A few thoughts - Wednesday, September 10, 2014

[Steve Sokolowski]

Good afternoon! A few thoughts for lunch today:

Darknet markets will change everything

One of the stories that doesn't seem to get much attention around here is the evolution of the darknet markets. While still small, few people seem to recognize how the darknet provides a superior product to what drug dealers are offering on the street. People buying drugs online don't have to worry about the cops busting the drug house while they are there, or whether the new guy on the corner cut the drugs with something that will waste their money or kill them. If the Postal Service seizes your drugs, you aren't in possession of the drugs because to possess something requires an intent to possess it - you can just claim that you didn't order them.

Places like the Silk Road 2 are eBay for drugs, with feedbacks and escrow systems and the like. In fact, there are academic studies that suggest that the average darknet seller has a greater percentage of positive feedback than the average eBay seller. In the drug world, trust is everything, and people have strong incentives to not rip people off. The key here is that buyers, who are often addicted to the substances, can obtain a steady supply. Even if one dealer gets busted, there are hundreds of other dealers from whom people can order. Addicts don't need to get dopesick walking around the city trying to find a supplier at 3:00am.

Within five years, it is likely that drug dealing on street corners will be nearly eliminated. The street dealers simply cannot compete with such an anonymous system. This will bring about several good things to the world. First, people will be free to do whatever drugs they want, and robberies, panhandling, and prostitution that is used to get the drugs (which are the things that should actually be illegal) can be the focus of law enforcement. From a standpoint of freedom, this allows people to live their own lives as they see fit, as long as they aren't hurting others. Second, lives will be saved. If demand on the corners is less, then the Bloods aren't going to shoot up the block the Crips control in order to gain customers.

The whole reason for violence in the drug trade is because there are no legal systems for drug dealers to fall back upon to settle their differences. When someone rips you off in the drug trade, you can't sue; your only recourse is to shoot. However, when you don't know who to shoot, you can't shoot him. People who look at the darknet markets as a "bad thing" need to recognize the opportunity cost to society of the current system of drug dealing.


A few comments about Apple

Looking at Apple's announcements yesterday, a few issues struck me as interesting.

At the event, Apple announced a smartwatch. Chris pointed out that the watch costs $350, and an iPhone costs $600, so to have both, you'll need to spend close to $1k. That's an astronomical amount of money and everyone who wants a watch needs to spend it because the watch isn't compatible with any other phone. In the end, Apple has a phone that is going on sale immediately, and a watch that will be delayed at least four months. By the time that the watch is available, the buzz over the iPhone will have worn off and Apple's highest spending customers (the people like my dad, who buy iPhones every year on launch day) will have already left the store. Of course, the store is the best location to show and sell them the watches. The timing of this watch is horrendous, and it will be difficult to convince people who are happy with their iPhones that they need a watch. People who are dissatisfied with their iPhones aren't going to lock themselves into the technology by buying a dependent watch, so what is the market for this watch?

Second, the phones have bigger screens. I use a Galaxy S3. While I decided not to buy a new smartphone for this two year cycle, the main complaint I have with the S3 is that its screen is too big. If I were to buy a new phone, the main reason I would do it is to get a smaller phone that can fit in my coat more easily. Consider the strange idea that cell phones from ten years ago were smaller than this new iPhone. I was again talking with Chris yesterday and he suggested that the reason that Apple is pushing these large screens is because large screen phones have a higher profit margin than phones with smaller screens. Whatever the case, phones with such large screens don't do a good job at anything. They are too big to easily carry around, but their screens are too small to use to watch videos or enjoy media on. If I needed a large screen, I would buy a tablet.

Finally, people tend to associate young people with being "hip" and setting the "trends" in technology. The idea many have is that teenagers latch on to the latest trends, and then their parents are "left behind" using old technology. The truth is that teenagers buy whatever the executives at Apple, who are in their 60s, decide they are going to produce. Everyone used to wear a watch, but now you see few people wearing them. Since Apple's executives decided that wearing a watch is the new "cool," then teenagers will start wearing them. If Apple had decided instead to go all out against Google Glass, then teenagers would be wearing Apple's latest glasses. Young people don't set the trends; old people do and advertise them to young people.


A review of false information

In /r/bitcoin, people just continue to repeat the same false information over and over again.

In one headline today, posters reported that a variety of indicators are looking up, but most of the indicators being provided repeat the same flaw over and over again. The number of transactions is irrelevant; sending small amounts of money back and forth can cause huge spikes in those graphs. The number of blockchain.info accounts is irrelevant, because they don't publish the number of wallets that have gone inactive, only the "total" number of wallets. We have no idea whether more people are joining blockchain.info than losing interest. Posters need to stop repeating the same mistakes over and over and recognize that these statistics are not predictive or representative of anything. In a few days, they will come back and ask "the number of transactions is increasing, so why hasn't the price risen?" as if the flaws in this line of reasoning haven't been debunked over and over before.

Then, you have people who continue to post, even after simple statistics clearly proves otherwise, that "you have to wait 10 minutes" for your transaction to get confirmed. You don't have to wait 10 minutes, or 5 minutes; the expected wait when you publish a transaction is 6.9 minutes, because each hash is independent of every other hash (review the exponential distribution). Big-time newspapers, which are supposed to get the facts right, criticize bitcoin for being slow because it takes "10 minutes" for a transaction to be sent. If I were the editor of such a newspaper, I would be embarassed that my writers were getting such basic information incorrect repeatedly.

It's reasonable that people make mistakes, but it's unreasonable that even after they are corrected, people are posting the same misleading information over and over again.


Charlie Shrem pleads guilty

Earlier this week, Charlie Shrem plead guilty to operating an illegal money transmission business. The other charges, like conspiracy to commit money laundering, were dropped.

My opinion of Charlie's situation was that he had been caught up in a situation where there was no legal guidance during a time when bitcoins were not recognized by the government as having any value. Karpeles's situation with the Mt Gox account seizure last May struck me as similar (Karpeles had some money frozen by Washington because he had failed to file paperwork). Given the uncertainty at the time, it seemed to me that Shrem would have had no idea he was required to obtain a license, and he had been caught violating a law of which he was unaware or of which he had no reason to believe applied to his situation.

But then, when he was brought to the hearing, Shrem said the following: "I knew that what I was doing was wrong. I am pleading guilty because I am guilty." Of course, that changes the entire situation. Rather than Shrem being someone who was caught up in something bigger than him, he admits that he purposely ignored money transmission laws so that he could get rich.

I see this as a more serious crime than the money laundering charge that was dropped, even if he won't go to prison for this one. Money laundering is a made up crime that only exists so that cops can jail people who commit other more serious crimes (and those more serious crimes should be dealt with directly, even if that means that law enforcement is less effective.) Money transmission laws, however misguided, are partially meant to ensure that the people operating these businesses are honest, actually have the collateral to operate, and will not fail spectacularly like Mt Gox did. Shrem says that he ignored laws that were intended to protect consumers, and that it wasn't an accident, which is a serious blow to his reputation.

[Chris Sokolowski]

Regarding the false information, this is not an issue isolated to one specific forum. You would be interested in many of the psychological studies on belief persistence/perseverance. This problem applies to the public perception of many scientific fields, and there doesn't seem to be an effective way to combat the issue. The problem in this case is the documented behavior that the first learned knowledge of an issue is the information most likely to be remembered, even when the person is clearly told that the first explanation was incorrect and given a second (correct) explanation that even they acknowledge to be better than the first.

[greenmon]

Good afternoon! A few thoughts for lunch today:
Second, the phones have bigger screens. I use a Galaxy S3. While I decided not to buy a new smartphone for this two year cycle, the main complaint I have with the S3 is that its screen is too big. If I were to buy a new phone, the main reason I would do it is to get a smaller phone that can fit in my coat more easily. Consider the strange idea that cell phones from ten years ago were smaller than this new iPhone. I was again talking with Chris yesterday and he suggested that the reason that Apple is pushing these large screens is because large screen phones have a higher profit margin than phones with smaller screens. Whatever the case, phones with such large screens don't do a good job at anything. They are too big to easily carry around, but their screens are too small to use to watch videos or enjoy media on. If I needed a large screen, I would buy a tablet.

You can type on them. People use their phones more for messaging than they do calling people nowadays.

I have an iPad. It's too big to type on. I have an iPod Touch. It's too small to type on. I'm glad that the new iPhone is addressing this.

(By the way, large phones are very popular in East Asia, especially with women — They just keep them in their handbags. Apple has lost a lot of business so far by not catering to this market. They might not be able to get it back.)

Then, you have people who continue to post, even after simple statistics clearly proves otherwise, that "you have to wait 10 minutes" for your transaction to get confirmed. You don't have to wait 10 minutes, or 5 minutes; the expected wait when you publish a transaction is 6.9 minutes, because each hash is independent of every other hash (review the exponential distribution). Big-time newspapers, which are supposed to get the facts right, criticize bitcoin for being slow because it takes "10 minutes" for a transaction to be sent. If I were the editor of such a newspaper, I would be embarassed that my writers were getting such basic information incorrect repeatedly.

I don't really understand this. Is it possible that it can take about 10 minutes?

[Steve Sokolowski]

I don't really understand this. Is it possible that it can take about 10 minutes?

The average amount of time between blocks is ten minutes. I don't know what people are thinking, so I can't say what people's thought patterns are, but the most common issue I've found is that people believe the blocks are required to occur every ten minutes, not that they occur every ten minutes on average.

I think that people are used to things with regular schedules, like trains. If a train runs every ten minutes, then when you get to the platform, you can expect to wait five minutes for the next train. You could get there just before the next train arrives, or just after the previous train leaves, but if you do this enough times, you'll wait for five minutes on average. The reason for this number is that trains are dependent upon each other; the schedule requires that they be spaced a certain amount of time apart because there is only one track and only so many passengers. You can't have one train arrive right after the other because they simply can't take up the same space.

Bitcoin blocks aren't dependent upon when the last block occurred. It's possible there could have been ten blocks in one minute, or it's been an hour since the last block, but that is irrelevant. There can be as many, or as few, blocks as you can imagine in any given interval. The exponential distribution, which you can search for online, computes the probability of something having happened given a certain number of trials from now. In the case of the bitcoin network, you can put numbers into the distribution and the point at which the probability of a block having been found reaches greater than 50% is 6.9 minutes.

The 6.9 minutes is always true, if there isn't a huge difficulty spike. It doesn't matter if a block has just been found or it's been a long time since the last block. No matter what time it is, there is always an expected wait time of 6.9 minutes until the next block is found, which means that any transaction with a fee that is published will wait, on average, 6.9 minutes until it is included in a block. This isn't intuitive, which is probably why most people keep repeating the incorrect information that it takes 10 minutes. Humans are used to things occurring on a regular schedule, so experience leads them to perform calculations as if there is a certain amount of time remaining until a block must be found.

By the way, this is true for almost any statistic you see on the news that is completely random. For example, if a meteor the size of the one that struck Russia last year is expected to hit the Earth every 100 years, then the next meteor is most likely to hit around 69 years from now, not 50 years or 100 years from now. If we survive without being killed by a meteor until next year, the expected time until such a meteor hits the earth still remains at 69 years and does not change. We don't become "overdue" for a meteor strike just because we've been lucky.