Thread by @WittyUsername30

Some highlights / takeaways / thoughts / comments from #RWRI 14, Day 8:

1. To deal with bad actors in a system, ensure damages to the system will also damage the bad actor.

This is difficult to do in practice, but Bitcoin accomplishes it.

The value of Bitcoin is largely based on trust of the system. So if bad actors are able to break the trust of the system, the value of Bitcoin could crater, making the bad actors' heist of Bitcoin lose its value.

The bad actors are concave (low upside, huge downside) in this scenario. It makes more sense for the bad actor to steal cash and buy Bitcoin with it or steal Bitcoin from a custodian like Coinbase, than to attack the network directly.

With Bitcoin, you can't profit from hacking the network if you destroy the network in the process.

This is different from a bank, where if you want to profit from a bank heist, you can destroy the entire bank on the way out and it won't affect the value of your stolen dollars.

2. Many of the potential downfalls of BTC aren't exclusive to BTC.

If a shortcut is found to solve for private keys, this would have implications far beyond the world of BTC. It would mean that no password in the world is safe (and thus, no money held electronically is safe).

Similarly, if the worldwide internet goes down, the entire banking system will go down with it.

3. "Anything can be money."

Money is a belief system. If I believe that you believe a grain of rice is worth $1, then I will use the grain of rice as if it is worth $1.

*I* don't need to believe that an item is worth anything to be able to use it as money. I just need to believe that *others* believe in it.

For example: I might believe that the USD is way overvalued, but if I want to buy groceries, the only thing that matters is how I believe the grocery store values it. If the grocery store values it, then I know I can use it as money to buy food.

4. When analyzing BTC with power laws, it is very fat-tailed (Extremistan).

5. Gambler's Ruin: even when you have an edge, if you don't know how to size your bets, the variance will eat you alive.

6. Even with an edge, gambling is much less convex then entrepreneurship or financial markets.

A poker player can only spend so much time playing poker.

A sports bettor can only get so much money in the field without attracting negative attention and getting restrictive bet limits placed on them.

A business can reach billions of people and make money while you sleep.

7. "It's not about probability; it's about payoff."

Psychology papers that say humans overestimate small probabilities are irrelevant. The *payoff* is what matters, not the probability.

For example, if I 'overestimate' the probability of dying in a car accident by wearing my seat belt 100% of the time, yet a study claims you really only need 99%, I am not being irrational. I am just optimizing for my payout (death avoidance) rather than probability.

Probability is first-order. Payout is second-order. Optimizing for first-order will result in devastatingly bad second (and third, fourth, etc.) order payouts.

8. Recurring daily theme: "Science is about getting the properties, NOT getting a single number."

Use Extreme Value Theory to get an idea of the distribution / maximum, and build your wall accordingly.

9. "The best quality of a trader is no memory."

Better to understand the full range of possibilities in front of you than the limited sample of experiences behind you.