Full text of the "Bitcoin Black Book"

Original: Liu Jiaolian

BTC hovered at 63k overnight. Recently, someone dug up a paper written by Taleb in 2021 called the "Bitcoin Black Book" and rehashed it. As the author of the best-selling books "The Black Swan" and "Antifragile", Taleb (Nassim Nicholas Taleb) was famous for a while. However, when he lost his BTC position in 2020 (or 2021), he angrily used his academic talent to concoct a paper criticizing BTC's inevitable return to zero, titled "Bitcoin, Currencies, and Fragility" [1]. Interestingly, this carefully crafted "black book" did not attract much attention and attention from the industry because of Taleb's fame.

Harold Christopher Burger and others once wrote an article in 2021 that refuted Taleb's paper point by point [2]. The specific Jiaolian will not be translated here. Friends who are interested can open the reference link at the end of the article to read the original text.

Jiaolian has read this paper by Taleb a long time ago. Overall, apart from the form of an academic paper, some pretentious mathematical symbols, and some vague terms, his criticism of BTC is not much better than what other people who criticized BTC have talked about in history.

Due to the recent re-rehash of this paper, and the market is in a divergent stage, many readers have forwarded it to Jiaolian and asked Jiaolian what they think about it. So Jiaolian thought that it would be better to write a criticism to dissect Taleb's "black book" to get to the bottom of the matter and answer questions.

1. Taleb's understanding of the randomness and unidirectionality of the BTC chain is completely wrong

In the first chapter of the paper, Taleb tried to start with "blockchain". Jiaolian can say that he was wrong at the beginning. Satoshi Nakamoto never used the concept of "blockchain". Satoshi Nakamoto wanted to invent Bitcoin, not blockchain.

Teaching Chain said that countless IT technicians, who are very professional in technology, just can't understand BTC. Why? One of the reasons is that they mistaken blockchain for Bitcoin.

Taleb showed off mathematics in his paper. What Monte Carlo simulation, what von Neumann, he was full of words, but it was a thousand miles away.

When Teaching Chain saw Taleb write about "pseudorandom numbers" (pseudorandom), "sequences" (sequences), "probabilisitcally mimicking the arrow of time" (probabilisitcally mimicking the arrow of time) in his paper, especially when he saw him write "the very nature of the blockchain, transactions are irreversible" (the very nature of the blockchain, transactions are irreversible), it was 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 naturally have the basis for several key properties that we understand to constitute BTC, such as: one-way, immutability, Byzantine fault tolerance, etc.

In fact, in the Bitcoin white paper, Satoshi Nakamoto cited three references about the blockchain data structure. These three reference papers were published in 1991, 1993 and 1999 respectively.

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

Taleb spent some time talking about hash collisions. In fact, the hash inverse algorithm (also known as proof of work) was proposed by Adam Back as early as 2002. His paper is also the sixth reference of Satoshi Nakamoto's paper.

Based on this, Taleb, like many IT technicians, believes that the three major technologies used by Satoshi Nakamoto - hash algorithm, Merkle tree, and proof of work - are all outdated technologies that have been invented by predecessors, which is very ironic.

The light bulb invented by Edison was made of materials that were invented by predecessors. All the components and technologies of the iPhone invented by Steve Jobs were also invented by predecessors. What exactly did the light bulb and the iPhone invent?

If we only observe from the level of mathematics (data structure), we will never understand why BTC can achieve true one-way (irreversibility), true arrow of time, true immutability, true Byzantine fault tolerance...

Jiaolian specifically talked about this issue in the 92nd chapter "Verifiable Randomness" of the book "History of Bitcoin", and talked about why many professionals' subjective intuition that "there is no real randomness in the blockchain world" is wrong, the inherent contradiction between "randomness" and "verifiable", and why the Bitcoin system can achieve verifiable and real randomness at the same time.

Please note that this question is not a low-level question, but a high-level question. The understanding of this question should span three levels:

The first level: ordinary people. They think that computer algorithms can generate real random numbers.

The second level: computer professional scholars, who have read the famous book TAOCP by computer scientist Donald Knuth. Understand why computer algorithms can only generate pseudo-random numbers, not real random numbers.

The third level: Beyond simple computer science, have interdisciplinary thinking in natural science, and understand Prigogine's theory of dissipative structures. Understand the true source of randomness in the Bitcoin system - completely open, permissionless, and fully competitive hash inversion, which is the so-called "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 problems will be clear. For example, a lot of electricity is consumed to perform PoW calculations, and it cannot be "improved" into other algorithms without PoW. Because the so-called "improvements" are all replacing physics with mathematics, which will greatly reduce the system's ability to obtain randomness, thereby greatly damaging the security of the system.

And Prigogine's dissipative structure theory also explains the fundamental reason why the Bitcoin system must be an open system without permission - a closed and isolated system cannot continuously absorb "negative entropy" from the outside, and thus will inevitably go to corruption and destruction. At the same time, it is precisely because the Bitcoin system is a dissipative structure that it can emerge through Turing bifurcation at every moment, a real, one-way and irreversible arrow of time. This is what Jiaolian introduced in the 22nd episode "Dissipative Structure" of "The History of Bitcoin".

After understanding this knowledge, we know that the arrow of time in the Bitcoin system, that is, the "timestamp server" mentioned by Satoshi Nakamoto in Section 3 of the white paper, is the real arrow of time, not the "simulated" arrow of time 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 see at a glance the low-level mistakes he made.

Taleb’s mistake is fundamental, critical, and fatal. Once this mistake is made, his entire paper basically becomes a high-rise building on quicksand, without any solid foundation, and it collapses at a push.

Second, Taleb’s perception that BTC is worth zero is completely untrue

At the end of the first chapter of the paper, Taleb suddenly jumped from discussing the data structure of blockchain to discussing the value of BTC as zero. The transition is a bit abrupt, let’s ignore it for now. He continues to argue that BTC is worth zero in the second chapter.

His main arguments include:

First, BTC is a zero-sum game. Second, the BTC network needs miners to maintain its existence, while things like gold can be preserved for a long time without paying any cost. Third, zero-interest assets will inevitably encounter the so-called "absorbing barrier" in the long run, and their value will return to zero. Fourth, anything whose expected value is zero must have a present value of zero. Fifth, gold has industrial and jewelry uses, but BTC does not. Sixth, the physical nature of gold does not have "path dependence", while BTC is a technology, and technology will always be replaced by better technology.

There is no need to refute one by one. Just one simple fact is enough to prove the opposite: in the past 15 years, BTC has not only not returned to zero, but has become stronger and stronger, and has continuously reached new highs. As we all know, the price of the financial market reflects future expectations. Since the price continues to rise, it means that people expect it to be higher in the future. If people expect the value of BTC to return to zero, then its price today should be zero. Obviously, this inference is inconsistent with the facts.

Excuse me, if the theoretical prediction does not match the facts, should we revise the theory, or insist that the theory is correct and the facts are wrong?

Obviously, 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 that high-speed motion did not conform to Newton's laws.

Obviously, the fact that BTC has not returned to zero but has repeatedly hit new highs is enough to disprove Taleb's long and tedious argument that BTC's value is zero and its present value should be zero is completely wrong.

Looking at them one by one, it is also easy to disprove that almost every point he said is wrong:

For example, the argument of "zero-sum game". Is the value of zero-sum game zero? Even more, how about negative-sum game, shouldn't the value be zero? Well, is car insurance a negative-sum game? Everyone pays the premium, the insurance company takes a part as operating expenses and profits, and the remaining pool of funds is the money that all the people who pay the premium share according to the expenses of the accident. This system is a zero-sum game or even a negative-sum game. So, is car insurance worthless? Of course not.

For example, "gold does not need maintenance costs". Taleb obviously cannot distinguish between gold as gold and gold as currency. Marx said that gold and silver are not naturally currency, but currency is naturally gold and silver. Gold as gold is just an element of the universe. Gold as currency is essentially a carrier of production relations in human society.

Gold as currency obviously requires extremely high maintenance costs. It takes a lot of infrastructure and force to store and keep it safely. Extremely slow and expensive transportation. In comparison, BTC's security costs (cold wallets) and long-distance transportation costs (network sending) are 10,000 times better than gold.

For example, "zero-interest assets". Gold is also a zero-interest asset, and according to Taleb's theory, it should also be zero. He also used the DCF valuation model to prove it. This is meaningless. Valuation models are nothing more than human subjective thinking patterns. In fact, Wall Street has long broken through these rules and regulations. Internet listed companies do not need to make profits to obtain high valuations, which does not conform to DCF (discounted future cash flows). There is no absolute relationship between future cash flows and value, but people subjectively believe that it is related or not.

The illusion of continuous interest and dividends of productive assets is not original to Taleb. This is the most common reason Buffett uses to criticize BTC. In fact, from the perspective of the laws of the universe, what productive assets are there? The direction of the evolution of the universe is eternal destruction, and the end point is heat death. Only local value increases, which is just a short-term illusion at the cost of greater damage to the surrounding environment and the value of others.

A factory, an enterprise, can continuously provide the so-called dividends and interest to the capitalists, which is based on the fact that it can continuously obtain value from the outside as a system and extract surplus value from it for distribution according to capital. If one day, it becomes corrupt and declines, it can no longer continuously obtain value, and it can no longer generate interest.

Using Prigogine's dissipative structure theory mentioned in the teaching link above to look at the dividend-generating system of enterprises and the non-interest-generating system of BTC, it is actually just that they have different ways of distributing value, and their essence is to absorb value from the outside. Which system is more open, more flexible, and more vital, which system will survive longer and continue to grow. Obviously, centralized and easily bureaucratic enterprises 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 less efficient than the latter!

As for the "practical value" issue, it is already an old question, and the coach is too lazy to refute it. Doesn't Taleb even understand the basic economic issues? How can value and practical value be confused? Air is very practical and cannot be lacking for a second, but its value is zero. A dollar has almost no practical value (it's too hard to wipe your butt), but it has a value of up to $100.

There is also "technological replacement", which is also a manifestation 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 be replaced every 7 years, but you are still you!

Replace every plank of the BTC ship, and the BTC is still the BTC. Use other planks to copy the BTC 1:1, then it is not the BTC. Even if the planks replaced by BTC were used to reassemble a ship, it would not be BTC.

3. Taleb’s perception that BTC is a failure as a payment currency is wrong

Taleb criticizes BTC as a failure as a payment currency in the third and fourth chapters.

Indeed, BTC has not yet been widely used as a payment currency.

However, anyone who understands the laws of currency development knows that the development stage of BTC should conform to the following historical laws:

First, it will be cold-started as a niche toy and collectible. Then it will evolve into a speculative product. Then it will evolve into an investment product, i.e., a store of value (SoV). Then it will evolve into a medium of exchange (MoE). Then it will evolve into a payment tool. Finally, it will have the possibility of becoming a world currency and pricing unit (UoA).

After 15 years of development, today’s BTC has just developed to the stage of transition from a speculative product to an investment product and SoV.

Taleb directly uses BTC's lack of widespread application as a payment tool today (it cannot buy things), or its lack of pricing unit properties (such as being unable to record accounts on accounting forms), etc. to say that BTC has failed so far. Isn't this ridiculous?

It's like saying when Taleb was still a one-month-old baby, look at this person who can't walk, he is a failed disabled person. Isn't this a ridiculous statement?

Fourth, Taleb's perception that BTC is a failure as an inflation hedging tool is wrong

Taleb did not make it clear what definition of inflation he refers to.

If inflation is the original definition, that is, the over-issuance of the amount of money. Then, BTC is obviously a very sensitive indicator of monetary expansion and withdrawal, and will have a very sensitive response to the Federal Reserve's monetary policy.

If inflation is a definition that has been tampered with later, it specifically refers to the rise in the price of a carefully selected basket of goods. So, in the long run, BTC is actually an excellent counter to the rise in prices, and plays a role in preserving and increasing value.

There are many empirical studies on this aspect, so I won’t go into details.

Taleb actually said in his paper that maintaining the stability of a basket of commodities is a good inflation hedge.

His idea reminds me of Wei Dai’s early b-money proposal. Unfortunately, Satoshi Nakamoto clearly pointed out that there is no way to link the prices of the outside world in a decentralized manner. Therefore, Satoshi Nakamoto believes that the best design is to keep the amount of currency stable and let the price of commodities fluctuate relative to the currency (ie BTC).

From the perspective of "Game Theory", this is the best monetary policy and plan.

Taleb is lying with his eyes open in the fifth chapter of the paper.

V. Taleb’s cognitive errors about other fallacies

In the last chapter of Taleb’s paper, he listed another 4 so-called “fallacies”.

The first is the so-called fallacy of 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. Taleb used other people’s interpretations of BTC as arguments to criticize BTC, which is like setting up a target and shooting at it yourself. It doesn’t make any sense. I don’t want to say more.

The second is that BTC is not a safe-haven asset. Taleb used the panic circuit breaker of the US stock market and the deeper decline of BTC as arguments to criticize BTC for not being able to fight against the so-called “tail risk”. He is subjective and nonsense.

The third is that it is wrong to say that BTC can protect anti-government people. This is still a straw man attack. Taleb likes to do this trick of setting up a target and shooting at it himself. Satoshi Nakamoto has never advocated anti-government, nor has he designed BTC to be anti-government.

The fourth is to criticize the early hoarders for becoming billionaires. Taleb criticized these early holders for forming a "monopoly consortium" and scolded them for being even more evil than government bureaucrats, because the latter only received some meager salaries.

Haha, I couldn't help but laugh when I read this. Did Taleb write so much just for the "jealousy" of the last point? Isn't he blatantly envious and jealous of those big holders who hoarded BTC in the early stage?

Ah, I won't refute it. After all, rational arguments are worth refuting. Jealousy is an emotional issue, what else is there to refute?

Sixth, Taleb's conclusion

After finally expressing his envy and jealousy of early holders, Taleb is ready to end the paper.

In the conclusion, he said, "In the history of finance, few assets are more fragile than Bitcoin." This is completely wrong. It should be said the other way around, "In the history of finance, few assets are more anti-fragile than Bitcoin."

He said, "At the time of writing this article, despite the hype in the media, we have achieved almost nothing in terms of blockchain." This once again proves that he confuses blockchain with Bitcoin and makes many mistakes.

In the last sentence, he said, "The only criterion for us to judge a technology is how it solves problems, not what technical attributes it has." This sentence is quite right. But unfortunately, it refutes what he said in his previous paper, that BTC will be replaced by better technology.

What we should value is precisely what problems BTC can solve, not what advanced (or not advanced) technology it has.

Finally, Jiaolian thinks that this poem from "Dream of Red Mansions" is quite suitable for Taleb's paper that is meant to be black:

The paper is full of absurd words, and a handful of bitter tears.

Everyone says the author is crazy, but who can understand the meaning?

After the interpretation of Jiaolian, I believe that all dear readers have tasted the meaning behind Taleb's absurd words, which is: (seeing BTC rising higher and higher, but having) no position in your hands.