"The Gaslit Asset Class"

From David Rosenthal's DSHR blog, September 30, 2025:

James Grant invited me to address the annual conference of Grant's Interest Rate Observer. This was an intimidating prospect, the previous year's conference featured billionaires Scott Bessent and Bill Ackman. As usual, below the fold is the text of my talk, with the slides, links to the sources, and additional material in footnotes. Yellow background indicates textual slides.

The Gaslit Asset Class

Before I explain that much of what you have been told about cryptocurrency technology is gaslighting, I should stress that I hold no long or short positions in cryptocurrencies, their derivatives or related companies. Unlike most people discussing them, I am not "talking my book".

To fit in the allotted time, this talk focuses mainly on Bitcoin and omits many of the finer points. My text, with links to the sources and additional material in footnotes, will go up on my blog later today. 

Why Am I Here?

I imagine few of you would understand why a retired software engineer with more than forty years in Silicon Valley was asked to address you on cryptocurrencies^[1].

I was an early employee at Sun Microsystems then employee #4 at Nvidia, so I have been long Nvidia for more than 30 years. It has been a wild ride. I quit after 3 years as part of fixing Nvidia's first near-death experience and immediately did 3 years as employee #12 at another startup, which also IPO-ed. If you do two in six years in your late 40s you get seriously burnt out.

So my wife and I started a program at Stanford that is still running 27 years later. She was a career librarian at the Library of Congress and the Stanford Library. She was part of the team that, 30 years ago, pioneered the transition of academic publishing to the Web. She was also the person who explained citation indices to Larry and Sergey, which led to Page Rank.

The academic literature has archival value. Multiple libraries hold complete runs on paper of the Philosophical Transactions of the Royal Society starting 360 years ago^[2]. The interesting engineering problem we faced was how to enable libraries to deliver comparable longevity to Web-published journals. 

Five Years Before Satoshi Nakamoto
I worked with a group of outstanding Stanford CS Ph.D. students to design and implement a system for stewardship of Web content modeled on the paper library system. The goal was to make it extremely difficult for even a powerful adversary to delete or modify content without detection. It is called LOCKSS, for Lots Of Copies Keep Stuff Safe; a decentralized peer-to-peer system secured by Proof-of-Work. We won a "Best Paper" award for it five years before Satoshi Nakamoto published his decentralized peer-to-peer system secured by Proof-of-Work. When he did, LOCKSS had been in production for a few years and we had learnt a lot about how difficult decentralization is in the online world.

Bitcoin built on more than two decades of research. Neither we nor Nakamoto invented Proof-of-Work, Cynthia Dwork and Moni Naor published it in 1992. Nakamoto didn't invent blockchains, Stuart Haber and W. Scott Stornetta patented them in 1991. He was extremely clever in assembling well-known techniques into a cryptocurrency, but his only major innovation was the Longest Chain Rule.

Digital cash
The fundamental problem of representing cash in digital form is that a digital coin can be endlessly copied, thus you need some means to prevent each of the copies being spent. When you withdraw cash from an ATM, turning digital cash in your account into physical cash in your hand, the bank performs an atomic transaction against the database mapping account numbers to balances. The bank is trusted to prevent multiple spending.

There had been several attempts at a cryptocurrency before Bitcoin. The primary goals of the libertarians and cypherpunks were that a cryptocurrency be as anonymous as physical cash, and that it not have a central point of failure that had to be trusted. The only one to get any traction was David Chaum's DigiCash; it was anonymous but it was centralized to prevent multiple spending and it involved banks.

Nakamoto's magnum opus

Bitcoin claims:

• The system was trustless because it was decentralized.
• It was a medium of exchange for buying and selling in the real world.
• Transactions were faster and cheaper than in the existing financial system.
• It was secured by Proof-of-Work and cryptography.
• It was privacy-preserving.

When in November 2008 Nakamoto published Bitcoin: A Peer-to-Peer Electronic Cash System it was the peak of the Global Financial Crisis and people were very aware that the financial system was broken (and it still is). Because it solved many of the problems that had dogged earlier attempts at electronic cash, it rapidly attracted a clique of enthusiasts. When Nakamoto went silent in 2010 they took over proseltyzing the system. The main claims they made were:

• The system was trustless because it was decentralized.
• It was a medium of exchange for buying and selling in the real world.
• Transactions were faster and cheaper than in the existing financial system.
• It was secured by Proof-of-Work and cryptography.
• It was privacy-preserving.

They are all either false or misleading. In most cases Nakamoto's own writings show he knew this. His acolytes were gaslighting. 

Trustless because decentralized (1)

Assuming that the Bitcoin network consists of a large number of roughly equal nodes, it randomly selects a node to determine the transactions that will form the next block. There is no need to trust any particular node because the chance that they will be selected is small.^[3]

At first, most users would run network nodes, but as the network grows beyond a certain point, it would be left more and more to specialists with server farms of specialized hardware. A server farm would only need to have one node on the network and the rest of the LAN connects with that one node.

Satoshi Nakamoto 2^nd November 2008

The current system where every user is a network node is not the intended configuration for large scale. ... The design supports letting users just be users. The more burden it is to run a node, the fewer nodes there will be. Those few nodes will be big server farms. The rest will be client nodes that only do transactions and don’t generate.

Satoshi Nakamoto: 29^th July 2010

But only three days after publishing his white paper, Nakamoto understood that this assumption would become false:

At first, most users would run network nodes, but as the network grows beyond a certain point, it would be left more and more to specialists with server farms of specialized hardware.

He didn't change his mind. On 29^th July 2010, less than five months before he went silent, he made the same point:

The current system where every user is a network node is not the intended configuration for large scale. ... The design supports letting users just be users. The more burden it is to run a node, the fewer nodes there will be. Those few nodes will be big server farms.

"Letting users be users" necessarily means that the "users" have to trust the "few nodes" to include their transactions in blocks. The very strong economies of scale of technology in general and "big server farms" in particular meant that the centralizing force described in W. Brian Arthur's 1994 book Increasing Returns and Path Dependence in the Economy resulted in there being "fewer nodes". Indeed, on 13^th June 2014 a single node controlled 51% of Bitcoin's mining, the GHash pool.^[4].... 

....MUCH MORE