WTF happened in 1971 (and why the f**k it matters so much right now)

"The temptation to print money is the greatest temptation in the whole world."

If you’ve ventured on to Crypto Twitter this year, you may have seen a tweet from the meme account WTF Happened in 1971?

Created in March, the account posts numerous times a week to its fast growing fanbase of 10,500 followers. A typical post features a graph that shows how inequality has grown in recent years, inflation has skyrocketed and how ordinary people are being priced out of houses and stocks due to low wage growth. Somewhere on the chart there will be a little arrow pointing at 1971, which highlights when the rot set in.

And it invariably poses a question like: “WTF happened to wages in 1971?” Or, on a chart showing ever-widening political polarization: “WTF happened in 1971 that led to such a divergence in political thought?”

Its followers notice similar phenomena and contribute to the meme by tagging them in. This week someone reposted a New York Post article showing a decline in the happiness of lower socio-economic status white adults since the early 1970s, asking: “Gee I wonder #wtfhappenedin1971???’

 

Income Gains since 1971

 

So what did happen in 1971?

The WTF Happened in 1971 website suggests that all of these disparate effects are connected to President Richard Nixon calling time on the Bretton Woods financial system which tied the value of the worlds reserve currency the U.S. dollar to gold.

The gold standard as it is known, underpinned global finance from 1944, when the World War II Allied Nations, including the U.S., Canada, Western European nations, Australia and Japan, negotiated the rules of the international monetary system with fixed exchange rates between currencies. This took place at a hotel in Bretton Woods, New Hampshire. At the time the U.S. controlled two thirds of the world’s gold and insisted the system was based on gold and the US dollar.

The system meant that in theory you could redeem $35 USD for one ounce of gold – although in actual fact it was illegal for US citizens to hold gold between 1933 and 1974 after the government ran into trouble backing the currency during the Great Depression. Foreign governments could trade dollars for gold at that rate however. The government again ran into trouble backing the currency with gold in the late 1960s, after printing too much money to pay for things like the Vietnam war and various welfare programs, which was the rationale for Nixon killing the system on August 15, 1971.

 

Real Wages since 1971

 

Yeah, but it was a good thing

The effects of this are contested to say the least. The International Monetary Fund (IMF) for example suggests that fears at the time that the move away from gold would bring the era of rapid growth to an end were misplaced. “In fact, the transition to floating exchange rates was relatively smooth, and it was certainly timely: flexible exchange rates made it easier for economies to adjust to more expensive oil, when the price suddenly started going up in October 1973. Floating rates have facilitated adjustments to external shocks ever since.”

For many traditional Keynesian economists leaving the gold standard behind has provided governments with the flexibility to use activist monetary and fiscal policies to respond to, or prevent, economic crises. For example, without the Federal Reserves ‘unlimited’ quantitative easing program (money printing) this year, the economy may have fallen into such a deep hole the U.S. may never have clambered out of it. And Greeces inability to inflate itself out of its sovereign debt crisis in the years after the global financial crisis was part of the reason it had to embrace crippling austerity measures. Surveys of mainstream economists suggest that 9 out of 10 think returning to the gold standard would be a disaster.

No, leaving the gold standard was a disaster

But WTF 1971 tells a different story. It showcases various graphs highlighting that from 1971 onwards productivity increased while wages flatlined; GDP surged but the share going to workers plummeted; and house prices went through the roof leading to Americans’ ‘savings’ becoming inextricably tied to home values. It suggests that around the world episodes of hyperinflation increased, currencies crashed more frequently and there was a spike in the number of banking crises. The personal savings rate fell off a cliff, the incarceration rate went up by a factor of five, divorce rates shot up and the number of people in their late 20’s living with their parents increased exponentially.

Most horrifyingly of all, the number of lawyers quadrupled.

 

Population per lawyer since 1971

 

The site and Twitter account was founded by former 3D graphics designer Ben Prentice and Bitcoin podcaster Heavily Armed Clown also known as Collin from The Bitcoin Echo Chamber. Both live on the east coast of the U.S., and met when Prentice pitched himself as a guest on Collins podcast.

Prentice discovered Bitcoin in 2017 and fell deep into the Austrian economics rabbit hole. Thats a strand of heterodox economics beloved by goldbugs that suggests Keynesian economists have got it all wrong, fiat is worthless paper and gold is the answer. Although hugely influential among Bitcoiners, Austrian economics is shunned by mainstream economists and frequently criticized for lacking scientific rigor and not relying enough on mathematical models and macroeconomic analysis.

“Austrian economics is really just trying to dispel the logical fallacies inherent in Keynesian logic, starting at first principles and then building you way up from there,” says Prentice. However the pair have one major difference to the Austrians in that they believe Bitcoin is the answer that gold never was, he continues:

Our belief is that gold itself failed as a money. And that’s hard for the Austrians to get because they’ve been advocating for gold for so long. But the reason gold failed as money is because we had to come up with paper in the first place to scale it and we know how many problems come with paper.

Collin says he was trading penny stocks, alternating between pump and dumps and a value investing strategy which isnt really a real thing when he stumbled across Presidential candidate Ron Paul’s End the Fed while researching the underlying causes of the 2008 Global Financial Crisis. This led to the work of famed Austrian economists Ludwig von Mises and Murray Rothbard who coined the term anarcho capitalism.

“That’s where we found commonality, says Collin. And it was between our economic discussions talking about history, talking about money, talking about human action, that we came upon a lot of inflection points in the data, which happened around 1971.”

The first few graphs for the site were taken from the Wikipedia entry on Bretton Woods, and they kept seeing more and more charts that suggested the same thing.

 

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“We started collecting those and other ones, says Prentice. We started arguing with economists on Twitter and eventually, I think it was Collins idea, he was like: ‘Well, we’ll just throw these up on a website and just ask WTF Happened? and the rest is history.”

So far in 2020, the site has had around 400,000 visitors, and is growing its audience month on month.

Collin says they’ve considered their arguments carefully.

“We spend the vast majority of every day especially Ben and I just in private, discussing these things back and forth and sending, you know, trying to poke holes in our ideas.”

Rising inequality the result

The most obvious effect of moving away from the gold standard, was the ability for governments to print as much money as their hearts desired. As Collin puts it:

The temptation to print money is the greatest temptation in the whole world.

To illustrate how this harms individuals, Prentice uses the analogy of a pie as representing the economy, with the slices representing the money in circulation. As we’re printing more money, all we’re doing is taking existing slices and making them smaller and smaller and smaller, he explains. Each unit is now worth less. Nothing new has been created. You still have the same pie, but now your slice of the pie is much smaller than it was before.”

Collin says that this results in people trying to store their wealth in other ways, which has resulted in runaway asset price inflation since 1971.

“When money is debased, and it loses its value over time, people store their wealth in assets, he says. That’s why it’s common financial wisdom, to diversify your assets, to invest in stocks to invest in bonds to invest in gold, buy a house. The more assets you own, the better off you’ll be in the long run, because all of those assets are going to increase in price because of inflation.

The net effect is a massive increase in economic inequality because the wealthier you are, the larger the percentage of wealth you can afford to hold in illiquid, volatile assets. Working Joes however the median household net worth in America is $97,300 need to devote most of their dollars to rent and food and insurance, and have a larger share of capital in depreciating assets like cars.

“This system is very, very much tilted towards the wealthy,” says Prentice. “A very wealthy person would hold 80 to 90% of their wealth in business interests and equities, right, and those inflate. This is the money of the wealthy, but the access to those assets is almost nil for the poorest.”

This would be less of a problem if wages had kept up with inflation. While average hourly wages in the US have roughly increased in line with CPI, thats just one way to measure inflation. One of the most telling charts on the site shows that the number of working hours to buy a single unit of the S&P 500 has increased to an all time high of 126 hours today, up from an average of 30.9 hours since 1860.

 

Buy the S&P cost since 1971

 

Depending on how deep down the rabbit hole you want to go, there are ramifications everywhere.

Collin explains theres an economic calculation that can be performed normally whereby as capital is accumulated in bank savings accounts, interest rates come down. “Then people are more likely to borrow money and go out and try and engage in new productive ventures, he says. Creating new money and artificially suppressing the central bank interest rate is distorting that economic calculation.”

He says our crazy financial system is the reason hugely profitable companies like Apple still borrow billions of dollars to buy back their own stock.

“Why would they borrow money which they then have to use to pay interest in order to buy back their own stuff? The answer is the replacement cost of assets is higher than the replacement cost of capital.

Like the famous chapter of Freakonomics that linked the Roe vs Wade Supreme Court decision on access to abortion in the 1970’s to the decrease in crime two decades later, theyre also not discounting some less intuitive ramifications.

“We believe that a lot of second, third, fourth and fifth order effects happen as ripple effects that happen outwards of monetary policy, explains Collin.

When we look at things like obesity, right, and you say that is not related to the end of the gold standard. Are you sure? Because people have to eat a whole lot more subsidized food than they did 60 years ago and in America, the number one subsidized crops are sugar and corn.

They now believe the system has become so distorted, its no longer genuine capitalism. Collin points to the 52% of young adults who are now forced to live at home with their parents instead of building their own wealth, buying a house and starting their own families. You can’t afford to do any of those things and you just look at the system that exists and you say: this is broken, right? You’ve always believed in capitalism, but now you’re seeing this system that they’ve called capitalism is broken. But Ben and I posit that this is not capitalism, this is something completely different. This is social monetarism.”

Although there are some pretty obvious drivers of the 100 days of protests and riots in America following the death of George Floyd, rising inequality has played a big role, says Prentice.

“I absolutely think so. I think that people get out in the streets when things aren’t going well. People are frustrated, because they don’t feel like this system is working at all, and that they work their whole lives at crappy jobs.

But maybe theyre wrong

Collin and Prentice sound pretty convincing, but economics is a frustratingly complex area and even the worlds best economists are frequently way off. In December 2007 the Wall Street Journal asked 51 economists to predict what would happen in 2008. Not a single economist predicted a recession, much less the dramatic events of the Global Financial Crisis, even though the subprime mortgage crisis had begun five months earlier.

Even though the charts on the site show a strong correlation between the end of the gold standard and a variety of different things, that doesnt prove it caused the issue. Correlation isnt causation: For example the number of films Nicolas Cage appeared in between 1999 and 2009 strongly correlates with the number of people who drowned by falling into a pool during the same period. The increase in per capita cheese consumption between 2000 and 2009 almost perfectly matches the number of people who died by becoming tangled in their bedsheets.

 

Cheese Consumption since 1971

 

Collin concedes that some of the charts may simply show a correlation.

We get a lot of people who think that we’re attributing things to the end of Bretton Woods that we shouldn’t be, says Collin. And maybe in a little way, sometimes we do, because to be completely honest, the website is a meme. We embrace that. We love that. That’s what’s made it so popular and anytime we find any chart that has an unusual inflection point in 1971, you better believe it’s going on there,” he says.

Prentice adds: “We just put a bunch of data on a website and asked a question, right? So we’ve tried to not like explain all those charts on the website. We just want it to exist and let people answer their own questions and let them debate among themselves.”

And of course other things happened in 1971: Disney World opened, the Monkees broke up. Could these things help explain why that year changed everything?

The one that we see the most is that someone says I was born that year. This was all my fault,” says Collin.

A more serious attempt to explain the major economic changes the charts show, is to attribute them to the wave of deregulation that swept over advanced economies in the 1970’s and 1980’s. Prentice says that hed wrestled with this because from his libertarian, anarcho-capitalist influenced world view, everything should have become so much better.

Why did everything get worse after deregulation? he asks.

This is a great question to ask. (Its) because the money system is so broken it’s not capitalism. This is not what we’re advocating for. You took monetary socialism and then you took the reins off of it.

“So yeah, everything got way worse and the inequality got way worse. From that lens I think it’s much clearer to see why deregulation actually exacerbated everything.”

And while were trying to poke holes in the theory, a bunch of stuff has also got way better since 1971. Life expectancy in the U.S. is up 10%, infant survival rates have increased 71%, the food supply per person is up 21%. Globally, things have improved out of sight: in the early 1970’s half the world’s population lived in extreme poverty, now only 10% do. The number of illiterate people has dropped by more than 50%, while the number of people worldwide who live in a democracy grew from 32% to almost 56%

Prentice believes technological progress is the reason these some things have improved.

“We can afford more cool gadgets to increase our productivity, even something like as simple as the washing machine, he says. We used to spend hours a day washing our clothes and hanging them up and drying them. Now I don’t even think about it. Technology improves things like crops, right? Look at all the agricultural gear that we use now, these giant harvesters and all these things that allow us to get our food cheaper. In general, I believe all of the things you just listed are due to deflationary pressure inside an inflationary system.”

So essentially hes saying that all of the things that got better, would have performed even better if they hadn’t been hampered by the end of the Bretton Woods system.

Economics backgrounds

Prentice says the pair are well aware their ideas are outside of conventional economic thinking, but say thats because theyve attempted to approach things from first principles and “expose the errors that other economists make.

We’ve seen their arguments, and we constantly question ourselves, he says. It’s like at the end of Marty Bent’s podcasts, he’s constantly saying Are we crazy? We ask ourselves that all the time. I don’t have any hubris that I am a smarter economist than anybody else. But I do know that I work from logic and first principles, and I do wish to benefit everybody in the world.”

Since June theyve also been expounding on their ideas in a newsletter, which is up to issue 68 already and hits inboxes every couple of days.

“We started the newsletter to give these little economic tidbits and explain little bits of monetary history because we believe that Bitcoin is inevitable and it is the best money that has ever existed,” says Prentice.

Collin says it may one day prove to be the first draft of a book on the topic.

If our audience continues to grow, and we continue to get a good reception, we’re building up a library of content that may one day be edited into a book,” he says. “An ebook with a more cohesive analysis of monetary history and the emergence of a new paradigm, which is Bitcoin which will change the world because it is here and it can’t be stopped.”

 

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Chinese state-endorsed public chain to act as a global DeFi bridge, says Conflux CEO

Chinese Free Trade Zone is open to experimenting with permissionless DeFi applications.

Conflux Network, a permissionless blockchain project which is endorsed by the Chinese state, told Cointelegraph on Sept. 22 that the project has officially launched its Tree Graph Research Institute with the Shanghai government. 

According to Fan Long, CEO of Conflux, the Tree-Graph Blockchain Research Institute will experiment with local states to build a regulatory compliance platform that can bridge global DeFi applications and government regulations. He added that: 

“DeFi is a new world and while it appears as though it may pose a challenge for regulators, they appear willing to listen. At this stage, the most important thing is to maintain a reliable communication channel between two sides— the DeFi innovators and the regulators.” 

When it comes to new techniques and innovations, the Chinese government has shown signs of tolerance for experimentation in the past. Fan indicated that the complexity surrounding DeFi and other relevant distributed innovations will make open communication crucial for continued legislative acceptance. He stated that: 

“Regulators need a reliable way to learn what the new technique is about and where it might lead us to. Innovators need a way to understand the concerns and red lines of regulators.” 

At the moment, Conflux is working with the Shanghai government on several sandbox projects. Fan told Cointelegraph that these projects include integrating blockchain borrowing and lending services into Shanghai’s Pudong Development Bank, and leveraging the Shanghai free trade zone’s unique regulatory framework to devise a unique stablecoin for the region, The CEO explained: 

“Shanghai Free Trade Zone is outside of capital control of China where RMB is offshore with its own set of rules, so we are trying to come up with some regulation breakthroughs with experimenting under the free zone framework.” 

Compared with the central bank’s digital currency, or CBDC,  Fan pointed out that  although a CBDC will allow the central government to maintain control of the financial activities, it would be hard for such a centralized form of digital currency to be accepted outside of China. 

Conflux is trying to either create a free zone stablecoin or build a public permissionless cross chain for the CBDC.

The project, which began its life as a research project at Tsinghua University, has been working to provide a robust and cheap framework for developers to build decentralized finance applications. Fan explained that: 

“Conflux Network seeks to provide a POW network with transaction speeds an order of magnitude faster. The key enabler technique is a novel DAG-based ledger structure together with an optimistic concurrency control to achieve a consistent order of transactions among all the nodes in the network.”

Fan believes that DeFi projects will only be able to go mainstream through willfully enacted compliance measures which evolve alongside government regulations. Blockchain and DeFi are new areas for regulators. Although he cannot speak to how regulators will go about this, his predicts that: 

“Decentralization will make it more difficult for regulators to control DeFi products, but there are still possibilities to exercise controls at the boundary between the decentralized world and the centralized world.” 

The Shanghai Municipal Government, one of the states endorsing the project, is interested in exploring how the city can leverage blockchain techniques to integrate traditional finance with decentralized financial services, says Fan.

In order to connect global DeFi projects and regulations, the company also created the Conflux Open Defi initiative. 

Members include: Sequoia Capital, Blockpower Capital, Antelope Holdings, dForce, DeBank, and MCDEX along with Chinese state support through the Shanghai Science and Technology Committee. Fan says Open DeFi aims to unite Eastern and Western DeFi markets through three globally focused program tracks: risk management, new liquidity strategies, and incubation & innovation.

Congress sees two new bills looking to chart CFTC and SEC regulatory turf in crypto

A big day for crypto legislation in the United States.

Two major crypto bills were introduced in the U.S. House of Representatives on Thursday. One aims to establish which cryptocurrencies are securities. The other looks to put regulation of exchanges in the hands of the country's commodities regulator.

The securities bill

The Securities Clarity Act, from the office of Representative Tom Emmer (R-MN) establishes a new distinction in securities law between an investment contract and the "an asset sold pursuant to an investment 22 contract, whether tangible or intangible (including an 23 asset in digital form)."

The new bill is basically a direct response to recent controversy over the Simple Agreement for Future Tokens framework under which currencies like EOS were distributed and which caused immense controversy in the case of Telegram. If passed, the act would restrict the Securities and Exchange Commission from pursuing digital assets on the basis of the initial contracts under which they were sold.

...and the commodities

Representative Mike Conaway (R-TX), with support from a number of co-signers from the Blockchain Caucus, introduced the Digital Commodity Exchange Act to the House Agriculture Committee. 

Conaway may be less familiar to Cointelegraph's readers than Emmer, but his position on the Agriculture Committee is critical. Today's bill would put crypto exchanges under the jurisdiction of the CFTC, which answers to the Agriculture Committee. That registration would save exchanges from the patchwork of state-by-state licensing required of money service providers.

Though the new bill would seem to put retail crypto under the same rules as commodities exchanges, it is careful to leave space for the SEC for sales involving "a securities offering or transaction associated with a digital commodity presale."

Commissioner Peirce wants to see the SEC approve a Bitcoin ETF

At least one leader at the SEC is in favor of seeing a Bitcoin ETF approved in the US.

In a virtual fireside chat with the D.C. Bar, SEC Commissioner Hester Peirce criticized the commission’s long-standing resistance to a Bitcoin ETF.

Moderator Ashley Ebersole asked about the SEC’s highly public dissatisfaction with a long series of Bitcoin ETF proposals in the U.S. Peirce, who is often known as "CryptoMom," responded with opposition to those rejects: “I’ve been pretty outspoken about my disagreement with my colleagues on disapproving some of these exchange-traded products.”

Bitcoin is not uniquely volatile as a base investment for an exchange-traded fund, Peirce argued. “I would like us to look at how we’ve looked at similar products in the past. Many other products that we have are based on products that are messy,” she continued. “You can still have an orderly product built on top of it.”

Ji Kim of Gemini Trust continued along the same line of questioning as to what the SEC’s concern with a Bitcoin ETF is. Peirce answered “You can’t assume that markets are not going to function if they’re not subject to the exact same sort of regulation as securities markets are.”

I do think that Bitcoin markets are mature. There’s a lot of money in there now, there’s a lot of very sophisticated players in this space and there’s been a lot of work done to regularize the trading with Bitcoin particularly. I would say that the markets are mature enough to build something else on top of.

Regarding a recent interpretation from the Treasury’s bank regulator that banks can custody reserves for fiat-based stablecoins, Peirce noted that the SEC was paying close attention to such developments “There is a lot of regulatory coordination going on.”

Despite the new ruling, Peirce cautioned that some products advertised as stablecoins are in fact securities: “You can’t just put the label stablecoin on it and expect it to be regulated that way.”

Commissioner Peirce started her second term at the SEC last month, meaning she is set to remain on the commission until 2025.

Inside the blockchain developer’s mind: The vertical scaling crisis

In order to achieve blockchain mass adoption, three fundamental problems should be solved. Let’s dive into the second one: vertical scaling.

This is Part 2 of a three-part series in which Andrew Levine outlines the issues facing legacy blockchains and posits solutions to these problems. Read Part 1 on the upgradeability crisis here and Part 3 on the governance crisis as it goes live on Sept. 25.

The advent of the internet has revealed that we have a digital self that can amplify our real-world power thanks to the ability to interact with people anywhere on Earth and coordinate actions that our physical selves never could.

But our digital selves are shackled — imprisoned on private computers belonging to Facebook, Google, Amazon, Netflix, Twitter, and the list goes on. These private monopolies don’t actually produce technology; rather, their product is us — our digital selves — and their entire purpose is to extract as much value from us as they possibly can.

Many people recognize the potential for blockchain technology to disrupt these private monopolies and oligopolies, but unfortunately, no specific blockchain has been able to reach beyond the walls of the existing blockchain and cryptocurrency community.

And if it did, it would not be technically capable of supporting the kind of growth and adoption needed to empower every person on Earth to take control of their digital selves. Why is that? Is it just a matter of picking the right features? Switching to proof-of-stake? Sharding?

Unfortunately, the problem is much bigger than one or two missing features and will not be resolved by the planned changes to existing protocols because the problems lie at the very foundation of how they are constructed. The very architecture limits the potential for these platforms to scale vertically.

What is vertical scaling?

Vertical scaling is how you manage the growth of a single node (computer) in a network. Blockchains are databases that never discard information. Information is only added to the database, never removed. This makes growth an even bigger problem. Not only that, but most blockchains are not designed to make efficient use of the various parts of a computer. This adds up to a big database, consuming a lot of computational resources on a given machine in an inefficient manner.

In order to compensate for these shortcomings, node operators rely on expensive enterprise-grade hardware — specifically, random-access memory, or RAM, and non-volatile memory express, or NVMe, which is what pushes network participation (node operation) beyond the grasp of ordinary people. And somehow, we’re supposed to believe that is not bad for decentralization!

But sharding!

Ironically, one of the strongest arguments for the existence of a vertical scaling crisis is the level of demand for horizontal scaling solutions.

As of this writing, an Ethereum full node still does not exceed 500 GB. That’s nothing! And yet, it is also absolutely true that a complicated, risky mechanism needs to be added to Ethereum so that its blockchain can be broken up into bits and pieces, and that precious computational resources need to be spent on simply enabling these “shards” to communicate with one another, let alone perform meaningful computations.

The problem is that horizontal scaling — sharding — is not a substitute for vertical scaling. Imagine you have a factory producing 1,000 cars per year, but there is sufficient demand for 2,000 cars. What do you do first: build a new factory or try to make more cars out of the factory you already have? Vertical scaling is optimizing the factory to produce more cars before simply building a new factory. Blockchain nodes are the “factory,” and what determines their output is how efficiently they use the components in a computer.

Speaking from direct experience, blockchains are horribly unoptimized with respect to node resource management, which makes them the perfect candidate for vertical scaling solutions.

In blockchain, there are essentially two lineages: Ethereum and BitShares. Many people might not be familiar with BitShares, but its architectural design underpins some of the most performant blockchains in the space, including EOS, Hive and Steem. While Ethereum, and the many chains that are modeled on it, remains the most highly valued general-purpose blockchain with the most decentralized applications and unique users, the BitShares line absolutely dominates in terms of raw transaction activity, making it the performance king.

My team, arguably, has more experience in the BitShares line than any other team on Earth, so we will focus on that design. Because blockchains in the BitShares line are capable of performing so many more transactions per second, this actually increases the importance of vertical scaling — because their blockchain state is growing so much faster.

Vertical scaling, RAM and forks

Vertical scaling, in the computing context, is essentially all about using the cheapest form of memory (disk) whenever possible and to the greatest extent possible. In the case of blockchains, the two most relevant processes are fork resolution and storing state. There are all of these different versions of the database out there (“forks”), and the nodes have to come to a consensus on which one is the “right” one. That’s fork resolution.

Now, you have an irreversible database that needs to be stored. Ideally, you want that stored on the cheapest possible medium (disk) as opposed to the most expensive (RAM).

Because you want forks to be resolved as fast as possible, you want these computations to be done in RAM (fast memory). But once the forks have been resolved and new transactions have been added to the irreversible state, you want to store this database in disk. The problem with blockchains from the BitShares line is that they achieve their performance through a design that never actually reflects the current state of the blockchain. Instead, when each block is applied, the pending transaction state is “undone,” the old values are written back to the database, and then the block is applied.

One problem with this approach is that most of the time, this means performing the exact same calculations again and writing the same state back to the database that was just there, which is extremely inefficient.

Reading and writing: The arithmetic

Even more relevant to the issue of vertical scaling is that this design means the irreversible state as a whole cannot be stored on disk without having to “pop” blocks back out of disk and into RAM to resolve forks. Not only does this increase the RAM load on a given node, but it also has very serious consequences with respect to leveraging RocksDB.

RocksDB is a database technology developed by Facebook to power its news feed. In short, it enables us to get the performance of RAM but from disk. Many blockchain projects are using RocksDB in various ways, but the problem with the database design we have outlined is that the constant need to undo pending transactions and rewrite to the database negates the benefits of RocksDB.

Facebook’s news feed is all about database reads. Consider how many posts you scroll through before you engage with a single one. For that reason, RocksDB is designed to work best when there are far more reads to the database than writes. The database design outlined above leads to so many database writes that it negates the benefits of even using RocksDB.

In order to take full advantage of RocksDB, we need to rebuild the blockchain from the ground up to efficiently ferry blocks from RAM to disk while minimizing the number of writes so as to benefit from RocksDB. We can accomplish this by eliminating the need to undo/rewrite and creating a single database that tracks irreversible state and never needs to be undone.

This would enable us to minimize RAM use in nodes by efficiently ferrying irreversible blocks out of RAM and into disk without having to bring them back. We estimate that this could reduce the cost of running a node by as much as 75%! Not only would this make node operation more accessible, increasing the number of nodes in operation, but these cost savings would ultimately be passed along to users and developers.

Limiting blockchains or limitless blockchains?

Existing blockchains are reaching the performance limits of what they can get out of a single node as a consequence of how they resolve forks and how they store their blockchain state. In this article, we have explained how database design can lead to a fork resolution process that increases RAM use as well as database writes that negate the benefits that could accrue from the use of RocksDB, ultimately leading to less efficient blockchain nodes.

The truth is that there is a lot more to vertical scaling than this single problem. Blockchain ecosystems are complex, with many components that feedback into one another. Decreasing the cost of running an individual node is critical for increasing the number nodes in operation and reducing the costs of using the network, but there are also tremendous gains to be had by minimizing network congestion, incentivizing efficient node operation and more.

Our goal is not to explain in detail how one can solve the vertical scaling problem but to give some insight into the nature of what we think is a dramatically underappreciated problem in the blockchain space. Horizontal scalability is absolutely a very important area of interest, but if we ignore the problem of vertical scalability, all we will accomplish by horizontally scaling is dramatically increasing the number of horribly inefficient nodes.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Andrew Levine is the CEO of OpenOrchard, where he and the former development team behind the Steem blockchain build blockchain-based solutions that empower people to take ownership and control over their digital selves. Their foundational product is Koinos, a high-performance blockchain built on an entirely new framework architected to give developers the features they need in order to deliver the user experiences necessary to spread blockchain adoption to the masses.

Inside the blockchain developer’s mind: The vertical scaling crisis

In order to achieve blockchain mass adoption, three fundamental problems should be solved. Let’s dive into the second one: vertical scaling.

This is Part 2 of a three-part series in which Andrew Levine outlines the issues facing legacy blockchains and posits solutions to these problems. Read Part 1 on the upgradeability crisis here and Part 3 on the governance crisis as it goes live on Sept. 25.

The advent of the internet has revealed that we have a digital self that can amplify our real-world power thanks to the ability to interact with people anywhere on Earth and coordinate actions that our physical selves never could.

But our digital selves are shackled — imprisoned on private computers belonging to Facebook, Google, Amazon, Netflix, Twitter, and the list goes on. These private monopolies don’t actually produce technology; rather, their product is us — our digital selves — and their entire purpose is to extract as much value from us as they possibly can.

Many people recognize the potential for blockchain technology to disrupt these private monopolies and oligopolies, but unfortunately, no specific blockchain has been able to reach beyond the walls of the existing blockchain and cryptocurrency community.

And if it did, it would not be technically capable of supporting the kind of growth and adoption needed to empower every person on Earth to take control of their digital selves. Why is that? Is it just a matter of picking the right features? Switching to proof-of-stake? Sharding?

Unfortunately, the problem is much bigger than one or two missing features and will not be resolved by the planned changes to existing protocols because the problems lie at the very foundation of how they are constructed. The very architecture limits the potential for these platforms to scale vertically.

What is vertical scaling?

Vertical scaling is how you manage the growth of a single node (computer) in a network. Blockchains are databases that never discard information. Information is only added to the database, never removed. This makes growth an even bigger problem. Not only that, but most blockchains are not designed to make efficient use of the various parts of a computer. This adds up to a big database, consuming a lot of computational resources on a given machine in an inefficient manner.

In order to compensate for these shortcomings, node operators rely on expensive enterprise-grade hardware — specifically, random-access memory, or RAM, and non-volatile memory express, or NVMe, which is what pushes network participation (node operation) beyond the grasp of ordinary people. And somehow, we’re supposed to believe that is not bad for decentralization!

But sharding!

Ironically, one of the strongest arguments for the existence of a vertical scaling crisis is the level of demand for horizontal scaling solutions.

As of this writing, an Ethereum full node still does not exceed 500 GB. That’s nothing! And yet, it is also absolutely true that a complicated, risky mechanism needs to be added to Ethereum so that its blockchain can be broken up into bits and pieces, and that precious computational resources need to be spent on simply enabling these “shards” to communicate with one another, let alone perform meaningful computations.

The problem is that horizontal scaling — sharding — is not a substitute for vertical scaling. Imagine you have a factory producing 1,000 cars per year, but there is sufficient demand for 2,000 cars. What do you do first: build a new factory or try to make more cars out of the factory you already have? Vertical scaling is optimizing the factory to produce more cars before simply building a new factory. Blockchain nodes are the “factory,” and what determines their output is how efficiently they use the components in a computer.

Speaking from direct experience, blockchains are horribly unoptimized with respect to node resource management, which makes them the perfect candidate for vertical scaling solutions.

In blockchain, there are essentially two lineages: Ethereum and BitShares. Many people might not be familiar with BitShares, but its architectural design underpins some of the most performant blockchains in the space, including EOS, Hive and Steem. While Ethereum, and the many chains that are modeled on it, remains the most highly valued general-purpose blockchain with the most decentralized applications and unique users, the BitShares line absolutely dominates in terms of raw transaction activity, making it the performance king.

My team, arguably, has more experience in the BitShares line than any other team on Earth, so we will focus on that design. Because blockchains in the BitShares line are capable of performing so many more transactions per second, this actually increases the importance of vertical scaling — because their blockchain state is growing so much faster.

Vertical scaling, RAM and forks

Vertical scaling, in the computing context, is essentially all about using the cheapest form of memory (disk) whenever possible and to the greatest extent possible. In the case of blockchains, the two most relevant processes are fork resolution and storing state. There are all of these different versions of the database out there (“forks”), and the nodes have to come to a consensus on which one is the “right” one. That’s fork resolution.

Now, you have an irreversible database that needs to be stored. Ideally, you want that stored on the cheapest possible medium (disk) as opposed to the most expensive (RAM).

Because you want forks to be resolved as fast as possible, you want these computations to be done in RAM (fast memory). But once the forks have been resolved and new transactions have been added to the irreversible state, you want to store this database in disk. The problem with blockchains from the BitShares line is that they achieve their performance through a design that never actually reflects the current state of the blockchain. Instead, when each block is applied, the pending transaction state is “undone,” the old values are written back to the database, and then the block is applied.

One problem with this approach is that most of the time, this means performing the exact same calculations again and writing the same state back to the database that was just there, which is extremely inefficient.

Reading and writing: The arithmetic

Even more relevant to the issue of vertical scaling is that this design means the irreversible state as a whole cannot be stored on disk without having to “pop” blocks back out of disk and into RAM to resolve forks. Not only does this increase the RAM load on a given node, but it also has very serious consequences with respect to leveraging RocksDB.

RocksDB is a database technology developed by Facebook to power its news feed. In short, it enables us to get the performance of RAM but from disk. Many blockchain projects are using RocksDB in various ways, but the problem with the database design we have outlined is that the constant need to undo pending transactions and rewrite to the database negates the benefits of RocksDB.

Facebook’s news feed is all about database reads. Consider how many posts you scroll through before you engage with a single one. For that reason, RocksDB is designed to work best when there are far more reads to the database than writes. The database design outlined above leads to so many database writes that it negates the benefits of even using RocksDB.

In order to take full advantage of RocksDB, we need to rebuild the blockchain from the ground up to efficiently ferry blocks from RAM to disk while minimizing the number of writes so as to benefit from RocksDB. We can accomplish this by eliminating the need to undo/rewrite and creating a single database that tracks irreversible state and never needs to be undone.

This would enable us to minimize RAM use in nodes by efficiently ferrying irreversible blocks out of RAM and into disk without having to bring them back. We estimate that this could reduce the cost of running a node by as much as 75%! Not only would this make node operation more accessible, increasing the number of nodes in operation, but these cost savings would ultimately be passed along to users and developers.

Limiting blockchains or limitless blockchains?

Existing blockchains are reaching the performance limits of what they can get out of a single node as a consequence of how they resolve forks and how they store their blockchain state. In this article, we have explained how database design can lead to a fork resolution process that increases RAM use as well as database writes that negate the benefits that could accrue from the use of RocksDB, ultimately leading to less efficient blockchain nodes.

The truth is that there is a lot more to vertical scaling than this single problem. Blockchain ecosystems are complex, with many components that feedback into one another. Decreasing the cost of running an individual node is critical for increasing the number nodes in operation and reducing the costs of using the network, but there are also tremendous gains to be had by minimizing network congestion, incentivizing efficient node operation and more.

Our goal is not to explain in detail how one can solve the vertical scaling problem but to give some insight into the nature of what we think is a dramatically underappreciated problem in the blockchain space. Horizontal scalability is absolutely a very important area of interest, but if we ignore the problem of vertical scalability, all we will accomplish by horizontally scaling is dramatically increasing the number of horribly inefficient nodes.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Andrew Levine is the CEO of OpenOrchard, where he and the former development team behind the Steem blockchain build blockchain-based solutions that empower people to take ownership and control over their digital selves. Their foundational product is Koinos, a high-performance blockchain built on an entirely new framework architected to give developers the features they need in order to deliver the user experiences necessary to spread blockchain adoption to the masses.