Full Text Criticizes the 'BTC Black Paper'

Original: Liu Jiaolian

BTC hovered around 63k overnight. Recently, someone dug out a paper written by Nassim Nicholas Taleb in 2021, known as the “BTC Black Book”, and reheated it. As the author of bestsellers “The Black Swan” and “Antifragile”, Taleb gained fame. However, after losing his BTC position in 2020 (or 2021), he angrily used his academic talents to produce a paper criticizing that BTC will inevitably drop to zero, titled “Bitcoin, Currencies, and Fragility”.[1]Interestingly, this carefully crafted “black paper” did not attract much attention and attention in the industry because of Taleb’s fame.

Harold Christopher Burger and others once wrote an article in 2021 refuting Taleb’s thesis point by point.[2]. The specific teaching chain will not be translated here, interested friends can open the reference link at the end of the text to read the original text.

Jiaolian has long read Taleb’s paper. On the whole, apart from taking the form of a trap academic paper, making some pretentious mathematical symbols, and inventing some obscure terms, his criticism of BTC is no more profound than that of other historical critics of BTC.

Due to the recent rehashing of this paper and the current market divergence, many readers have forwarded it to Gate.io and asked for their perspective. So Gate.io decided to write a critique and dissect Taleb’s ‘black paper’ to clarify and answer questions.

First, Taleb’s understanding of the randomness and one-wayness of the BTC chain is completely wrong

In the first chapter of the paper, Taleb attempts to start with “blockchain”. It can be said that he is wrong from the start. Satoshi Nakamoto never used the concept of “blockchain”. What Satoshi Nakamoto wanted to invent was BTC, not blockchain.

The blockchain has said that countless IT professionals are very professional in technology, but they just don’t understand BTC. Why? One of the reasons is that they mistakenly take blockchain as BTC.

Taleb showed off his math skills in the paper. What’s this Monte Carlo simulation, and what’s this von Neumann, so grandiloquent and far-fetched.

When Tetherb saw what Taleb wrote in the paper, “pseudo-random” “sequence” “probabilistically mimicking the arrow of time”, especially when he wrote “the natural nature of the blockchain, transactions are irreversible”, it is very clear that Taleb didn’t really understand Bitcoin at all.

Without BTC, blockchain is just an ordinary data structure. This data structure does not inherently provide the key properties that make up BTC, such as unidirectionality, immutability, Byzantine fault tolerance, and so on.

In fact, Satoshi Nakamoto cited three references on the blockchain data structure in the BTC White Paper. These three reference papers were published in 1991, 1993, and 1999 respectively.

I wonder if Taleb has ever thought about what happened from 1999 to 2009? The data structure of the Block chain used by Satoshi Nakamoto to record BTC transactions is exactly the same as described in the paper more than 10 years ago.

Taleb again spent some ink talking about hash collisions. In fact, the Algorithm for hash reversal (also known as Proof of Work) was proposed by Adam Back as early as 2002. His paper is also the 6th reference in Satoshi Nakamoto’s paper.

Therefore, like many IT professionals, Taleb believes that the three major technologies used by Nakamoto - Hash Algorithm, Merkle Tree, Proof of Work - are all outdated technologies already invented by predecessors, which is very ironic.

Edison’s invention of the light bulb used materials that had been invented by predecessors. Jobs’ invention of the Apple phone, all the components and technology had also been invented by predecessors. So, what did the light bulb and Apple phone really invent?

Just observing from the mathematical (data structure) perspective, it is impossible to understand why BTC can achieve true one-wayness (irreversibility), true arrow of time, true tamper resistance, true Byzantine fault tolerance…

In the 92nd episode of ‘BTC History’, TeachChain specifically discussed this issue, why many professionals’ subjective intuition that ‘there is no real randomness in the blockchain world’ is wrong, the inherent contradiction between ‘randomness’ and ‘verifiability’, and why the BTC system can achieve verifiability while also being truly random.

Please note that this is not a low-level issue, but a high-level one. Understanding this issue needs to span three levels:

The first level: ordinary people. Think that the computer Algorithm can generate truly random numbers.

The second level: computer professionals who have read the well-known work TAOCP by computer scientist Donald Knuth. Understand why computer Algorithm can only produce pseudo-random numbers, not truly random numbers.

The third level: beyond pure computer science, with interdisciplinary thinking of natural science, understanding the theory of Prigogine dissipative structures. Understand the true source of randomness in the BTC system - completely open, permissionless, and fully competitive hash reverse calculation, also known as “PoW Mining”. PoW is the so-called Proof of Work mentioned above.

In fact, when your thinking and understanding of BTC reach the third level, many questions will be understood. For example, consuming a lot of electricity to conduct PoW calculations cannot be ‘improved’ into other algorithms without PoW. Because, the so-called ‘improvement’ is to replace physics with mathematics, which will greatly reduce the system’s ability to obtain randomness and greatly damage the security of the system.

The dissipative structure theory of Prigogine also explains the fundamental reason why the BTC system must be an open system without permission - closed and isolated systems cannot continuously absorb negative entropy from the outside, and they will inevitably decay and perish. At the same time, precisely because the BTC system is a dissipative structure, it can emerge as a true, unidirectional and irreversible arrow of time through Turing forks every moment. This is the content introduced by Jiao Chain in Episode 22 of “BTC Historical Stories” - Dissipative Structure.

Understanding this knowledge, you will know that the time arrow of the BTC system, that is, the “Timestamp server” mentioned by Nakamoto in Section 3 of the White Paper, is the real time arrow, not the “simulated” time arrow mentioned in Taleb’s paper.

Therefore, when we look at the lower-level arguments in Taleb’s paper from a higher level of thinking, we can instantly see the elementary mistakes he has made.

Taleb’s error is fundamental, crucial, and fatal. Once this error is made, his entire thesis basically becomes a skyscraper on quicksand, with no solid foundation, ready to collapse at any moment.

Second, Taleb’s perception that the value of BTC is zero is completely contrary to the facts

At the end of Chapter 1 of Taleb’s paper, he suddenly jumps from discussing the blockchain data structure to discussing the value of BTC being 0. The transition is somewhat abrupt, but let’s put that aside for now. He continues to argue in Chapter 2 that the value of BTC is zero.

His main arguments include:

First, BTC is a zero-sum game. Second, the BTC network requires Miners to maintain its existence, while something like gold can be stored long-term without any cost. Third, zero-interest assets will inevitably encounter the so-called “absorbing barrier”, resulting in the value dropping to zero. Fourth, anything that is expected to drop to zero in value will have a present value of zero. Fifth, gold has industrial and jewelry uses, while BTC does not. Sixth, the physical nature of gold does not have “path dependence”, while BTC is a technology that will always be replaced by better technology.

There is no need to refute one by one. Just one simple fact is enough to refute: in the past 15 years, BTC has not only not dropped to zero, but has instead become stronger and stronger, reaching new highs. Everyone knows that the price in the financial market reflects future expectations. Since the price keeps pumping, it indicates that people expect it to go even higher in the future. If people expect BTC to drop to zero in value, then its price today should be zero. Obviously, this inference does not align with the facts.

Should we revise the theory if it doesn’t match the facts, or should we insist that the theory is correct and the facts are wrong?

It is obvious that the latter approach does not conform to the scientific spirit of seeking truth from facts. When people found that high-speed objects did not conform to Newton’s laws of motion, they did not stubbornly believe that the objects were wrong, but overturned the old theory and invented the theory of relativity to explain the problem of high-speed motion not conforming to Newton’s laws.

It is quite obvious that BTC has not dropped to zero, but has repeatedly hit new highs. This fact alone is sufficient to refute Taleb’s long and smelly argument that the value of BTC is zero and the present value should be zero.

It is also easy to refute each point he made one by one, as almost everything he said is wrong.

For example, the argument of ‘zero-sum game’. Is the value of a zero-sum game really zero? Moreover, what about negative-sum games? Shouldn’t the value be zero? Okay, is car insurance a negative-sum game? Everyone pays premiums, and the insurance company takes a portion as operating expenses and profits. The remaining pool of funds is distributed among those who paid premiums based on the expenses incurred in accidents. This system is definitely a zero-sum game or even a negative-sum game. So, does car insurance have no value? Of course not.

For example, ‘gold doesn’t need maintenance costs.’ Taleb obviously cannot distinguish between gold as gold and gold as currency. Marx said that gold and silver are not naturally money, but money is naturally gold and silver. Gold as gold is just an element of the universe. Gold as currency is essentially a carrier of human social production relations.

As the golden standard for currency, it obviously requires extremely high maintenance costs. It takes a huge amount of infrastructure and force to safely store and protect. The transportation is extremely slow and expensive. In contrast, the security cost of BTC (cold wallet) and the long-distance transportation cost (network transmission) are ten thousand times better than gold.

For example, ‘zero-interest assets’. Gold is also a zero-interest asset, according to Taleb’s theory, it should also drop to zero. He also uses the DCF valuation model to prove it. This is meaningless. Valuation models are just human subjective thinking patterns. In fact, Wall Street has long surpassed these constraints. Internet companies can obtain high valuations without profits, which does not conform to DCF (discounted future cash flow). The relationship between future cash flow and value is not absolute, it is just a subjective perception of whether they are related or not.

The illusion of productive assets generating interest and Dividend is not original to Taleb. Buffett criticizes BTC, and this is the most commonly used reason. In fact, from the perspective of universal laws, are there really any productive assets? The direction of the universe’s evolution is eternal destruction, and the end point is heat death. The only value that increases is only a temporary illusion obtained at the expense of greater damage to the surrounding environment and the value of others.

A factory, a company, can continuously provide so-called Dividend and Interest to capitalists, based on its ability as a system to continuously obtain value from the outside and extract surplus value from it for distribution according to capital. If one day it becomes corrupt and declines, it can no longer continue to obtain value and cannot generate interest.

Using the dissipative structure theory of Purico mentioned in the previous teaching chain to view the Dividend system of enterprise and the non-interest-bearing system of BTC, it is only the difference in the method of value distribution, and their essence is to absorb value from the outside. The more open, flexible, and vital a system is, the longer it will survive and continue to rise. Obviously, centralized and bureaucratic enterprises, which are prone to ossification, are definitely not the same species as the decentralized and highly open BTC system. The vitality and value absorption capacity of the former are far inferior to the latter efficiency!

As for the issue of ‘practical value’, it’s an outdated question, and the coach is too lazy to debate it. Has Taleb even failed to understand basic economics? How can value and practical value be confused? Air is very practical, it can’t be lacking for even a second, but its value is zero. A dollar bill has almost no practical value (it’s even too hard to use as toilet paper), but it has a value of up to 100 dollars.

Also, ‘technological replacement’ is also a sign of unclear thinking. The technology used by BTC can be replaced, but BTC is still BTC. This is the ‘Ship of Theseus’. It is said that most of the cells in your body will probably be completely replaced in about 7 years, but you are still you!

Replace every plank of the ship BTC with a new one, and it is still BTC. If you replicate BTC using other planks in a 1:1 ratio, it is not BTC. Even if you assemble a new ship using the planks from BTC, it is still not BTC.

Three, Taleb’s misconception that BTC as a payment currency is a failure

Chapters three and four of Taleb criticize BTC as a failed payment currency.

Indeed, BTC is not currently widely used as a payment currency.

However, those who understand the laws of currency development know that the development stages of BTC should follow such historical patterns:

First, start as a niche toy and collectible. Then evolve into a speculative product. Then evolve into an investment product, that is, a store of value (SoV). Then evolve into a medium of exchange (MoE). Then evolve into a payment tool. Finally, it may become a world currency and pricing unit (UoA).

Today, BTC has only just transitioned from a speculative product to an investment product and SoV after 15 years of development.

Isn’t it funny that BTC, which lacks widespread applications for payment tools (can’t buy things) or the nature of a pricing unit (can’t be recorded on accounting spreadsheets), is considered a failure so far?

It’s like saying, when you were a 1-month-old baby in Taleb, you said, “You see, this person can’t walk, he’s a disabled person who has failed.” Isn’t that a ridiculous assertion?

Four, Taleb’s misconception that BTC is a failed hedge against inflation

Taleb did not specify which definition his inflation refers to.

If inflation is the original definition, that is, the excessive issuance of currency. Then, BTC is obviously a very sensitive currency point shaving and water withdrawal indicator, and will have a fairly sensitive response to the monetary policy of the Federal Reserve.

If inflation is a definition that has been later tampered with, specifically referring to a carefully selected basket of price pump. Then, in the long run, BTC is actually a great counter to the price pump, playing a role in preserving and appreciating value.

There are many empirical studies on this, and I won’t go into detail about the teaching chain.

Taleb shamelessly claims in his paper that maintaining stability in a basket of commodities is good inflation Hedging.

His idea reminds the education chain of Wei Dai’s early b-money proposal. Unfortunately, Satoshi Nakamoto clearly pointed out that there is no way to peg the price of the outside world under the condition of Decentralization. Therefore, Satoshi Nakamoto believes that the best design is to keep the quantity of currency stable, while allowing commodity prices to fluctuate relative to the currency (BTC).

From the perspective of game theory, this is the best monetary policy and solution.

Taleb is talking nonsense with his eyes open in Chapter 5 of the paper.

5. Talib’s cognitive errors about other misconceptions

In the final chapter of Taleb’s paper, he added and listed 4 additional so-called “fallacies”.

The first is the fallacy of so-called libertarianism. This is a straw man attack. Satoshi Nakamoto never said that BTC is a branch of the Austrian School of Economics. I also said that BTC is a branch of the Marxist School of Economics. Taleb takes other people’s interpretations of BTC and uses them as arguments against BTC, which is like setting up a target and shooting it himself. It doesn’t make any sense. JiaoChain doesn’t want to say much.

The second is that BTC is not a safe-haven asset. Taleb criticizes BTC for not being able to resist the so-called “tail risk” by using the evidence of the panic halt of the US stock market and the deeper decline of BTC. He is subjective and nonsense.

The third point is that it is wrong to claim that BTC can protect anti-government activists. This is still a strawman attack. Taleb likes to set up his own targets and shoot at them. Satoshi Nakamoto has never advocated against the government, nor has he designed BTC to be anti-government.

The fourth criticizes the early hoarders who became billionaires. Taleb harshly criticized these early holders as a “monopoly group”, cursing them as even more evil than government bureaucrats, who only receive a meager salary.

Haha, I can’t help but be happy when I read this. This Taleb has written so much, is it just for the “vinegar” of the last article that he wrapped the whole paper and this plate of “dumplings”? Isn’t he clearly envious and jealous of those large investors who hoarded BTC in the early days?

Ah, I won’t argue anymore. After all, rational arguments are worth refuting. Jealousy is an emotional issue, so what else is there to argue?

Chapter 6: Taleb’s Conclusion

After expressing his envy, jealousy, and hatred towards early holders, Taleb is finally ready to finish his thesis.

In the conclusion section, he said, ‘In financial history, few assets are more fragile than Bitcoin.’ Completely wrong. It should be said the other way around, ‘In financial history, few assets are more anti-fragile than Bitcoin.’

He said, “At the time of writing this article, despite the media hype, we still have made almost no progress in the blockchain field.” This once again proves that he confuses blockchain with Bitcoin, with numerous mistakes.

In the end, he said, “The only criterion for judging a technology is how it solves problems, not what technical attributes it has.” This statement is quite correct. Unfortunately, it precisely refutes what he said in his earlier paper, that BTC will be replaced by better technology.

What we should value is exactly what problems BTC can solve, rather than its advanced (or not advanced enough) technology.

Finally, Jiaolian thinks that this poem from ‘Dream of the Red Chamber’ is quite suitable for Taleb’s black paper:

Full of absurdities, a handful of bitter tears.

They all say the author is foolish, but who can understand the meaning behind it?

After the interpretation of the Education Chain, I believe dear readers have tasted the taste behind Taleb’s absurd words, and that taste is: (Seeing BTC rise higher and higher, but) no Position in their own hands.