of revenue a year. It is quite possible that betting on the NBA already generates more revenue than the NBA itself, so integrating betting money into the sport could have a major influence.
The appeal of all this betting money brings me to my second worry: that the NBA, for commercial reasons, will create more bettable events, such as a mid-season tournament. Tennis is well-suited for betting (and corruption) because there are so many discrete wins and losses distributed across games, sets, matches and tournaments. Very frequently something decisive is on the line.
I prefer the longer story arc of a basketball season. Unlike the French Open, which takes place over the course of two weeks, the NBA season is nine months long, and the ongoing stories often are the relatively small events, understood primarily by the harder-core fans. That requires more patience, but it makes for a richer long-term narrative.
To be clear I think sports betting should be legal, but simply done apart from the leagues, such as in Las Vegas or through non-league-affiliated apps. And this:
The backdrop is that in 2018 the Supreme Court struck down federal restrictions on sports betting, clearing the way for states to allow the practice. State laws vary, and even when sports betting is legal, it may be restricted to casinos or to mobile devices. But the trend is to allow more betting, not less.
Finally:
Again, the question is not whether sports betting should be prohibited. It’s how much official sanction it should receive. What would you think of a university that allowed betting on which students passed their exams? Like schools, sports leagues play roles as rule-setters and impartial referees. Maintaining that role is more important than pursuing the gamification of everything.
Structural unemployment for me but not for thee (a continuing series!)
Paul Krugman cries “Uncle!”, apparently seconded by Peter Diamond, and the continuing deserved elevation of Marianna Kudlyak. She is a truly great and important economist.
A simple and stupid one variable theory of this year’s NBA playoffs (so far)
It is typically worth trying on such theories for size, no matter what their defects.
It is hard to avoid noticing that last year’s finalists — Miami and the Lakers — both exited this year in the first round, and ignominiously. Injuries and fatigue were part of the reason why.
The teams that are doing best — Phoenix, New Jersey, and Atlanta — had minimal or zero playoff responsibilities last time around. Usually of course playoff performance is positively correlated from one year to the next.
We will see if this theory has predictive value moving forward. In any case, it does seem the league has discovered the margin where player fatigue truly is a binding variable.
Addendum: ESPN provides the data on injuries to stars.
Tuesday assorted links
1. National Geographic. And amazing how unfunny is Woke TikTok (NYT). How many Woke comedians could fill a mid-sized arena?
2. Cicadas swarming around Washington are showing up on weather radar.
3. Bitcoin en El Salvador? (in Spanish) What is their real strategy here?
4. An argument that high inflation is indeed coming.
5. Ross is right (NYT). And aphantasia and hyperphantasia (NYT). Here is a rebuttal to Ross if you would like to read it, I think it is weak.
Better Crowdfunding
In 1998, I designed the “dominant assurance contract” (DAC) mechanism for producing public goods privately. In my latest paper, just published in GEB written with the excellent Tim Cason and Robertas Zubrickas we test the theory in the lab and…it works! Kickstarter hadn’t yet been created when I first wrote but the DAC mechanism can now be easily explained as a Kickstarter contract with refund bonuses. On Kickstarter and other crowdfunding sites you contribute to a project and if a contribution threshold isn’t reached you get your money back. The Kickstarter contract is useful but it’s still easy for a good project to fail because there are many equilibria with non-funding. For example, if I think that you won’t contribute then I may decide not to contribute and if I don’t contribute then you may decide not to contribute. Neither of us can do better by contributing, given the other person is not-contributing, and so non-contributing is a Nash equilibrium (see my talk at the Foresight Institute for more details). Now introduce refund bonuses which pay out only if the threshold is not reached. Now if I think that you won’t contribute then I want to contribute, to earn the refund bonus, and the same is true for you. Indeed, the only equilibria in the crowdfunding game with refund bonuses have the project being funded. Thus, a nice feature of the refund bonus game is that in equilibrium the refund bonuses are never paid!
To test the theory we (mostly Tim and Robertas!) created an environment very similar to that faced by people on Kickstarter. Namely, there are multiple projects to choose from, each with different private payouts and each project has a contribution threshold and some projects offer refund bonuses. We test a variety of different types of refund bonuses including fixed (e.g. $10) and proportional e.g. (20% of your contribution) and also early refund bonuses (a refund bonus if the contribution threshold is not reached and you agreed to contribute in the first half of the funding period) or for contributions at any point in the game. Our research leads to three important conclusions.
First, without refund bonuses only ~30% of socially valuable projects succeed (perhaps coincidentally almost the exact same as on Kickstarter). But with refund bonuses the success rate increases by about 50% to 50- 60% and it doesn’t much matter much what type of refund bonuses are used!
Second, early refund bonuses have some useful properties. A key to the mechanism is that it quickly makes many contributors pivotal. At the beginning of the game it’s in no single individual’s interest to fund the public good but as others contribute there comes a time when the contribution necessary to push the total funding over the threshold is less than the value of the public good to the individual–thus, for purely self-interested reasons, a potential contributor can benefit by pushing funding just over the threshold. We say such contributors are pivotal. Early refund bonuses make contributors pivotal sooner and we think this gives people time to recognize that pushing funding over the threshold is in their interest. In addition, when more people contribute early this sends a signal of social cooperativeness which also appears important to fund public goods.
Third, refund bonuses pay for themselves! In theory, refund bonuses are never paid but in practice, as we have seen, some socially valuable projects fail even with refund bonuses. Nevertheless, for reasonable markups it’s still in an entrepreneur’s interest to use refund bonuses because the greater success rate more than pays for having to pay modest refund bonuses when a project fails.
We think refund bonuses can substantially improve crowdfunding and we hope to partner with a crowdfunding site to run a field experiment. Contact me if interested!
Read the whole thing.