• By Amy Castor and David Gerard

Crypto is still hungover from New Year’s and there’s no news. So we asked readers what they were curious about in crypto. [Twitter; Bluesky]

Keep your questions coming for part 2, some time or other!

Sending us money will definitely help — here’s Amy’s Patreon, and here’s David’s.

Q: I keep wondering what’s keeping the circus alive, given that the retail dollars are practically gone, and the last remaining on/off-ramps are all but down the drain. [Tomalak on Bluesky]

The circus is fed by dollars — real and fake — and its product is hopium, the unfaltering belief that number will always go up. The hopium runs on narratives, such as the current story that a bitcoin ETF will result in a magical influx of fresh dollars.

In crypto, the retail dollars have largely gone home — but too many people have large piles of crypto accounted as dollars to let the number go down. So they deploy fake dollars to keep the crypto flowing.

There are currently 93 billion dubiously-backed tethers sloshing around the crypto markets. We expect that to go over 100 billion as we get closer to the bitcoin mining reward halving in April.

The circus is advertised by the crypto media, which functions as PR outlets for the space. The CoinDesk live-wire feed on any given day is about half hopium, for instance. There are no respectable media outlets in a crypto winter.

(Except us, of course. Subscribe today!) 

Q: Why can’t or wouldn’t the average investor make money in crypto? We criticize it, and rightfully so, but why should the person looking to make a profit care? [King Schultz on Twitter]

There is no source of dollars other than fresh retail investors. Old investors can only be paid out with money from new investors.

Crypto isn’t technically a Ponzi scheme — it just works like one. So investing in crypto will always be a slightly negative-sum game.

Functionally, crypto is a single unified casino, run by a very small number of people, with no regulation. Binance is the tables, Coinbase is the cashier window. The flow of cash is from retail suckers to very few rich guys at the top.

There are many, many complicated mechanisms in the middle, and they’re fascinating to look at and describe and watch in action. But the complex mechanisms don’t change what’s happening here — money flows from lots of suckers to a few scammers.

Some people make money in crypto, just like some people make money in Las Vegas — but gambling in Vegas isn’t an investment scheme either. And the house always wins.

You can make money in crypto if you’re a better shark than all the other sharks in the shark pool, who built the pool. It can be done! Good luck!

Q: be interested in reading about money laundering [Broseph on Bluesky]

Money laundering is when you try to turn the proceeds of crime into money that doesn’t appear to be the proceeds of crime. Laundering money is also a specific crime in itself.

With money going electronic, it’s harder to obscure the origins of ill-gotten gains and avoid unwanted attention from banks and the authorities. Many crooks have attempted to launder money by using crypto as the obfuscatory step.

Bitfinex money mule Reggie Fowler set up a global network of bank accounts. He told the banks the accounts were for real estate transactions. He was sentenced to six years in prison.

Heather “Razzlekhan” Morgan and Ilya Lichtenstein tried laundering the bitcoins from the Bitfinex hack through the Alphabay darknet market. This would have completely covered their trail! Except that the police had pwned Alphabay by then, and Lichtenstein’s transactions were all right there for the cops to track him. Whoops.

We also highly recommend Dan Davies’s fabulous book on fraud, Lying for Money.

Q: Not so much baffled but curious as to how law enforcement can and does identify people using blockchain. Also, do some coins not have a public blockchain? [Bob Morris on Twitter]

Cryptocurrencies run on publicly available blockchains. In theory, you can trace the history of every transaction on a blockchain right back to when it started.

The hard part for authorities is linking someone’s real-world identity to a specific blockchain address. Achieving this was the key to busting Heather Morgan and Ilya Lichtenstein, for instance. The hardest part for crooks is cashing out successfully without being busted.

The trail can be difficult to trace, especially if the crook has put effort into obfuscation — e.g., running transactions through a mixer such as Tornado Cash. But specialists can get good at tracing blockchain transactions and several companies sell this as a service.

Privacy coins like Monero and ZCash try to obfuscate the traceability of transactions on the blockchain itself. But users often give themselves away by other channels — e.g., transaction volumes elsewhere that coincidentally correspond to amounts of Monero sent to a darknet market.

Even if you can protect yourself cryptographically, one error can leave your backside hanging out — and crypto users are really bad at operational security.

Q: nfts aren’t really relevant these days but I’ve never been clear on what ‘mint events’ are and how they relate to the icos. Are users generating new nfts paid for by using the coins they previously bought? [Robert Kambic on Bluesky]

Initial coin offerings (ICOs) were huge in 2017 and 2018 — but the SEC came down hard on them because they were pretty much all unregistered offerings of penny stocks.

Since that time, crypto has tried to come up with other ideas for doing unregistered offerings while making them look at least a little less illegal. There were SAFTs, airdrops, and now NFT mint events. These are all about creating fresh tokens out of thin air and promoting them as an investment in a common enterprise that will make a profit from the efforts of others.

A “mint event” is when you buy into an NFT collection early — when it first mints — hoping the value will increase astronomically over time.

But these are not securities, no, no, no. Yuga Labs wasn’t selling you shares in a company — they were selling you ape cartoons! You weren’t getting dividends, you were getting Mutant Apes, dog NFTs, and ApeCoins! You’re not investing in a speculative startup, you’re buying art!

The SEC has so far sued one NFT company, Impact Theory, after it raised $30 million through NFT sales. The SEC said the NFTs were promoted as investment contracts and not registered. [Complaint, PDF]

We didn’t say too much about NFTs in our 2024 predictions, but we expect that the SEC will go after more NFT projects this year, as they clear their backlog of violators.

Q. I’d like a definitive explanation on the amount of apes you can feed with a single slurp juice. [Etienne Beureux on Twitter]

Slurp juices were popularized in a tweet about Astro Apes, a Bored Apes knockoff, which also featured tokens called “slurp juices” that you could apply to your Astro Ape tokens to generate more Astro Ape tokens and get rich for free.

The tweet was posted on May 4, 2022 — just a few days before Terra-Luna exploded and popped the 2021-2022 crypto bubble.

Also, the guy who tweeted about slurp juices is a neo-Nazi. Welcome to crypto. [BuzzFeed News]

Q: I’ve often wondered why new languages like Solidity were necessary for smart contracts. [David John Smailes on Twitter]

The Ethereum team originally just wanted to use JavaScript, but it didn’t quite do what they needed in terms of functionality and data types — so they created Solidity, a new language based on JavaScript.

A blockchain is an extremely harsh programming environment. It’s hard or impossible to modify your code once deployed — you must get it right the first time. It’s about money, so every attacker will be going after your code.

In situations where programming errors have drastic consequences, you usually try to make it harder to shoot yourself in the foot — functional programming languages, formal methods, mathematical verification of the code, not using a full computer language (avoid Turing completeness), and so on.

Solidity ignores all of that — and the world’s most mediocre JavaScript programmers moved sideways to write the world’s most mediocre smart contracts and cause everyone to lose all their money, repeatedly. Smart contracts are best modeled as a piñata, where you whack it in the right spot and a pile of crypto falls out.

Other blockchains saw Ethereum-based projects making a ton of money (or crypto) and wanted that for themselves — so they tend to just use the Ethereum Virtual Machine so they can run buggy Solidity code too.

There are other, somewhat better, smart contract languages — but Solidity is overwhelmingly the language of choice, which keeps the comedy gold flowing nicely.

Q. Miner extracted value? [Cathal Mooney on Twitter]

Miners — or now validators — supposedly make money from block rewards and transaction fees.

There is a third way for validators to make money. Smart contract execution depends on the order of transactions within a block. Since the validator controls what transactions they can put in a block and how they order those transactions, they can front run the traders — the validator sees an unprocessed transaction, creates their own transaction ahead of that one and takes some or all of the advantage that the trader saw.

The term “Miner Extractable Value” was coined in the paper “Flash Boys 2.0: Frontrunning in Decentralized Exchanges, Miner Extractable Value, and Consensus Instability” in 2020. [IEEE Xplore]

Front-running is largely illegal in real finance. But since the Ethereum Foundation couldn’t stop their validators from front-running their users, they decided to claim it was a feature, which they have renamed “maximal extractable value.” [Ethereum Foundation]

Q: What do you think will eventually happen to all the Satoshi Nakamoto Bitcoin wallets? [Steve Alarm on Twitter]

Quite likely nothing. We suspect the keys, and thus the million bitcoins, are simply lost. Nobody has heard anything verifiably from Satoshi since April 13, 2011, when he sent a final email to bitcoin developer Mike Hearn. [Plan99]

If the Satoshi coins ever did move, there would be a lot of headlines. But we don’t think the crypto trading market would be affected much — the market is so thin, there are multiple large holders who could crash the market any time they felt like it, and the market is already largely fake. We think everyone will just pretend nothing happened and everything is fine.

Q. Did Do Kwon actually sell all his BTC to prop up Luna? [Saku Kamiyūbetsu on Twitter]

Terra (UST) was an algorithmic dollar stablecoin and luna was its free-floating twin. Terraform Labs ran the Anchor Protocol, which promised 20% interest on staked UST. At peak, there were 18 billion UST in circulation.

It turned out there was money to be made in crashing UST — so in May 2022, someone did. There is a strong rumor (and DOJ investigations) that it was Alameda. Other parties who collapsed because of Terra-Luna left the gaping hole in Alameda that eventually killed FTX. If Alameda fired the first shot directly into their own leg, that would be extremely crypto, as well as extremely funny.

UST was crashing, so Terraform Labs tried to prop up Terra-Luna. The bitcoins came from the Luna Foundation Guard, which promised to deploy $1.5 billion worth of bitcoin to defend UST. This didn’t work. [Twitter, archive]

We haven’t found a smoking gun that Luna actually spent the bitcoins on buying up UST or luna. In 2023, the SEC charged Terraform Labs and Do Kwon and said that Kwon and Terraform took over 10,000 BTC out of Luna Foundation Guard in May 2022 and converted at least $100 million into cash.

Q: I’m baffled at the lack of interest from crypto critics that the DoJ will not be pursuing additional charges against SBF. Specifically, the charges that could make some politicians very uncomfortable. [Amer Icon on Twitter]

The issue was specifically whether to further prosecute Sam Bankman-Fried. The prosecution letter to the judge quite clearly explains their reasons why a second case wouldn’t do anything useful in this regard. [Letter, PDF]

The evidence that Sam was the guy who made these bribes was presented in the case that just concluded and will be considered when he’s sentenced in March — they don’t need a second trial to nail those facts down.

Hypothetical other evidence that might have come to light about other parties wasn’t a factor in considering what to do about Sam Bankman-Fried. It’s quite reasonable to want to get those guys, but you will probably need a more direct method than a side factor in an additional case against a guy who is already likely going to jail forever.

Q. snarkier memes would be worthy [Chris Doerfler on Twitter]

“Esto no puede ser tan estúpido, debes estar explicándolo mal.”

We did a follow-up on this story. Part 2, though not labeled as such, is here!

Image: Amy Landers and Dear David reading today’s Web 3 Is Going Just Great