Currency Extremism

This is a story about my adventures with the Lightning Network, Banks, the financial crisis of 2007–2008, Bitcoin and cryptocurrency applications.

The Lightning Network Adventure

I’ve been thinking a lot lately about the Lightning Network (LN).

LN is what we call a second layer network for Bitcoin.

With LN, point of sale (POS) transactions can take place in under a second.

Currently, the cost of an LN transaction is very low.

I thought, “Hey, that’s just what the market needs!”

• Faster, cheaper, safer transactions (tx’s)
• Merchants won’t need to worry about charge backs
• Sellers won’t need to worry about getter scammed
• It can work for interpersonal as well as store front tx’s

I even went as far as building a full Bitcoin node and Lightning Network side chain in local Virtualbox VM.

I used docker-compose and Docker Swarm and had plans to scale big time with Kubernetes.

I even pitched to a few angel investors/people with enough money to fund such a venture.

I’m almost done creating a Bitcoin payment processing solution for my web site: https://cryptocurrencies.developersclass.com/ … why not add a Lightning Network payment option?

“You provide the money and know-how to grow the business and I’ll provide the technology.”

My Bank Bashing Article

And then there’s that (draft) bank bashing article I wrote and hesitate to publish.

It expresses frustration with our current banking system.

Here’re a few lines from that article:

Why do we accept bank fees as a given?

Why do banks get to hold on to my money for 7 days? Why do banks get to earn interest on that money of mine, charging me NSF fees even though I have plenty of money.

Why is it okay for our deposits to be “processed” only during “business work days”?

Do banks use only bank employees, i.e., humans, that don’t work weekends and frequently take vacations to process our transactions?

No. Of course not.

Right Wing Extremism

Let’s not forget my How Does the Central Bank Print Money? article.

I returned to the diagram I created in that article and added a few more details. Let’s focus on that now (the red box below):

The nationally charted commercial banks are special banks that are given the privilege of buying bonds (Treasury Bills) at a low price and selling them to the Federal Reserve (the Central Bank) for a profit. 

These elite banks buy low and sell high.

These elite banks serve the same purpose as Bitcoin miners. When they sell the bonds to the Fed, the money that appears on their electronic balance sheet is new money. That is where our USD money is actually minted.

The physical dollars and coins “minted” by the Treasury (the “$” in the diagram) closely reflect that newly minted money.

These elite banks are like Bitcoin miners, but instead of solving a cryptographic puzzle to get rewarded with Bitcoins all these elite banks have to do is give the Fed the T-bills that they got from the Treasury. It’s all done electronically. (If there were such a thing as the Illuminati, this would be it!)

Left Wing Extremism

This sums up what happened in our 2007–2008 financial crisis:

Acorn => Banks => Bad Loans => Financial Crisis

Fannie/Freddie => Bad Loans => Financial Crisis

Wall Street *** => Bad Loans => Financial Crisis

The Association of Community Organizations for Reform Now (Acorn) sued and extorted banks which into making bad loans, in an effort to put lower income citizens into houses that they could not afford.

Fannie Mae and Freddie Mac were created by Congress to provide low cost loans. They made a lot of very bad loans, i.e., they allowed low income people to move into high rent homes that they could not afford.

Lobbyists and political action committees and nonprofit organizations exerted influence over members of the U.S. Congress to ensure that Fannie/Freddie were allowed to continue to grow and take on unreasonable risk under their congressional charters and implied federal backing.

The U.S. Congress gave Wall Street firms (AIG, Citi, Merrill Lynch, RBS, UBS, JPM) the ability to compete — Wall Street firms had been complaining about the unfair competition from Fannie/Freddie — by permitting them to package bad loans and sell them to investors.

*** Granted “Wall Street” is considered more right-wing than left-wing, but there’s more left-wing non-sense in this section than the other.

Fractional Reserve Lending

See the big green circle in the diagram?

That’s where Alice deposits $100 in bank 1 that takes Alice’s money and loans out $90 to Bob.

Bob puts his $90 in bank 2 that takes Bob’s money and lends out $81 of it to Cindy, etc.

This process drastically increases the money supply in circulation.

It’s great; however, it only works when the banks make good loans.

The financial crisis of 2007–2008 is an example of what happens then banks make bad loans. The whole system implodes.

It’s not fair, but it’s real

Is it fair that some loud mouth special interest group can extort banks into making bad loans?

Is it fair that banks can still make money even when they make bad loans?

Is it fair that special interest groups can lobbied congress to allow Fannie Mae and Freddie Mac to make bad loans that almost bankrupted our economy?

Is it fair that congress would allow Wall Street firms to knowingly package bad loans and sell them to citizens as “good” investments?

Is it fair that all these shenanigans were permitted, that nearly threw us all into the next Great Depression and yet nobody went to jail?

Who was held accountable for playing politics with our financial security?

Wall Street firms got bailed out.

Wall Street executives got golden parachutes.

Banks still make money coming and going no matter how bad they screw up.

That frustration created the motivation that created Bitcoin.

Bitcoin was born

On November 1, 2008, a post appeared on a discussion forum called the Cryptography Mailing List …

“Abstract. A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without the burdens of going through a financial institution.”

… and was signed with the pseudonym Satoshi Nakamoto.

Many other attempts at digital currencies had all failed.

Then, two months later on 3 Jan 2009 Satoshi mined the first 50 bitcoins (known as the Genesis block).

Encoded in that Genesis block are the words:

“Chancellor on brink of second bailout for banks”

… that suggests that Satoshi frowned upon the bank bailouts of 2008. He wasn’t just a coder; his motivation was political.

I thought it was just what the market needed…

Now, back to my thoughts on the Lightning Network (LN) ...

The more models I created to simulate the workings of the LN, the more it became apparent that well funded hubs would be required to make the payment channels work as a general purpose point of sale system.

Where would the well funded hubs come from? Who has tons of money?

Banks.

Shit!

When that happens, we’ll be back where we started only this time around there will be no customer service, no branch offices, nobody to call to handle fraud, reverse bogus payments, etc. (Or maybe the banks will create “new” cryptocurrency customer support services for the LN side chains.)

The banks will still be the middlemen, charging whatever fees they see fit. 

What Happened to Bitcoin?

Satoshi Nakamoto intended to build a decentralized cryptocurrency; a currency that would be free from political lobbyists, the U.S. Congress and unscrupulous Wall Street firms.

Most people think Bitcoin is free from centralized control; that’s not true.

Bitcoin’s source code is now largely controlled by single private company.

They have the power to change the rules of how Bitcoin works.

For example, they could increase the blocksize, therefore increasing the scalability of Bitcoin, but they have kept it at 1MB.

This plays right into their business plan, i.e., to make money on side chain networks, like the Lightning Network.

This bothered me for a while.

Cryptocurrencies are like Apps

Then, I heard Andreas Antonopoulos talk about cryptocurrency sovereignty.

Consider this use case that includes multiple internet-aware apps:

You read a Twitter tweet that makes you think Alice.

You start chatting with Alice over Telegram.

Typing becomes too much so you request a Google Hangout in order to talk.

You switch to video when you realize Alice has something on the white board to share.

You begin recording and save the .mp4 file.

You followup with an email summary of your meeting, including a link to the .mp4 video file.

You just used 4 different applications to communicate

Maybe cryptocurrencies will be like that. We’ll use multiple cryptocurrencies to transact business.

We may use one for a quick payment to a friend, another to pay a mortgage payment and yet another to buy that toy that we don’t want anyone else to know about.

Multiple cryptocurrencies for multiple purposes.

Enjoy paying fees for the customer support services? Use crypto A.

Dealing with friends and want super low fees? Use crypto B.

Prefer privacy? Use crypt C.

Who is going to create that killer cryptocurrency wallet app that makes such transactions quick, easy and affordable?

Ah, now I feel better. Time to go to sleep.

Nite nite.

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Gaining Understanding and Confidence

It’s easy to get tripped up with questions about how the US monetary system works.

Throw cryptocurrencies into the equation and it can get overwhelming.

I grew up with a mom that was intrigued with US economy, currency, gold and other investments.

I guess that’s why cryptocurrency (and blockchain technology) is so interesting to me.

I get to combine the rhetoric that I heard in my formative years with my education and professional experience.

I invested my time, energy and resources to develop a training course to help others “get it”.

That’s a big part of what my Cryptocurrencies Developers Class is about.

The first class is all about money (what it is, its history and relationship to digital currencies) and would serve as a good educational resource for those in finance and insurance professions.

The rest of the course is about how to leverage our understanding of money and blockchain technologies to build our own cryptocurrency.

Join me in class where we’ll:

• Distill facts from fiction
• Provide pertinent resources on a guided journey of learning
• Provide well structured lab assignments
• Provide starter projects (and completed solutions)
• Provide insightful visual presentations
• Provide a Certificate of Completion to attendees that finish the assignments

… and that’s just the 1st half of the course. In the 2nd half we cover the Ethereum blockchain.

I have condensed this class into an Immersive one week Master Class in Atlanta, GA.

Register now, while seat are still available at https://cryptocurrencies.developersclass.com/products/register

Thanks, hope to see you in class! — Lex Sheehan

Lex Sheehan

Atlanta, GA

Software Engineer

Author Learning Functional Programming in Go

Instructor cryptocurrencies.developersclass.com

Blogger lexsheehan.blogspot.com

Twitter @lex_sheehan

LinkedIn lexsheehan

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