Cryptocurrencies, 1: What Exactly Is Bitcoin?

Everybody knows that Bitcoin is a “digital currency”. But what does that really mean, and what is Bitcoin really good for? Who developed it? Turns out, oddly, that we don’t actually know. Can you buy a pizza with it? Turns out that perhaps the most famous pizza purchase of all time was made with Bitcoin.

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The Massive SolarWinds Hack: A Work of Art

With all the uproar around the election in December, the news of the SolarWinds data breach did not get the attention it deserved. Some well-resourced foreign organization, almost certainly in Russia, succeeded in infiltrating the data systems of an astounding 18,000 or more U.S. organizations. These included major federal agencies such as the Pentagon, the Department of Homeland Security, the State Department, the Department of Energy, the National Nuclear Security Administration, and the Treasury, and other big targets like Microsoft, Cisco, Intel, and Deloitte, and organizations like the California Department of State Hospitals, and Kent State University. Security watchdogs run out of adjectives (“11 out of 10”) in characterizing the magnitude of this hack.

At the same time, security experts cannot help admiring the sheer artistry of this exploit. Hackers themselves often view their codes as a work of art. According to one cybersecurity expert, “Programmers and hackers like to sign their work like artists…So they sign that code in various ways. Often, they’ll leave their initials or they’ll try to be cute and put some sort of cryptic message.” So how was this hack accomplished?

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Going back to the gym?

Who doesn’t want to be stronger? You can get on the floor and do 5 pushups right now. Did you do it? Probably not. (If you did, great work.) For most people, nothing is stopping you from getting strong, except yourself.

I just keep sitting around. Going to a gym and meeting with an instructor in person used to be a way around this problem. This takes our human foibles and makes them work to our advantage. The sunk cost fallacy can work for us.

If you bought a stock and it’s a loser, you should sell! Too many people keep holding and go down with the ship.

However, knowing themselves, many people also go to the gym and sign up for a class. Not wanting to walk away from their investment, they actually do the classes.

The WSJ reports that many gyms are closing after Covid-19 forced the customers out. The article describes the machines people have brought into their homes to replace gyms. The Peloton is a signature of the year 2020. The new trend brings a live human trainer into the process of exercising alone at home.

The new machines can collect data on the user. This data is transmitted to instructors and maybe even friends. Now, from the comfort of your own home, you can “sign up for a class” again.

Had Covid struck in 1980, people might have bought fitness machines for their basements and they might even have bought a VHS to pop in and exercise with. But they would have been missing the link to a human who knows where they are supposed to be, which apparently provides more motivation.

The market has loved Peloton and smart money seems to think it will continue to do well, even with a vaccine already rolling out.

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The Sound of Silence

I became aware of SlateStarCodex during the online kerfuffle over the popular blogger, Scott, getting his real name and professional identity exposed by the NYT. He’s written a new post about the whole event. He is a victim of sorts, but he doesn’t ask for more sympathy than he deserves. His story is an interesting case study concerning free speech and the internet.

See here the consequences of becoming a known figure in 2020. Quotes from Scott:

The New York Times thought so. Some people kept me abreast of their private discussions (in Soviet America, newspaper’s discussions get leaked to you!) and their reporters had spirited internal debates about whether I really needed anonymity. Sure, I’d gotten some death threats, but everyone gets death threats on the Internet, and I’d provided no proof mine were credible. Sure, I might get SWATted, but realistically that’s a really scary fifteen seconds before the cops apologize and go away. Sure, my job was at risk, but I was a well-off person and could probably get another.

So, you know, death or abuse and unemployment is all. Scott recognizes that some people have it worse. He used his situation to discuss the whole issue of anonymity. Why do people want anonymity to discuss their ideas? Scott brings us some data:

And: a recent poll found that 62% of people feel afraid to express their political beliefs. This isn’t just conservatives – it’s also moderates (64%), liberals (52%) and even many strong liberals (42%). … And the kicker is that these numbers are up almost ten percentage points from the last poll three years ago

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Fitbit got 2 billion and all I got was an email

I made a Fitbit account years ago, even though I don’t wear one. As a user, I got an email on Jan 14, 2021 alerting me that they just sold Fitbit to Google. The email assured me that Google will not try to muscle Fitbit users away from iPhones or iOS. Google has said that it will keep Fitbit data “separate from other Google ad data.” TechCrunch had some more details for me, including how many billions of dollars Fitbit was getting out of this deal.

Is it so bad to see adsbased on your sleep habits? What if you had a bad night and then saw more coffee ads the next day? Seems fine. Is it more “creepy” than seeing an ad for something you just bought?

I don’t actually know much about Google’s data structure. But I can imagine ways that a large tech company could use Fitbit data in a way that users would not like. What if Google knows that you didn’t sleep well this week. Say someone else is using Google search to find a person to recruit for a desirable job in Public Relations. What if predictive models indicate that people who don’t get at least 6.5 hours of sleep per night are low performers? What if you ended up not getting linked up with your dream job, because you weren’t sleeping well one week? This is all speculative. What if Google starts measure how your heart rate responds to viewing various website that you access through Chrome? Have they agreed to not do that as part of the acquisition deal?

In 2018, Tyler sat down with Eric Schmidt, a senior executive of Google. Tyler asked him why Google doesn’t use their massive stores of data to inform investments for a hedge fund. Here was the reply:

SCHMIDT: Well, I’ll give you a more generic answer, which is, from the moment I joined the company, there were many people who said, “Why don’t you take this information and do something that will use it for marketing purposes?”

And the answer is always the same, which is that you need people’s permission to do that, and you can be sure you won’t get that permission, if you follow that reasoning. So we decided that was a pretty bright line. For example, if a tech company that were a consumer company were bundled with a hedge fund, you would have to disclose that it was being used in that context. The people would go crazy.

But the other thing that’s true — and Google was good about this — is we took the position that it was important for us to disclose everything we were doing as well as we could.

I’ll give you a governance argument. In a large company, the employees are independent citizens of humanity, and if they see corruption in your leadership — in other words, if they see you doing things which are inconsistent with the values, you will be criticized.

Schmidt doesn’t deny that Google could take advantage of data in order to become a successful hedge fun. He says that it would look bad, and Google doesn’t want to look bad even to its own employees. Hmmm, right? I don’t bring this up to accuse Google of wrongdoing. It just makes you wonder how things will unfold in the future. One can, at least, see why the acquisition of Fitbit was scrutinized.

I use Google products heavily on my laptop. I don’t have many “smart” devices aside from my smartphone. I wore the Fitbit step tracker for a few days, but I didn’t find the information to be helpful. It’s not like the Fitbit does the dishes for me or drives me to the gym. Get me that smart device and I’ll look at any ads you want.

Rules versus Discretion in Soccer a.k.a. Football

It has been pointed out that the only thing funnier than “someone who never played the game” trying to improve soccer is someone who calls football “soccer”. Admittedly, the nomenclature I use is endogenous to my audience, but that is neither here nor there.

The rules of football are perfectly distilled examples of the merits of rules versus discretion in optimal policy. Historically, the “laws of the game” codified by FIFA was a relatively sparse tomb that made copious use of the phrase “in the opinion of the referee”. This reliance on referee discretion has contributed as much to the evolving game as globalization, nutrition, and greater athleticism. YouTube is a wonderful place to watch footage of older matches and stare aghast as the world’s very best players try to shatter each other’s tibias and femurs every few minutes. (Brief digression: to really appreciate this, watch this collection of George Best dribbling and note how to succeed at dribbling at any time meant the opposition would inevitably try to break his legs). As our cultural norms have shifted, away from preferences for ultraviolence on fields of play, so too have the enforcement norms amongst football referees. This is at the margin, mind you, with many inframarginal fans and participants left indignant by the cowardice imposed on the game.

I previously questioned the overreliance of the game on referee discretion, much the way I sometimes questioned discretion in monetary policy. My views on monetary policy have shifted somewhat away from pure rules commitment, in part because of what I have viewed in football, and the introduction of a massive institutional shift away from discretion in two dimensions has been nothing sort of disastrous for the experience of both watching and playing a high-level professional game. The introduction of Video Assisted Replay (VAR) and its application to the enforcement of 1) Offsides and 2) Handball infractions has changed not just how the game is optimally played, but the entire emotional arc of observing and playing the game.

  1. Offsides
Premier League are considering removing the drawn lines when using VAR for offside calls

The offsides rule is quickly defined as such: you may only pass the ball to a player who has between themselves and the goal either i) the ball or ii) two opposition players. The two player bit always confuses people until they remember that the goalkeeper counts as a player.

The rule is, historically speaking, revealing in its continued structure. First, it is on its face silly that they’ve never changed the rule to “one non-goalkeeper between the player and the goal” and make an already cognitively challenging rule to monitor that much easier to enforce. It seems like the kind of rule change easily smuggled in with little opposition, not unlike eliminating offsides for throw-ins, which happened roughly a century ago. Second, there has always been a looseness to what body parts can place a player offsides – in a sport where hands cannot be used, it seems odd that they might shift the imagined lines.

For the purposes of this discussion, what matters is that what might seem a rule with little gray area was actually rife with two forms of important discretion. First, the already alluded to application to body parts. Second, given that a linesmen 40 yards from the middle of the pitch must track the ball and players often 50 yards from it, the triangle of vision they must manage simply does not allow for fine-grained analysis. They’re not tracking limbs, they’re tracking center mass, and barely at that. All of this adds up to enforcement guided by the discretion of the referee and the norms that inform them. Those key norms over time boiled down to 1) Even is onside, 2) When in doubt, the benefit is given to the attacking player, 3) the only parts that should matter are those that can play the ball i.e. flailing arms don’t count. Defensive lines were welcome to play an offside trap i.e. a high line with a governing centerback managing the line and yelling “step!” when a key offensive player might be put in an offside position. But such a strategy came with the risk of relying on a cognitively overwhelmed linesman not leaving your hapless goalkeeper one-on-one against a marauding forward.

VAR was erroneously introduced on the false premise that the weakness of offsides enforcement was the fuzziness of observation when, in fact, the entire institution was predicated on that fuzziness. Without that fuzziness, the advantage shifts strongly to the defensive player(s) because they are facing the passer, giving them the half-second to step forward, placing the offensive player offsides. Such a strategy was too much of a gamble before – placing a player 3 inches offside was sufficiently unlikely to be acknowledged, and goals too scarce, to warrant frequent reliance. Further, as it turns out, the “even is on” norm is critical to offensive counter-attacking. Which leads to the single greatest error in the introduction of VAR: the comically thin 1-pixel lines with which positioning is assessed. Presented with the fallacy that video technology could assess position with <1inch precision, “even is on” ceased to exist because effectively no two players would ever be deemed even. Without additional explication, I will simply note that assessing when a pass was executed is sufficiently fuzzy that <1 inch precision is not on offer.

How to fix it

It’s actually fairly simple in this case – you reconstruct VAR to mimic the ideal referee of the past. You make the lines wider. If those lines overlap at all, the players are deemed even. The system should either a) assign the body parts that are relevant to the rule and make the lines 6-10 centimeters wide or, b) construct the lines at center mass and make them 15-25 centimeters wide. In this manner, we get the best of both worlds – the key elements revealed by 100 years of discretionary enforcement and the uniformity of computational augmentation.

2. Handball

FIFA's takeover of the handball law has led to greater controversy and uncertainty

There is this silly posture that players now frequently assume, with their arms hidden behind their backs, as they try to move about athletically without the balance of their arms (it’s really hard, try it some time). This posture is a product of the rule that any violation inside the your defensive penalty box results in a penalty kick which results in a goal roughly ~70% of the time. That’s a very high value event when fixtures average fewer than 3 total goals per game, and is actually even higher value when you consider that scoring opportunities are endogenous to the current score i.e. teams are more conservative with a lead.

In case you did not know, you can’t use your hands, or arms, in football. You’d be within your rights to imagine that players have always gone about pegging the ball at the other teams arms when in the penalty box, trying to draw penalty kicks. You’d have been largely wrong though, for the simple reason that referees have historically been reluctant to reward such tactics. Under the loosely codified rubric of intent of action, proximity to the strike of the ball that eventually contacted their arm, awareness of the ball, or other such language, referees repeatedly made it clear that the penalty they least desired to award was one for a nebulous handball.

VAR stepped in, along with some mind-bogglingly stupid reinterpretation of the handball rule and said “Nope, if it touches the defending player’s arm in the box, it’s a penalty, and absolute chaos ensued. professional players quickly realized that any outstretched arm was to be chipped at and any leaping defender was to be collided with, in the hopes of producing a random arm-ball contact and, in turn, seven-tenths of a goal. Everyone hated it.

So what went wrong? Once again, it’s a case where the equilibrium of the game had evolved to entirely depend on discretion. The penalty box, and its single-sanction system for violations, was designed to deter teams for being overzealous in defense, and give attacking teams fair opportunity to score. That single-sanction, however, was so strong, that it only held in equilibrium through its discretionary, and therefore unpredictable, application by the referee. Sure, it’s arguably the single most powerful referee tool in major sports, but given that soccer is the most popular sport in the world, it certainly warrants respect as a stable second-best solution.

When VAR robbed the institution of its discretionary fuzziness, however, the equilibrium was shattered and the combination of a single-sanction system with a rule that cannot be perfectly complied with, well, the game was sent into minor chaos. The de factor rules had shifted so rapidly and so completely that neither players nor fans understood what was happening. Everyone was thinking more about if and when balls were in contact with arms than if and when it might go in the net. That’s not the ideal equilibrium for a sport, particularly if you’d prefer highlights that are more than penalty kicks (which make for exceedingly boring viewing).

How to fix it

There’s no getting rid of the handball rule. There’s no way to eliminate random contact with arms/hands. There’s no way to adjudicate intent well. If you can’t change the rule and you can’t change the monitoring quality, there’s only one thing left to do: change the punishment. Football should walk away from the single-sanction system.

Indirect free kicks from the spot of the handball

Why Indirect free kicks in the penalty box?

  1. They offer lower expected value than penalties,
  2. The expected value that does emerge reflects the ability of both teams, rather than just the shooter and goalkeeper.
  3. They sneak in a little bit of referee discretion when they identify the spot of the foul i.e. location determines value.
  4. They are fun as hell.

Which obviously brings me to monetary policy

Classic arguments about rules versus discretion are typically about constitutional constraints of elected and appointed officials. Maybe the most salient to our modern lives is how the Federal Reserve should go about it’s policy of increasing or decreasing the money supply i.e. what is the optimal amount of inflation? Regardless of what that number might be, or whether it should be adjusted with the assessed stage of the business cycle, the underlying argument is really about whether or not the targeted number should be chosen by people or set by a rule to which we are bound by a codified pre-commitment.

I myself was once a hard line “rules” person, or at least as hard line as one can be without being a monetary economist by field or training (for an informed opinion, ask this guy). Over time, though, I’ve come to appreciate that rules only work if we know what we are doing when we set them and if we can credibly commit to them. These are big “if’s”. The reality is that there is no such thing as a “pure rule” setting – some amount of discretion is always baked in. If you can’t identify exactly where the status quo discretion is, or, more importantly, why we arrived at the current equilibrium level of discretion, you should proceed with extreme caution. You may find that the discretion you didn’t know was there was the only thing keeping the system afloat this whole time.

The Feel of Money

The Federal Reserve System has the ability create virtual dollars with the stroke of a key. They also issue the physical bills of U.S. currency ($1, $1, $2, $5, $10, $20, $50, and $100). The actual manufacturing of the bills for the Fed is done by the federal Bureau of Engraving and Printing.

Wouldn’t it be nice if you could just print up a bunch of $100 notes yourself? Well, the feds have already thought of that, and include an ever-growing array of features to make it hard to duplicate these bills.

Counterfeiting of dollar bills has a long history. Following a distasteful experience of runaway inflation with paper money during the Revolutionary War, the U.S. remained primarily on a gold standard for most of its existence. The first major issuance of paper money was in 1862, to help finance the Civil War. Counterfeiting of these bills soon became a major problem, with up to half the dollars in circulation being phony. A primary mission of the U.S. Secret Service when it was founded in 1865 was to combat counterfeiting.

During World War II, the Nazis in “Operation Bernhard” succeeded in producing enough counterfeit British money that the U.K. had to switch production of banknotes to a different format. The work was carried out by prisoners at concentration camps. Later in the war, the prisoners were tasked with counterfeiting U.S. currency as well. Due to the security features in the dollars, this was a more complex task. Also, the prisoners realized that their chance of being killed was higher after they succeeded in devising a process for making counterfeit dollars, so they slowed the work down as much as they could.  The $100 bill has been a frequent target of more recent counterfeiters, including the British Anatasios Arnaouti  gang and (allegedly) North Korea.

Modern U.S. currency includes numerous feature which make it difficult to duplicate. Only about 1 note in 10,000 in circulation is fake. You can click this link

The Seven Denominations | U.S. Currency Education Program

to zoom in on each of the seven denominations of U.S. currency and see the current security features for each one. The more valuable bills get more sophisticated. The $100 bill has color-shifted numerals and bell image, a 3-D security ribbon with shifting images of bells and 100s, a security thread which glows under ultraviolet light, and subtle watermarks. Magnetic features are also included.

But it turns out that one of the most reliable and hard-to-duplicate features of dollars is the feel in your fingers, a result of the material they are made from and the printing process which gives a 3-D texture:

Perhaps the most difficult-to-duplicate counterfeit deterrence feature of U.S. banknotes is its unique yellow-green paper, manufactured under close security by a single U.S. firm from a mixture of 75 percent cotton and 25 percent flax. When combined with intaglio-printed images and numerals, this gives the notes a unique “feel,” which surveys have reported is the most common method of counterfeit detection by the public and bank employees.

So, if you want your own $100 bills, it looks like you will have to earn them, or wait for the next stimulus check to arrive.

Gender and computer attitudes

I’m currently working on understanding the gender gap in tech careers. Here’s a paper published in 2016 about a survey conducted in 2011. They found that male students reported more time on the computer for leisure. However, if they asked about computer use for school activities, there is no gender difference. The question remains as to how much one’s leisure time and subjective attitudes affects one’s ability to take a high-income software engineering job.

This study responds to a call for research on how gender differences emerge in young generations of computer users. A large-scale survey involving 1138 university students in Flanders, Belgium was conducted to examine the relationship between gender, computer access, attitudes, and uses in both learning and everyday activities of university students. The results show that women have a less positive attitude towards computers in general. However, their attitude towards computers for educational purposes does not differ from men’s. In the same way, being female is negatively related to computer use for leisure activities, but no relationship was found between gender and study-related computer use. Based on the results, it could be argued that computer attitudes are context-dependent constructs. When dealing with gender differences, it is essential to take into account the context-specific nature of computer attitudes and uses.

Vaccine Innovation: A Marvel of Modern Science and Modern Markets

We’ve already talked about different methods for distributing the vaccine in the face of limited supply on this blog (see my post and Doug Norton’s post). But today I want to talk about something different: the speed at which this vaccine was developed. It is truly amazing.

Timeline showing a comparison of vaccine development timescales from Typhoid fever in 1880 to SARS-CoV2 in 2020.

This chart from Nature (adapted from the fantastic Our World in Data) dramatically shows just how quickly the COVID-19 vaccine was developed compared with past vaccines. What used to take decades or even a century was done in mere months (yes, even with all the regulatory barriers today).

Exactly how we developed this vaccine so quickly is a complex story that involves the advanced state of modern science, incentives offered by concerned governments, and the harnessing of the profit motive to advance the public good. We don’t know all the details yet, and likely won’t for a long time since, like a pencil, no one person knows how to make and distribute a vaccine.

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“Rapid Uncontrolled Disassembly”: Musk’s Positive Take on Rocket Explosion

If you haven’t been living under a rock, you probably saw at least one image of Elon Musk’s “Starship” rocket blowing up last week. This is a really big rocket, some 165 ft high, which Musk intends to use to ferry humans to Mars, as early as 2026. And before that, paying passengers like you and I are to climb aboard for brief tourist excursions to outer space.

The rocket is designed to land back on its launchpad, to be ready for its next flight. That part is what went wrong last Wednesday. I snagged three screenshots from the live-streamed SpaceX video on YouTube to show what happened. The first image shows the vessel descending on its rocket jets, obviously dropping way too fast as it neared the ground.

This is what happened upon impact:

Ouch.  It turns out that not enough fuel was getting to the rocket engines to slow the vessel’s descent.

Here are the smoking ruins:

Another man may have been chagrined over this outcome, but not the indomitable Musk. He had given this flight only one in three odds of landing intact, and he was ecstatic over the vast majority of things that went right, and the useful data collected. After all, the rocket did successfully take off, ascend to 40,000 ft (12 km), and mainly descend in the desired horizontal orientation to minimize overheating. Right after the blast he tweeted:

“Fuel header tank pressure was low during landing burn, causing touchdown velocity to be high & RUD, but we got all the data we needed! Congrats SpaceX team hell yeah!!”

 When you are Elon Musk, a little RUD (Rapid Uncontrolled Disassembly) is all in a day’s work. Which may be partly why he accomplishes so much more than most of us.