The problem with utilitarianism

Considering my posts on game theory, epistemology, one might think I'm sympathetic to Utilitarianism as a fundamental moral philosophy. But I'm not!

The reason is basically the trolley problem:

Uilitarianim is pretty easy when it is a large abstract problem. For example, if you have to choose a public health policy that decreases mortality by 0.1% on 1M and another than decreases mortality by 0.1% on 5M people, of course you would choose the latter. But this quickly breaks down as you leave the domain of business or economics. What about if one group is your family and the other is strangers. Would you start giving multipliers like 1 friend is worth 3 strangers? Such calculations are abhorrent. Or absurd -- a trillion shrimp in 100 years vs 1 human life today?

Now let's take not being abhorrent nor absurd as axiomatic for a fundamental moral philosophy. Not in a prescriptive way. I just mean, here we are, and we do deal with good and bad. How do we do it? What do we really use as our deepest foundation? 

When you get down to it, it is the golden rule: Do to others as you would have others do to you. It is not a coincidence that versions of this principle appear not just in Christianity but throughout the history of human wisdom. My favorite (hat tip to Nassim Taleb) is the converse, aka silver rule: don't do to others what you don't want others to do to you. The silver rule, because it applies before action, is more fundamental.

The "greater good" abstraction generally works up to a limit, but if you stick to utilitarianism all the way, you get dystopian outcomes (I'm looking at you "Effective Altruism"). The real foundation of human morality is the silver rule.

Feynman Diagrams of Currencies

Feynman diagrams are a way of understanding state interactions and changes in subatomic particles. In this post, I use simple diagrams to understate state interactions between different types of money.  The title of  is inspired by Michael Crichton's explanation of how he coined the phrase "Gell-Mann Amnesia" as I wrote about before: Name dropping a famous physicist bestows gravitas.  So now that I have your attention (if not respect), let's draw some diagrams.

Current era

The picture that is worth a thousand words. If you understand this picture no need to read this post.

Gold Standard: pre-1930s

But to put into historical context, here's what the picture looked like in the late 19th and early 20th centuries.

Post-Bretton Woods

And here's the world that evolved in the mid 20th century. Under the Bretton Woods agreement, from 1945-1971, the major currencies continued to be theoretically pegged to gold reserves, even though ordinary users of the currency did not have automatic convertibility, having lost that in the 1930s. Eventually, the pegs were abandoned completely in 1971. And this was the picture from 1971-2009, until the current digital currency era began with Bitcoin.

Legend

In each of these diagrams, 

• Solid lines represents easily exchangeable value. 
• Dashed lines represents flows with barriers e.g. currency controls.  
• The direction of the arrows represents where value "wants" to flow

What determines the directions? Two principles

1. Inflation:  people prefer strong money to weak money. Strong in the basic sense of future purchasing power for real goods and services. Of course all else is not equal, so sometimes a weaker currency is required as a means of exchange.  
2. Permission: all else being equal, people prefer money that they can use without permission. Of course all else is not equal, for example physical cash is great for permissionlessness. But it's not the best for long distance exchange or storage. 

Hard/soft and strong/weak currencies

"Hard currency" traditionally meant the money is made of, or directly convertible to, gold, silver, or some other hard to produce commodity.  The natural scarcity provides inflation resistance. This link faded in the 20th century, but it still persists in for example central banks gold reserves, which help "back" the value of their currencies.  But there is no guaranteed convertibility. It is money by fiat.

The US Dollar for example is no longer a hard currency in the traditional sense. The scarcity is not given by nature, but rather by  monetary policy (i.e. politics), which in practice is almost always inflationary. In the last 80 years, there have only been 2 years in which  the US CPI change was negative. 2% inflation used to be  the target. Now the target is creeping up to 3%.  Everyone expects one dollar will buy less stuff on average in the future than it does today. We are now so deep into the post-hard currency world that nobody even expects to keep savings in dollars.  The very idea seems quaint. Bury dollar bills in your backyard? Your mattress? It is accepted that to store money for the future, you have to invest it. And of course investing is work.  As Bitcoiners like to say, with fiat you have to work twice for your money, once to earn it and again continuously to keep it.

But the USD is strong compared to the many weak fiat currencies at the bottom. Everyone expects these units will lose value faster than dollars.  Instead of 2-4%  being normal, it's more like 15-30%. Most people at the bottom would rather hold USD than their local weak currency.    This all sounds strange if you are part of the 1B people currently living in the rich countries. But for the other 7 billion people in the world this is a very familiar story.

The arrows show the direction in which money "wants" to flow to store value.  But of course, local fiat is required as a means of exchange, either by convenience or by law.  And you have currency controls, bans, sanctions, and many other kinds of friction, all represented by the dashed lines. 

Stablecoins

The key feature of stablecoins is allowing people currently locked-in to weak currencies to access the strongest fiat currencies with relatively low friction. 

Reminds me of the situation with long distance phone calls in the early 2000s. An international phone call could cost 10x more from poor countries to rich countries than vice-versa. This gave rise to "call-back" services, using VOIP/SIP and the web to bridge the call via two separate calls originating in the rich country, allowing people in poor countries to make international calls at the same low price as people in rich countries. (I was actually a partner in a project called africalling.com that did that circa 2005).  Then eventually, bandwidth became so cheap that voice calls just became another type of data on the internet, and now everyone uses Internet-native voice in messaging apps like Whatsapp, Telegram or Signal, etc. No one even thinks about long distance phone calls per minute.

Stablecoins and CBDCs

Stablecoins are like the call-back services. They allow people in poor countries to use rich country money. Local currencies are like the old third world phone monopolies  A lot of sweat and tears will be spilled trying to stop international stablecoins. CBDCs ("central bank digital currencies") will be touted as the national alternatives.  But once users have access to the stronger money with low friction, why would they prefer the weaker money? So it's just the same old game as with current fiat, but the playing field is now slightly more tilted in favor of the individual users.   As people around the world gain access to USD stablecoins, they will experience the ability to buy from suppliers and sell to customers in other countries. The ability to travel and use their money in  other countries.  If you are part of the 1B people in rich countries, this is something you take for granted. But for the other 7B people this is a huge deal. Like being in Africa and being able to make a voice call to someone in another country in 2005!

USD Stablecoins demand

Now if there are many equally accessible stablecoins tied to different fiat units, there is no reason to use the second strongest units. Everyone will just use the USD stablecoins. Which means not just the weak, but also the other "strong" currencies, like the Euro or Yen etc will become less relevant.  Even the Chinese Yuan, which you would think would have strong demand since everyone imports from China, is going to be less desirable because the Chinese recipient will gladly accept USD knowing that everyone else does. In a friction-less fiat world, USD is the Schelling point.

Stablecoins as USD turbo-supply

On the supply side, the mechanism is self-reinforcing. USD stable coins are backed by US government debt. When they issue $1 of a stablecoin, the issuer takes $1 from the buyer and uses it to buy $1 of treasuries. The coin then circulates indefinitely with the value remaining pegged based on the belief that it can always be redeemed for a real $1. 

And that peg is solid. Because 

• the US government will never do a hard default where it simply refuses to pay back that $1 of debt.  Why? Because it can always do a soft default: print another $1 out of thin air and pay the debt with it. It is fiat money, remember?  Of course you can only do this if the debt is denominated in the currency that you print, so this is more true of the dollar than other currencies, because of it's unique historical position (world reserve currency, petro-dollar, euro-dollar,  etc.).  And from a stablecoin perspective, a soft default is a no-op. As long as they keep short duration treasuries, the stablecoin issuer can legitimaely maintain the peg at $1 per coin. 
• the stablecoin issuer meanwhile happily buys $1 of treasuries, issues $1 of tokens, maintains the peg, and gets to keep the interest on the debt. At 4% per year, and $200B of USDT issued, Tether could make $8B a year while maintaining a 1:1 peg. Of course they could also be fraudulent and not maintain the peg, but that would be irrational. Why jeopardize a legit $8B profit by stealing from your customers?

This makes stablecoin issuers large buyers of US government debt. Which is convenient for the US government as additional demand for treasuries makes it easier to continue running a deficit. And stablecoins also make the USD more dominant internationally at the expense of all the other fiat currencies. It reinforces the "dollar milkshake theory". The US was already in a position to suck up a lot of international demand for safe debt, now stablecoins provide more straws for it to drink the milkshake. So the US government has very good reasons to support USD stablecoins.  

If the US government is like an engine pushing the dollar out into the world, the stablecoin acts like a turbo which takes the exhaust and pumps it back in to increase power.

Don't get me wrong a soft default is still bad as it implies high inflation. But "nothing stops this train", to quote Lyn Alden. All fiat currencies are heading for higher inflation. However, in the short to medium term, the dollar, via stablecoins, will dominate even more than it does currently.

Bitcoin

But just like in our long distance phone call story, there's a final twist. Back to our basic principles of inflation and permission.

First, as those 7B people use the ladder of stablecoins to climb up from the flooded basement of weak fiat to the ground floor of strong fiat, they will start thinking what the 1B already on the ground floor are thinking. The ground floor is sinking too! I have escaped double digit inflation but now I have savings with 0% interest rate in dollars which, adjusted for inflation, is minus 3% per year. Can I do better?

Second, stablecoins are not entirely permissionless. They have lower friction than traditional fiat rails but at the end of the day, a USD stablecoin issuer will still obey the US government, since their main asset is US treasury bills.  (The Iranian government recently bought $500M of USDT. Grab your popcorn).  Can you use something that has even less risk of confiscation?

The answer to both of these is Bitcoin. Fiat will continue to exist for a long time of course, but Bitcoin will play an increasing role as the global neutral hard money.

The four anti-pillars of Marxism

Those who don't understand history are doomed to repeat it.... And those who do are doomed to watch in horror. 

In recent years, I've watched in horror Marxism seemingly coming back in fashion, as if we're in the 1920s. Too many people lack the practical experience, theoretical context,  or intelligence to know the lessons of the last 100 years. 

The seven pillars of wisdom in Christianity or the seven pillars of Islam are things you should build on. With Marxism, we have some seductive big ideas that you should not build on. I call them anti-pillars.  I won't explain them since many great people have before. I'll just list them as pointers.

1. Economic calculation problem and the fallacy of central planning.  

It is not just about having better computers or more data. The information in an economic system doesn't exist in one place or time, it is distributed. Furthermore, even if you had it all at once, much of it is not explicitly manifest but rather implicit preferences.

2. The labor theory of value is wrong

It is not just labor vs capital, there is also value and, more subtly there is quality.  If I spend an hour on the piano and Mozart spends an hour, it's one hour of labor. But there is a subjective difference in value. And an objective difference in price that others will pay for it. Finally, there is something that is neither objective nor subjective, beyond dialectics, namely quality.

3. The class struggle is a static one dimensional model, but human economic relationships are dynamic and multidimensional. 

This may have been subtle in the 19th century, but in the 21st century, it should completely obvious.  In fact even in the 20th century, class was often cynically replaced by ethnicity or religion by various revolutionary Marxists hungry for power. Lenin used "nations, nationalities and peoples" when he realized Russia was not industrialized enough for Marx's class structure. Ethiopian Marxist-Leninists adopted the same hack 3/4 of a century later. 

4. A political system based on class struggle necessarily evolves into an escalating war of purity. In this process, the most ruthless sociopaths, the self-appointed revolutionary vanguard, always end up as the rulers. Which is why almost every Marxist state converges on a violent totalitarian government.

If you are ever about to be to be seduced, at least know these anti-pillars, and spend a small amount of time understanding them.

አቡጊዳ...? Completion of the abugida sequence

I've long been curious about the structure of "a-bu-gi-da".  What comes after the first four elements of the sequence? Finally today, I worked out an answer:

አቡጊዳሄዝቶየኩሊማኔስዖፐሩሢጣዬፍኆፀቹዊሓሼቅኞጀጹጲ

Since I'm just having fun, and I am lazy, I didn't do any real research. I just tried to construct it somewhat logically. But it's probably wrong. So, apologies to real scholars out there. If there's an authoritative answer, maybe one of you will see this post and tell me. As they say, the fastest way to get an expert answer to a question is to post a wrong answer on the Internet! While we wait, let me explain my construction.  

Background

Abugida is the name used for alpha-syllabaries, like the Ethiopic (aka Ge'ez) script, where each character is a syllable equivalent to a vowel + a consonant in the roman alphabet. In fact, the term comes from ge'ez. But it is now used as a general term for alpha-syllabaries including some Indic ones.  Now normally, the Ethiopic character set is organized in a matrix where the columns correspond to the vowel form and the rows to the consonant, like this:

Image courtesy of this paper

As you can see the sequence of rows (consonants) here is not a-b-g-d-.... It is h-l-h-m-s-r-... So where does a-bu-gi-da come from?  Notice it sounds a lot like: alpha, beta, gamma, delta, ... 

A Greek connection

So it is related to the Greek alphabet! 

Note that I say "related" and not "comes from", which may surprise Westerners who tend to think of ancient Greece as the origin of a lot of stuff. But Greek letters descended from the Phoenician alphabet, and Phoenician is Semitic, as is Ethiopic. So the relation may go back to an earlier node in the ancestor tree, or could be a more recent adoption. 

Another interesting connection is that Ethiopic numerals from 1 to 6:  ፩, ፪, ፫, ፬, ፭, ፮, ... look a lot like the first 6 Greek letters α, β, Γ, δ, ε, ζ, ... (lowercase except gamma being uppercase). I should note that Professor Hailu Habtu in a recent book entitled "Aksum: A glimpse into an African Civilization" (excellent book by the way) disagrees with this connection. But I digress.

The Diagonal

The a-bu-gi-da consonant order is the same as the first four letters of the Greek alphabet. But notice also the vowels correspond to the first four vowel forms of the Ethiopic alpha-syllabary. So if we imagine a different matrix, with the rows matching consonants in the Greek order, and columns matching the vowels in the Ethiopic order, then we are basically going down a diagonal. Cute!

I am fond of diagonals. Like Cantor's diagonal argument that the real numbers are not countable. A classic way to introduce the difference between countable and uncountable infinity. Everyone should learn that! And how about eigenvalue decomposition... But I digress, again.

So if we follow the diagonal, wrapping around when we run out of columns, i.e. diagonal with column index being modulo 7, we can continue the a-bu-gi-da sequence. Here's the sequence with explanations. 

አ (a) – ሀ (h), 1st vowel /ä/ (Greek: Α, alpha)

ቡ (bu) – በ (b), 2nd vowel /u/ (Greek: Β, beta)

ጊ (gi) – ገ (g), 3rd vowel /i/ (Greek: Γ, gamma)

ዳ (da) – ደ (d), 4th vowel /a/ (Greek: Δ, delta)

ሄ (he) – ሀ (h), 5th vowel /e/ (Greek: Η, eta)

ዝ (zə) – ዘ (z), 6th vowel /ə/ (Greek: Ζ, zeta)

ቶ (to) – ተ (t), 7th vowel /o/ (Greek: Θ, theta)

የ (yä) – የ (y), 1st vowel /ä/ (Greek: Ι, iota)

ኩ (ku) – ከ (k), 2nd vowel /u/ (Greek: Κ, kappa)

ሊ (li) – ለ (l), 3rd vowel /i/ (Greek: Λ, lambda)

ማ (ma) – መ (m), 4th vowel /a/ (Greek: Μ, mu)

ኔ (ne) – ነ (n), 5th vowel /e/ (Greek: Ν, nu)

ስ (sə) – ሰ (s), 6th vowel /ə/ (Greek: Ξ, xi)

ዖ (‘o) – ዐ (‘), 7th vowel /o/ (Greek: Ο, omicron)

ፐ (pä) – ፐ (p), 1st vowel /ä/ (Greek: Π, pi)

ሩ (ru) – ረ (r), 2nd vowel /u/ (Greek: Ρ, rho)

ሢ (śi) – ሠ (ś), 3rd vowel /i/ (Greek: Σ, sigma)

ጣ (ṭa) – ጠ (ṭ), 4th vowel /a/ (Greek: Τ, tau)

ዬ (ye) – የ (y), 5th vowel /e/ (Greek: Υ, upsilon)

ፍ (fə) – ፈ (f), 6th vowel /ə/ (Greek: Φ, phi)

ኆ (ḫo) – ኀ (ḫ), 7th vowel /o/ (Greek: Χ, chi)

ፀ (ṣä) – ፀ (ṣ), 1st vowel /ä/ (Greek: Ψ, psi)

ቹ (ču) – ቸ (č), 2nd vowel /u/ (Greek: Ω, omega, next Ge'ez consonant)

ዊ (wi) – ወ (w), 3rd vowel /i/ (no Greek equivalent, next Ge'ez consonant)

ሓ (ḥa) – ሐ (ḥ), 4th vowel /a/ (next Ge'ez consonant)

ሼ (še) – ሸ (š), 5th vowel /e/ (next Ge'ez consonant)

ቅ (qə) – ቀ (q), 6th vowel /ə/ (next Ge'ez consonant)

ኞ (ño) – ኘ (ñ), 7th vowel /o/ (next Ge'ez consonant)

ጀ (ǧä) – ጀ (ǧ), 1st vowel /ä/ (next Ge'ez consonant)

ጹ (ṣu) – ጸ (ṣ), 2nd vowel /u/ (next Ge'ez consonant)

ጲ (p̣i) – ጰ (p̣), 3rd vowel /i/ (next Ge'ez consonant)

To generate this I used the Grok large language model. After all, LLMs are language sequence completers, how appropriate! It took a bit of prompting to get to this. If you are interested, here's the whole conversation with Grok.

Actually this whole exercise was as much to see if an LLM could do this as it was about the subject itself.   

Oh by the way, if you want serious content on Ethiopic, check out  geez.org.

Why the Ethiopian government shouldn't mine Bitcoin

This is more of a draft of talking points or notes rather than a properly written article. So apologies to my regular readers. 

I've been asked to participate in a Twitter spaces discussion on this topic. Here's a very quick post to list my main arguments, in case I'm unable to articulate them clearly enough live. I've said all this in my talk at the Africa Bitcoin Conference 2024  

I recommend the whole talk. The part discussed in this post starts at around 16 minute mark. Here's a summary.

Mis-allocation of resources 

Government should be investing on infrastructure that has a multiplier effect on the rest of society. For example, water and sewage, which Ethiopia desperately needs, and any number of things that the private sector can't do but are vital. In particular, the return on investment in directly building electrical infrastructure is far greater than almost anything else. Even within the Bitcoin mining sector, it is much better to be upstream selling energy to miners than to be buying energy to mine. In the case of Ethiopia, the marginal profit of EEP from each kWh sold to miners is bigger than the margin of the miner per kWh. This is because as the seller, you have the option of selling to higher value uses at a higher price, and selling the leftover (stranded energy) to miners. 

The misunderstanding here is that casual observers think mining is easy and cheap. But the numbers they throw about are based on silly premises, like assuming the machines and data center infrastructure cost is zero. 

For example, I've estimated that the cost of mining 1GW requires $500M of investment. If you do the math, you can earn much higher returns if you put $500M into more generation and transmission. 

So why am I investing in mining? Well I, like many miners, would happily move upstream into generation if I could! But restaurants exist downstream from farmers. Vertical integration is not always possible so specialization makes sense, if you want to actually accomplish things and have an impact.

Danger of missing the opportunity cost

Those who push for government mining often say the government has free electricity, so why not? But that would be a tragic mistake. If you take some energy that could be sold for $0.06 and use it for an activity that is worth $0.03, then you are basically losing 50%. But the danger is if you own both sides, you don't see the loss from this opportunity cost, you just think you made $0.03. So while it looks like you are making cash from free energy, what you are actually doing is taking energy from the people. You are generating cash for the government while incurring a hidden loss to the people.

The biggest opportunity cost of course is that, by doing this, you are losing the chance to finance further growth. The net effect is slowing down electrification. Instead if you sell the power to the people who need it most and sell the excess to the miners, you are accelerating electrification. Not understanding the opportunity cost is like the proverbial eating of the seeds instead of planting them.

A bad way to build a strategic Bitcoin reserve

A confusing argument is that mining allows the government to build up a reserve in Bitcoin. I am actually in favor of the state owning some Bitcoin as I've advocated for many years. It does make sense, just like gold or foreign currencies, except better.  But you don't need to mine to do that. You can just buy it.  The counter argument I've heard on this is: "well they will never get their act together to buy some. They are not competent enough". Besides the fact that insulting the people you are trying to convince is never a good strategy, there is a more basic flaw in this reasoning. Mining is harder in every way than buying. So to say they are too incompetent to buy but they should mine, is ridiculous. 

Some may say I am making a self serving argument because I want to protect my own investment in mining. But anyone who has studied the dynamics of Bitcoin mining understands that it is a global competition and location doesn't matter. Whether someone mines right next door to you or on another continent they are all equal competitors. In fact the closer ones are positive because they create a cluster that can help each other. No, my reason is that I think it risks derailing what could be a very positive trajectory of accelerating electrification.

If you want to dig deeper, here are a couple of previous posts on the real cost of Bitcoin mining and the good, the bad and the ugly of Bitcoin mining in Ethiopia.

P.S. My opponent in the "debate" I suppose will be someone from Project Mano. First let me get the main issue I have with their post that started the debate. They used a grossly incorrect fact as the basis for the entire thing. That it costs less than $2000 of energy for a miner to produce one Bitcoin. The real number is close to $40,000. With the real number, and then adding on capital expenses and other operating expenses, their entire argument falls apart. When I asked them, they privately admitted they knew it was wrong but persisted in spreading this dangerous lie. When a discussion is *knowingly * based on falsehood, nothing else matters. No logic or reason can work. Just politics in it's ugliest basest form. So I don't expect to convince them, but I do want to help give a realistic perspective to well meaning but less informed people who can be misled.

On the real costs of Bitcoin mining

Someone is wrong on the Internet! A recent article on a website called NFT Evening has been circulating, claiming that it costs $1,986.20 to mine 1 Bitcoin in Ethiopia. This information is outrageously wrong,  by more than 2000%.  Normally I would just ignore such nonsense.  But unfortunately, it is spreading, and many people are getting misled. The misinformation is potentially harmful, so I feel compelled to respond. 

Disclosure:  My company QRB Labs is the first Bitcoin mining company in Ethiopia, and to date the only Ethiopian company. I believe this business is very good for the country, as explained before here and here. 

First misconception: price of energy

So here are the facts (see the footnote at the end of this post for details on the units).

• The global hashrate, i.e. total computing power of all Bitcoin miners in the world, is currently around 800EH/s. 
• All together miners earn about 3.2 BTC total every ten minutes. This is the sum of the block subsidy and transaction fees.
• Thus to get 1BTC , it takes about 800x10^18*600/3.2 = 1.48 x 10^23 Hashes. 
• Mining is done by ASIC computers which use from about 17 J/TH for the most efficient machines to 35 J/TH for the less efficient ones.  Let's take the mid-point of 26 J/TH.
• Therefore to get 1BTC it takes about 1.48 x 10^23  x 26 / 10^12 Joules of energy. Converting to kWh,  1.48 x 10^23  x 26/10^12/ 3,600,000 = 1.07 Million kWh. 
• The price of energy from Ethiopian Electric Power for Bitcoin miners is US$0.0314 per kWh. With Value Added Tax, the total cost of energy is a bit over $0.036 per kWh
• Multiplying the last two, the answer is $38,480 dollars of electric energy per BTC.

Note that the global hashrate and the transaction fees change continuously but this snapshot gives you an idea of the situation for the last few months. For a more in-depth explanation of how it evolves, see the paper entitled "Dynamics of Bitcoin Mining". 

Hopefully now you understand just how ridiculously incorrect $1,986.20 is. The real number is around $38,000 -- about 2000% more.

Second: energy is not the only cost

A lot of people who have never mined  think energy is the whole cost. This is very incorrect. The price of electric energy is indeed a big variable for miners,  but it's only half of the total cost. You need to add infrastructure and the machines and the operating costs. To take some nice round numbers, let's assume we have 1GW of mining.  

• First you need to put in transformers, electrical distribution switchboards, breakers, cables, routers, switches, shelves, containers or buildings, air or water cooling systems, etc. This will be about $200M to $300M in capital expense.  Depending on your power supply and demand in your area, and the overall environment, this investment may last 5 years, so as an amortized  expense it would be about $5M per month.
• Second you have to buy the ASIC computers. At today's price, for 1GW that will be about  $400M to $500M of capex on the computers. These machines will typically have a lifespan of about 4 years. So, amortized, an expense of about  $10M/month
• Third you have to actually run the facility, including internet access, employees salaries etc. For 1GW, you can assume about $1M-$2M/month.

Put it all together, throw in taxes, repairs, spare parts, logistics costs etc, and you get that 1GW of mining incurs costs about $26M per month in energy and $20M per month in other expenses. With revenues of about $50M to $55M per month. That makes the profit margin 10% to 20%. 

Of course, if the price of Bitcoin drops by 20%, as it just did in the last week,  the mining margin can quickly turn  negative. Conversely, if the price shoots up, then profits go up, but eventually the global competition increases and profits shrink right back. For a more technical explanation, I refer you again to "Dynamics of Bitcoin Mining". Bottom line: mining is a ruthlessly competitive, risky, low margin global commodity business.

These numbers give you a range of what might be the total of the industry in Ethiopia. Bitcoin mining in the country involves a couple of dozen companies, and it reached ~600MW in October 2024, just 9 months after it started. So 1GW gives a rough order of magnitude for the near future. It may sound like easy money. But what it really is: invest $600M-$800M of capital into a country which is risky and difficult to work in, even by African standards. And then pray that you can survive risks. If you do, after a couple of years, you will recoup  your initial investment, and then for another 2-3 years you will maybe achieve a low double digits return on investment per year. It's a pretty tough proposition. The average tech startup is low risk by comparison. Most Western investors can generate that rate of return at much lower risk in traditional areas. To go for it you have to have a very strong dedication to a mission, or an extraordinary level of risk tolerance. 

For comparison, Core Scientific, a publicly traded American miner put out their earnings report just a few days ago. Their electricity cost is $0.024 per kWh and operating costs are $0.009 per kWh. So Ethiopia is actually more expensive than the best places in the US. Considering all the other handicaps of Ethiopia (like extreme import difficulties and high taxes as discussed here), mining in Ethiopia is no walk in the park.

So it's a bit annoying to have ill-informed people with no skin in the game calling for bans, confiscations, price increases or whatnot. If they succeed, not only will our investment be burned, setting a very negative precedent for future investment, but also the country would lose its fastest growing major source of foreign currency. Most importantly, the opportunity to accelerate the electrification of the country could be squandered. This is why it's important to fight this bad information, as stupid as it seems.

Enshittificafion

As Bitcoin miners, turning waste into useful things is kind of our ethos.  So besides correcting the facts as we have just done, it's worth taking a moment to examine how we got here. This is a good case study of enshittification, the gradual degradation of quality in online content.

Consider the timeline

• On February 3, 2025, a website called NFT Evening posted a typical content-farm article. Full of incorrect data, nonsensical comparisons and flashy tasteless infographics. Some red flags that should alert the reader immediately. Half way down the article it says the current price of Bitcoin is $57,909.16. First of all, that week, the price of Bitcoin was in the mid ninety thousands range, briefly spiking above $100k. The price hasn't been anywhere near $57k in months. Second, why use 7 digits of precision on the price when it changes continuously? Unless you are talking about the real time price at a specific moment in time, like citing a transaction, that makes no sense.  One reason could be that the author is, or thinks the reader is, impressed by the false precision of more meaningless digits. Another explanation is that the article was generated by an AI language model which accidentally regurgitated six month old data. Even the electricity prices are pretty random. They cite a petroleum website as the source. But for all we know, they were harvested from local prices published long ago, multiplied by exchange rates from a different time frame; confusing rates which vary by quantity and industry; or maybe just made up. Another red flag is the author's bio: full of the most cliché keywords like crypto, NFT, DeFi, Web3, AI... Ugh.  That string is not a sign of high quality to put it mildly.
• On February 20, 2025, BitCluster (a foreign company mining in Ethiopia) posted the story highlighting the number $1,986.20 for Ethiopia. Why? This is a mystery. First of all, again going down to the cent is ridiculous as the precise number would be changing continuously. Second, more importantly, anyone even remotely connected to the real business operations would know the number is ridiculously wrong. Third, to the extent that this number is believed, it could lead to calls for massive increases in electricity price, suspicion from the tax authorities looking for hidden profits, and outright ban. Fourth, if this was true, it would mean BitCluster is gouging their own hosting customers. All things that presumably BitCluster doesn't want. I have reached out to the CEO of BitCluster for an explanation but haven't heard yet. For now, I'm going to assume a drunk marketing intern is in charge of the BitCluster X/Twitter account.
• On February 24, 2025, the X/Twitter account called Project Mano reposted the BitCluster tweet and went on an unhinged rant about how foreigners are bad for Ethiopia, how this is a national humiliation etc. When we QRB Labs corrected their number publicly, they reached out privately with long justifications for their attack. I asked the person simply if they believe the number $1,986.20. They said of course not. Literally the only data point which underpins the entire rant is false, and they know it!  This was actually a shock.  Honest disagreement is no problem.  Ignorance and innocent mistakes are forgivable. Holding strong opinions without having skin in the game is not great but understandable. But deliberate falsehood, I did not expect. Of course it's normal in politics people lie and convince themselves the ends justify unethical means. But in this context, it may sound naive or strange to outsiders who only hear about "cryptocurrency" and "blockchain" nonsense, but there's a certain idealistic ethos among Bitcoiners. Things like honest money, proof of work, low time preference etc. are taken seriously.  So to see Project Mano engage in pure falsehood and propaganda was a deep disappointment. 
• On February 27, 2025, the website Addis Insight posted the same article. They literally copy-pasted the entire article from NFT Evening without attribution.  I guess there's no honor among content farms. No research, no credit, no attribution,  just a mindless relentless race to the bottom. It's almost a perfect case study of enshittification. The only thing missing is 2010-style "listicles" about "Ten easy steps for you to profit from this today!" 
• Shortly after that it started circulating on Whatsapp. The blast radius is expanding. More and more innocent people are being fooled.
  

It's an amazing example of how bad information can start on one website trying to make money in a quick and lazy way, and then quickly flow downhill from there. As the saying goes, a lie can travel halfway around the world before the truth puts on its shoes.

Notes

1. Units used in calculation:

• H stands for hash, the calculation miners do.
• E stands for Exa, which means a quintillion, 1 followed by 18 zeros.  
• T stands for Tera, a trillion, 1 followed by 12 zeros. 
•  J is a Joule, the standard unit of energy. Power is in Watts. 1W = 1J/s. And 1kWh = 3,600,000J.
•  Power is energy divided by time.

2. A quick note on the related topic of asking the Ethiopian government to mine Bitcoin itself. I think it's a bad idea. My reasons are explained in this talk https://youtu.be/sHiN0yTz4BE?si=zMBa7-fL4JteiNYp&t=998 starting at the 16:30 mark. But that is a longer topic which I will maybe cover separately.

3. EEP pricing is not quite optimal in my opinion. To fully align the incentives of the industry and the energy provider with the benefit to the country, it should be dynamic, with strong differentiation based on supply and demand at different locations and times. But that's another larger  topic to address separately.

4. Shout out to Gridless for the Bitcoin dung beetle metaphor and image.

5. In case they get deleted, here are the achive links for

Addis Insight article: https://archive.is/1dLTW

Project Mano tweet: https://archive.is/bMROv

NFT Evening article: https://archive.is/2HDMC

Datacenter potential in Ethiopia

Where is Africa in this picture?  It's a fraction of the "rest of world" slice.  

A bit of history:  Until the late 2000s, data centers tended to be where the telecom cables were i.e. near big population centers with lots of Internet users. The important internet data center locations were NYC, Northern Virginia, SF bay area, Amsterdam, London, Hong Kong, etc. But as we approached the second decade of this century, energy gradually became a bigger cost than bandwidth so they started developing near power sources. Nowadays, Google and Facebook's datacenters are in places like Iowa and Oregon, far from cities and near abundant supplies of energy. 

This is an opportunity for Ethiopia.  (And it's what my company QRB Labs is focused on).

But two caveats: 

a) latency still matters so they can't be too far from the consumer for some applications like communications and live media. So in the short term, for content hosting, the focus will likely be regional rather than international.

b) for some applications, privacy, data security and intellectual property considerations are complicated, so the data centers need predictable and favorable legal environments. So Ethiopia has some catching up to do before it can really compete in hosting AI and other cloud computing services. But it remains an interesting potential area, especially for the model training portion of AI which is not latency sensitive.

There is one immediate application which is energy intensive, not very latency sensitive and completely location agnostic: Bitcoin mining.  I've written about it at length here, but let's put it in the context of data centers in general. The legal requirements are pretty simple as all the data involved is public and the algorithms are open source. And contrary to common misconceptions,  mining is purely infrastructure serving global users, it doesn't depend on local adoption of Bitcoin or the local financial regulations. So it can be anywhere in the world. The catch is, because it is location agnostic, miners are constantly seeking the cheapest power worldwide. Mining is globally hyper-competitive,  any miner that pays more than the other miners on average will immediately go out of business. So to attract miners power prices have to be very low. In the US, while AI data centers can pay up to $0.10/kWh, and households average around $0.15/kWh, and other industries such as manufacturing tend to be somewhere in between those two, big Bitcoin miners pay $0.02/kWh or less (total cost around $0.04 with half being energy). Of course, power providers will prioritize customers who can pay the higher prices. Thus, the natural equilibrium is that Bitcoin miners tend to buy power that no one else can use, also known as stranded power, and thus average lower price than any other users.

So with the right strategy, Ethiopia has a chance to benefit from the data center boom, selling stranded power to Bitcoin miners while working to develop the higher paying demand.  The highest priority should be for the power company to make electricity pricing be supply and demand-based, with aggressive location-based differentiation.

The second priority should be for the government  to radically reform the equipment import process. Currently this is a huge handicap. Importing data center equipment is a 9 step bureaucratic process. It takes on average more than 6 weeks to process each shipment, not including transportation time. 

• Security clearance. Each piece of equipment goes through lengthy "pre-import" approval and post-arrival "import release" approval processes. But everyone involved knows that computer hardware doesn't pose any cyber-security threat. Cyber threats are generally software and network based. In fact it's difficult to think of a single example in the world of a national security problem which can be solved by controlling which computers are allowed into the country. To be blunt, it is a gigantic waste of time. The national security interest should be focused on the energy security of the country.  Is the power company planning  the supply and demand correctly? The current approach makes no more sense that limiting the number of light bulbs that enter the country. 
• Import duty and investment incentives. Capital investments are charged lower import duties. This is an understandable objective. However, the process of qualifying is extremely onerous and often arbitrary. It requires an investment license which creates enormous complexity as I've written about before. Once you start operations you have to switch from an investment license to an expansion license, which has a new set of requirements like minimum payroll etc. Each shipment has to be gruelingly reviewed and approved by the investment commission, by the ministry of finance, as well as customs commission. Besides the inefficiency, the uncertainty is huge. Imagine importing equipment not knowing if the import duty will be 3% or 40% until after it arrives. Any misstep carries the risk of huge penalties, and at worst, the equipment can in theory be confiscated. For a data center, capex efficiency is a life or death matter, so the import risks are high enough to scare away most rational investors. It makes it very hard for a company to grow investment progressively. It would be much better to simply have a constant low import duty, say 5%,  for all equipment and get rid of the investment license. The businesses would be happier, and the government would likely make more revenue from the boom.
• Customs. Besides security and investment approvals, you have to go through customs. These offices are notoriously inefficient and unfair. To make matters worse, the more they delay, the more revenue they generate. Conversely, if they clear stuff too fast and at a low price, the individual customs agent can be suspected of corruption. This creates a cruel incentive for them to become ever more inefficient. A crucial reform would be to a) introduce the following key performance indicator: total customs revenue divided by average time to clear shipments. Tie it to salaries and promotions of the customs officers and their managers. Those who get the most revenue in the least time would be rewarded. And b) create a public database of assessed value and duties paid for all shipments. (The public database shouldn't have the name of the importer, just the numbers). This combination would help eliminate unreasonable delays and  corruption, as both the importer and the customs agent would be incentivized to quickly agree on the correct value. 

For once, Ethiopia has something that the whole world really needs. It can be the Saudi Arabia of electricity.  (Ok the second time, if you count coffee. But as I've written about before a long time ago, it's tough for a producer to capture its fair share of the coffee value chain). Let's not mess it up! We need the best possible energy pricing and the best import process.

Free at last

On the evening of Sunday July 28, 2024, the Ethiopian government made a historic Macro-Economic Reform Program Policy Statement. Early Monday morning, the National Bank of Ethiopia (the central bank), followed up with the details: The National Bank of Ethiopia Announces a Reform of the Foreign Exchange Regime with Immediate Effect. The details are important so if you are interested, you should read the the press release, or better yet, the full directive. 

The bottom line is simply this: the price at which you can legally exchange the local currency for foreign currency is no longer fixed by the government. This doesn't mean all finance is deregulated, you still need licenses to be a bank or other financial service provider. But last week, the price of dollars was 57 ETB/USD and any other price was technically illegal. Today it can be anything. 47, 57, 67, 97, 100...  It is up to the banks and their customers to agree on a price, like buyers and sellers of anything else. The price itself is no longer a crime. Free at last! 

Last year, in my post entitled "The mother of all distortions", I wished for exactly this:

The government could simply revoke the law that says Abebe, Berhane and the banks are not allowed to exchange their USD for ETB at whatever price they agree to. That's what is meant by jargon like "float" or "unification", "liberalization", etc. Just let the two parties agree on a price. No other laws need to change. Any product that is illegal can remain illegal. Banking licenses don't need to change. Just decriminalize voluntary price. That's it. 

And, surprise! That is actually the current Ethiopian government's position. Don't take my word for it. It said so in 2019: Ethiopia: Central Bank announces floating exchange rate regime. And again in 2020: Ethiopia Plans New Key Rate, Floating Currency to Boost Economy. Even now in 2023, exchange rate unification remains the goal. But the policy is "gradual", and 4 years in, the peg remains and the gap is growing. So what are we waiting for? Why don't they just waive this magic wand today?
[...]
To be blunt, the political cost of doing the right thing is very high.

So let's applaud the government for finally doing it. A very courageous move. 

Defenders of the status quo

As expected, there has been a lot of discussion of this historic change. Much of it is excellent and constructive. The press has been vigorous, quick and has offered diverse views. Today I want to focus on a subset, the hard core defenders of the old status quo who are crying bloody murder. Intentionally or not, they are ensuring that the political cost we discussed above is paid in full!  Their arguments are predictable. In fact I haven't yet heard any that are not already debunked (or rather "pre-bunked") in my aforementioned article. It would be tragic if these fallacies caused a political failure of this reform. So here's my modest contribution: by responding to some of them directly, maybe I can help the probability of success a tiny bit. But first, since I won't be repeating the details, if you haven't yet read my article, now would be a good time to go and read it. I'll wait... 

Ok are you back? Once more unto the breach dear friends!

One of the loudest opponents of this freedom is Alemayehu Geda. A few hours after the initial statement, on Sunday evening, before the change actually took place on Monday, he was already out on the radio and social media attacking the reform. Here's what he had to say (I will put his claims in italic, since as you can guess, I'm about to rebut them).

Proposition AG1: Ethiopia imports more than it exports. If the exchange rate is freed,  things that were imported at 50 ETB/USD will now be imported at 100 ETB/USD and so imports will be more expensive. This will cause inflation. Inflation will cause the currency to weaken further. And as the exchange rate goes up the prices will go up even more. And so we will have an unstoppable spiral of general price inflation and currency weakening. 

If you follow his argument carefully, you will realize it it mixes up cause and effect, and then loops back in a circular argument. It's like saying: "Wet streets cause rain. This rain in turns causes the streets to get more wet. And the wetness of the streets causes more rain to fall. Because of these wet streets, soon there will be a hurricane!" Sounds scary. Indeed we've all noticed the close correlation between rain and street wetness! But in reality, it is more like astrology than meteorology. Econstrology.

To show why, let me ask some questions. Excuse me Professor, of course we all know the peg was keeping the rate artificially low, so when freed, it will naturally go up close to the "black" market rate. And you are saying inflation will go up if the government allows this. Then does that mean inflation would go down if they pegged the rate lower?  Maybe even  deflation? If the peg went to  50, 40, 30, ... 0.01 Birr per Dollar, would the cost of living would get lower and lower? The central bank has a magic keyboard that lowers the cost of living?  What about the huge fraction of imports priced according to the black market exchange rate. If the new free market rate holds at or below the old black market rate, why would prices go up on those? 

One more question Prof! You then say if inflation goes up, the currency gets weaker.  How does that work? Let's say we collectively spend 100 Birr every day. And we spend 50 Birr to buy domestic products, and 50 birr to buy US dollars to import stuff. If suddenly we have to spend say 65 on domestic stuff, now we only have 35 birr left to buy dollars with. Therefore there is less demand for dollars. How can that make the price of dollars go up? Conversely, if the dollar is more expensive we should have less money for the domestic stuff, so their price should go down. But you are saying both go up together... Very strange! Clearly if both were to go up together, there would have to be something else causing it (hint: money supply. But more on that later).

Clearly there's a bug in your model. Here's what was really happening. There was two foreign exchange markets. The official one which is pegged by law and the "black" market which I will simply call the market. The price of foreign currency on the market was double the official price.  For forex coming in, legally, you had to "surrender" your forex and get only 50% of the market value in Birr. Similarly for dollars going out, if you could get forex legally, you were basically getting a 50% discount on the market. And it is illegal to evade it. In other words, mathematically it is exactly like a tax and a subsidy. No magic wealth creation by fixing the price. Purely a mechanism of transfer. Taking money from exports and foreign investments, and giving it to consumption of imports. Meanwhile local producers who need forex for their capital investments were getting starved. So as a share of the whole economy: exports decrease, investment decreases, manufacturing decreases, and import consumption increases. More dollars go out and fewer dollars come in. This in turn increases the gap between the market and the official rate, so the implicit tax/subsidy effect gets bigger and the whole problem accelerates. This is the real spiral, and it is the reverse of your spiral.  Your model is right to point out the correlation, but it has cause and effect backwards.  Wet streets do not cause rain!

So, whither inflation? Shouting "everything will go up! panic!" is incorrect. All else being equal, the price of things that were implicitly subsidized by getting forex priority will go up, and the price of things that were implicitly taxed will go down. But of course not all else is equal, other variables will change. If the government wants to subsidize fertilizer imports, it will have to do so explicitly,  as government spending, with the choices and trade-offs that implies, not implicitly via distortion of the currency. This is the healthier way. Explicit and transparent. Implicit subsidies are prone to capture by special interests, and end up being regressive and corrupt.   

Another thing that can change is money supply. On that note, let's go to the Prof's second major point.

Proposition AG2:  Government budget includes a number of things paid for in foreign currency. So that portion of it will double.  Tax collection is already down in the last couple of years, because of war etc..Where will it get the money? And the white people want the government to cut spending and increase taxes. The economy can't support that. This will lead to printing and inflation. Ethiopians are poor. Now they will be poorer.

Ok this is partially true. When government prints more money, when the amount of Birr increases faster than the real economic activity, then we get inflation. More money / same stuff,  means more money per unit of stuff, i.e. prices go up. It is possible government will just print more Birr and this would lead to inflation. The part that is not true is the implication that reforming the exchange rate will automatically cause the government to print more Birr. You have to ask: what actually creates the temptation to print more, and will the temptation be stronger now? In fact Ethiopia already had very high inflation, running at around 30% per year, before this reform! One of the reasons is that the currency distortion was killing real productivity, increasing implicit and explicit tax evasion. In those conditions, the government is tempted to print more as quick fix, like an addict taking more drugs to avoid dealing with a painful reality. So the old currency regime was contributing to inflation! Now this reform, by improving productivity, should reduce inflationary tendencies in the long term.

To be clear, the reform does not silence the siren song of the money printer. The transition will be disruptive. There will be winners and losers in the short term. The old winners of the letter of credit privilege game will now be on equal footing with everyone else. The old losers, those who were generating forex and were forced to convert below market rate, will now get more of the benefit of their efforts. Manufacturers will have an easier time with imported equipment and inputs. Banks and merkato traders will speculate on whether the new policy will hold, and this will add volatility in prices and supplies. It will take a bit of time for things to settle down. Until then, it will be tempting for the government to spend more to smooth some of the bumps, whether newly borrowed money or printing. 

For this reform to succeed, the government must resist the temptation. If it does succeed, it will lead to more efficiency and fairness, a more productive economy and therefore less poverty. As it turns out, the central bank (NBE) has actually been systematically reducing the Birr money supply for the last few months. Not to be too technical, but they "drained liquidity out of the system" by lowering the maximum amount of lending  as a fraction of banks' balance sheets.  This is basically the opposite of printing money. So even though so the temptation will be there, there's reason to be optimistic that this reform is well prepared and the discipline to see it through will be there.

Now his third and final point is the following.

Proposition AG3: The people are poor. Cost of living is high. 70% of the population earns less than 50 dollars [a month].  Inflation makes life harder for the poor. 

That doesn't even need rebutting. It's just stating the obvious. But it is not derived from the subject at hand. No reason is given why this reform will increase poverty or reduce it. This is a rhetorical tactic called "motte and bailey fallacy". Continuing our previous analogy, it's like saying: "Wet streets cause rain and rain causes hurricanes. Hurricanes are terrible!" Then if an opponent says  "No, wet streets don't cause rain!" then he can respond with "Oh so you like hurricanes, you horrible person!" In this case, if you point out the incorrectness of his argument about the forex regime, this allows him to say "Oh so you want more poverty!"

One more thing. In Proposition AG2, there was a passing jab at  "ፈረንጆቹ"  (i.e. the white people)... He's just using that as shorthand for the IMF, western governments etc. And the IMF is of course the most toxic brand in the third world.  If the IMF says the sky is blue, you can get a lot of political mileage by saying the sky is green. But that's empty rhetoric. The reality is the IMF is more like a pharmacist and third world governments are addicted to prescription drugs. And this pharmacist (or drug dealer if you prefer) says: you really should stop the addiction, but I'll give you a little dose to wean you off, if you promise to reform yourself. Most of the time, the reforms fail. This has been going on for decades and everyone hates the IMF as a result. But nobody ever cured an addiction with righteous indignation about the pharmacist. Ultimately the addicts need to repair themselves. IMF loans can be addictive and destructive in the long term. But if used correctly in the short term with exception discipline, they can also help wean the government off the addiction.  So please dear friends, don't fall for the old  "Whitey made them do it!" attack. Just think from first principles about this reform. 

Finally, when asked if there's anything positive, the Prof acknowledges that it may close the gap with the black market for remittances (true).  But then he simply asserts that exports can't increase! He says exports have other problems like shortage of foreign currency (duh!). He also blames customs, bureaucracy,  corruption and lack of peace in the country for harming exports.  That's all true. 

For example:

• Customs is hell. This week the customs commission suddenly decided to freeze imports of capital goods including those that are en route and those that have  already arrived and been cleared. This is a devastating cost to many businesses, including some that would be generating forex.
• Land transportation from Djibouti to Ethiopia, both trains and trucks,  is plagued by congestion and insecurity.
• The Houthi blockade of the Red Sea is extremely costly for trade to/from Ethiopia.
• Political problems and violence handicap many parts of the economy, including exports.

All that is true. Doing business in Ethiopia remains unfathomably difficult.  But none of that is a reason for opposing this particular reform. On the contrary, it *will* improve a lot of it. Much of the incomprehensible torture that you go through in customs or investment licenses, for example, is based on forex things like franco valuta, bank permits, etc. Having a freely exchange currency will definitely eliminate this important source of red tape and corruption.

To conclude, the professor despairs that he's been a prophet but the government is not listening to him. But what he doesn't say is that his approach was actually implemented for the last 50 years! And even though this reform has been the goal since 2019, such arguments have delayed it for 5 years.  So Prof, congrats on your team's five decade policy victory streak. Now please have the humility and honesty to admit that your approach was tried and failed.  

Five decades is a long time. Over 95% of the population has never known a life where changing currency from one to another is no big deal, like in Europe, or America or indeed much of Africa. I'm confident Ethiopians will adjust to this little bit of extra freedom, and the benefits will accrue slowly but surely.

P.S. A personal note to Prof Alemayehu. If you ever read this, first thanks for reading and second, let me be clear, this is not  personal. In fact by picking on you, I'm recognizing you as one of the chief public  defender of the old system. You are widely respected. I just think you are wrong. Second, even though we don't know each other, you've  made a couple of condescending public comments about my previous article, essentially calling me a simpleton. Since you blocked me, I never got to thank you. I took your insult as a compliment.  My goal is always to make things as simple as possible!

P.P.S. This post is too long so I'm stopping at the polemic. In a follow-up post, I will give some concrete predictions and maybe even offer some bets! A preview:

I expect
1. bank rates will rapidly converge to the current parallel market rate, maybe a bit lower.
2. market rate will not go down but it will rise more slowly, over the next 6 months, % change of ETB/USD will be less than the last 6 months.
3. longer term, ETB will strengthen pic.twitter.com/lJz0yg81z7

— Nemo Semret (@nemozen) July 29, 2024

Five books: Asia

Once in a while, I notice in my unplanned readings a cluster, theme. When this happens, it's time for a "five books" blog post. So here we are.  Asia. Not a very coherent theme. But I recently read five books connected to that continent. 

The Cowshed: memories of the Chinese cultural revolution by Ji Xianlin

An extraordinary book. This episode of history is strange but at the same time a bit familiar.  Marxism puts "class struggle" as one of the foundations of politics. That makes class labels an extremely powerful weapon. Whether it is at the top of the national party or in the smallest village committees, all it takes is a tiny minority of sociopaths to figure out this weapon will get them power, and it leads to inevitable escalations of ostracism: capitalists, bourgeois, petit bourgeois, kulaks, liberals, the list of enemy classes always grows. The rituals become crazier, the language itself becomes insane, and the violence extreme. The Chinese cultural revolution is perhaps the largest ever version of this process.  The "cancel culture" of western society in the 2010s is almost harmless by comparison but it is a prototype of this process. If you can imagine it raised to the n-th power, multiplied by a lot of cruelty and sadism, growing for a couple of decades of political madness, you can maybe get a sense of what it might have been like in China from the mid 60s to the mid 70s. Or you can just read this book.  

As I write this, for some reason I'm reminded of a book by Elie Wiesel, which I read years ago, I can't remember what the title is, but it's not one of his famous one, maybe Paroles d'étranger? They are not similar, Wiesel talking about the Holocaust is much more emotional and philosophical, while Ji has a very matter-of-fact style, almost journalistic. But deep down, it kind of makes me feel the same way. Shudder.

The Anarchy: The East India Company, Corporate Violence, and the Pillage of an Empire by William Dalrymple

Everyone knows that India was a British colony. This book is about what happened before that, long before the administrators in khaki shorts and funny hats etc. A few random observations: 

• At the beginning, in the year 1600, it was not the British government, but a private company with shareholders in London, equipped with a "charter" from the King (basically a business license), that decided to go trade in India.  I am against the idea of business licensing in general, and reading this book didn't change my mind about that to say the least!
• During most of this time, the British could not even imagine controlling India. On the contrary, they were in awe of the wealth and power of India. They had to curry favor, and beg for permission from the Mughal  authorities. Their focus was to compete with other Europeans especially the French, and make money by connecting the wealth of India with Europe.  If you went back to say 1700 and told a British guy in India that his successors would rule the country, it would seem completely ridiculous.
• Over 250 years, through incredible ups and downs, the company evolved from simply trading, to participating in the politics of the empire, to  eventually dominating the country militarily, and then gradually being replaced by the British government. The more famous period of colonialism as we know it was less than 100 years, from 1858, when the British government nationalized the company, until 1947. 
• Nowadays, the biggest companies in the global stock market are 20 to 50 years old. But the British East India Company occupied an  equivalent position for over 200 years! 
• Interestingly, the British started dominating India politically right around the time when they started losing their colonies in North America which became the USA. There are actually quite a few people who fought in the American war of independence, the conquest of the Mughal Empire in India, and the Napoleonic wars in Europe. Can you imagine? Pretty dramatic couple of decades.

From Third World to First: The Singapore Story: 1965-2000 by Lee Kuan Yew

Which country had the best economy of the last 150 years? The USA is obviously the undisputed heavyweight champ over this period. But if you wanted to make a pound for pound argument? Singapore is definitely in the conversation. The title of this book is literally true, in 1965 it was an underdeveloped economy, poorer than many African countries. Today it boasts some of the highest GDP/capita figures in the world. 

Singapore has no oil, nor gold. No forests, no farmland. They barely even have enough fresh water to drink. Their biggest neighbors, Malaysia, Indonesia or China were hostile to them most of this time. How did they pull of this miracle?  They do have a pretty great location for trade. But then again so does Djibouti. Much of their population came through the Darwinian process of migration. But same can be said for many other countries. Will this book will not give you the "one weird trick to go from third world to first world"?  No. There are a lot of factors. Many of them kind of boring. And some the choices the government made are questionable, some policies are bad. And a lot are good. You have to read the whole story to get it.    

There is however one implicit meta-lesson:  sometimes history hinges on exceptional individuals.  Reading this book, you can't help but realize just how bad most political leaders are compared to Lee Kwan Yew. Lee may very well embody the best combination of intelligence, wisdom, integrity and competence found in any political leader of the 20th century. 

Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World by Tom Wright and Bradley Hope

This book is the bizarro world  complement to the story Lee Kwan Yew's Singapore. Set in neighboring Malaysia in the early 21st century, it is also a true story. But there's no wisdom, no integrity. No long term vision. Just the opposite. But it is a fascinating story of a young guy who managed to skillfully tap into the veins of corruption at the highest levels of finance and politics, swindle his way to billions, and briefly reach the very top of the strange world of obscene consumption. Lots of huge deals, celebrities, yachts, that kind of stuff. The book is not just entertaining, but it is also well researched and does a good job of explaining the financial mechanics of the story.

Remembrance of Earth's Past (aka The Three Body Problem trilogy) by Liu Cixin

OK I'm cheating here, since this entry is three books not one.  But I'll count them as one to fit into my "five books" series of blog posts. 

This is quite simply one of the best works of science fiction I've ever read. Of course it has excellent  technological imagination, but is also precise scientifically, and really deep philosophically.  And the human story is really good too. In fact it starts right where this post started, in the cultural revolution of China of the 1960s. I don't want to give too much away, but the space and time scale of the story is just about as big as it can be without exploding your head. 

Bitcoin mining in Ethiopia: the good, the bad and the ugly

In the last few months, media have been buzzing about Bitcoin mining in Ethiopia. For Bitcoiners, it is part of the story of Africa as the new frontier in the much desired geographic diversification of Bitcoin mining - a perspective I agree with. In mainstream Western media, it's sometimes framed as yet another example of China in Africa. That framing, while not inaccurate, I think casts a geopolitical shadow that obscures the national perspective. Others portray it as a desperate attempt by Africans for a "quick fix" to foreign currency shortages -- not false but a bit condescending and missing the bigger picture.  So, let's shine a bit more light on it from the Ethiopian point of view (Shadow, light... sorry I couldn't muster some "dark clouds" to complete the trifecta of clichés!) 

Full disclosure: I'm a co-founder of  QRB Labs, the first company to introduce Bitcoin mining to the country.  We've been quietly working since 2021 to do this the "right way" against tremendous odds.  But this post is not our company's story.  It's a skin-in-the-game opinion about how this industry should evolve for the benefit of the country. To highlight the good it can do. But also the risk of bad, and ugly.

The Good

First let's talk about the positive. Energy in Ethiopia and Bitcoin mining are a match made in heaven. 

In Ethiopia, electricity generation capacity is growing very rapidly. From 2GW in 2020 to over 10GW in the next couple of years. The Grand Ethiopian Renaissance Dam (which I've written about before) is the biggest and most famous step in that growth, but there are many projects contributing to it. All of course phenomenally good. Indeed, practically nothing is better for economic growth and broadly improving lives than electrification.  For comparison, the average Ethiopian has 1/50th the electricity of an American. So, until we get to 100GW at least, another 1000% growth, increasing generation is unquestionably necessary. 

But there's a catch. It is extremely difficult and expensive to deliver that energy to users. In the case of Ethiopia, some estimate that  $10B of investment and years of hard work are needed for transmission and distribution to catch up to generation. In the meantime, up to half of the generated energy remains unused. Which means the investment in generation takes longer to pay for itself. Meanwhile how do you finance the transmission and distribution? It's a huge chicken and egg problem, and it's unavoidable when there is rapid growth.  

In more developed countries, capacity may not be doubling or quadrupling but a similar problem exists with solar and wind power. Huge investments in supply are needed, but the demand may not match up with the supply, since consumption peaks don't line up perfectly with the times when the sun shines or the wind blows.  Whether caused by the difference between the time of generation and consumption, or by the distance, this is the problem of "stranded energy".

Now what if there was a way to make money from stranded energy? In Ethiopia, this revenue could help accelerate electrification! That's where Bitcoin comes in:   

"the competitive dynamics of Bitcoin mining are such that it shifts in time and space to the lowest available cost of electricity. This occurs not just by deploying hardware to various locations, but also by turning miners on or off instantly. This flexible demand-side support makes mining the ideal customer to balance variable supply...."  from "The Dynamics of Bitcoin Mining" by yours truly.

Thus the energy demand profile of data centers that host high energy computations makes them the perfect customer for Ethiopia's stranded energy. Bitcoin even more so than other data applications because: 

• Bitcoin mining is location agnostic. It doesn't matter if it runs in Antarctica or the Sahara as long as it's connected to the Internet. 
• It's also time agnostic.  Each hash computation is independent of the previous one. You can mine 24 hours a day, 12 hours a day, at random times. Of course miners, in order to be profitable, must be very good at making the complex trade offs between between energy cost and hardware utilization. But they don't inherently need 24x7 power. 
• Further, contrary to common perception, it doesn't actually need very much bandwidth. The entire blockchain is still barely more than half a terabyte! 
• And equally importantly, it's all public data. The entire world can see all the inputs to the miners. So there's no data sovereignty, legal information jurisdiction or cyber security issue.
• Mining is purely infrastructure for running computers. There's no link between the locations of the miners and the users of Bitcoin. So Bitcoin mining doesn't depend on local regulations about money and financial services, legality of "cryptocurrencies" etc. 

For traditional data centers hosting say streaming video, social media or corporate IT,  cheap electricity is nice to have, but they also require some combination of high bandwidth, low latency, and a compatible legal system for privacy, copyright, finance etc. These are all areas where it is presently tough for Ethiopia to compete globally -- to put it mildly. But Bitcoin mining has in principle no disadvantage running in Ethiopia. 

Further, Ethiopia's electricity generation mix is over 98% renewable. And the other 2% is largely off-grid. So for a data center in Ethiopia, the energy is pretty much 100% "green" hydroelectricity. This is very desirable for the Bitcoin community. Bitcoin arguably doesn't have to be green, any more than ice cream or football. In fact proof of work is one of the most noble uses of energy in the world. But Bitcoin has a lot of enemies who, as I have written about before on this blog. hypocritically or ignorantly use energy as an attack vector.  So "greening" mining is good for Bitcoin globally, and Ethiopia is perfect for that.

So there you have it.  The good is amazing.  Accelerating electrification for economic development of Africa. Geographic diversification and greening of Bitcoin mining.  That is literally the mission statement of QRB Labs. And also why Ethiopia and Bitcoin mining are truly a match made in heaven.

The Bad

But an electricity grid is a very complex beast. You can have too much energy in one place and too little in another at the same time.  When you have too much, it's  a waste. And where there's too little, consumers suffer outages which have negative economic and other consequences. In addition, both excess and shortage can cause costly damage to infrastructure. The best way to balance that is to manage the demand, through price and quantity allocation.

In the case of Ethiopia, while the people at the power company are dedicated to doing the right thing, historically it has not had the independence to manage pricing and demand as it needs to. By contrast, the airline, even though it is also state owned, has a long history of independence, allowing it to mange routes, schedules and prices on a purely commercial basis. This allows it to succeed in an extremely competitive and complex international industry.  But electricity prices have historically been dictated by politics.  Thus, when it comes to the relationship between the energy producer and Bitcoin miners, they don't have the full flexibility to achieve true win-win pricing.  Consumer utility pricing is understandably more difficult to change. But at the wholesale level, the producer should be allowed to make stranded energy cheap, and conversely to charge higher prices where there's lots of demand, whether it is from data centers, factories or households.  

Without modernized pricing from the supplier, the risk is that Bitcoin miners who don't particularly care about the long term of the country can rush in  with demand in the wrong places, and destabilize the grid. Not because they are particularly evil or greedy. But just like water flows to the bottom of a valley, Bitcoin miners will go to where they can get energy at a good price. In this almost perfectly competitive industry, the purest embodiment of survival of the fittest, the typical buyer can't afford to think for the seller.

The only solution is incentive compatible pricing. Rational, non-political, and based on supply and demand. Further, it is crucial that the pricing not be based on the industry, or what the energy is being used for. Electricity is fungible. So price discrimination by type of application never works well. If one industry  gets lower rates than another, it creates perverse incentives, where one will disguise itself as the other, and cause complexity in enforcement. This is also true for Bitcoin mining. Instead, energy should be commercially  negotiated based on quantity, location and time. Let the buyers find their niche. In a fair rational environment, Bitcoin demand will naturally stabilize and benefit the grid, and  monetize excess capacity to help long term electrification. And when the country's transmission and distribution infrastructure is fully developed, when industrial and consumer demand can use all of the electricity being generated, then Bitcoin miners will not be able to pay the same price as factories or households. We should be happy to declare mission accomplished and look for cheap power somewhere else.

Another potential Bad is that Bitcoin mining can easily get politicized in Ethiopia. People who don't understand the subtle win-win dynamics may complain that Bitcoin is taking power from the people. Or based on superficial nonsense about "cryptocurrencies", especially in a bull market, assume Bitcoin miners are rich and should pay high prices. Such interference risks killing the goose that lays the golden egg. If handled correctly, mining is a tough global competition for miners but an easy win for local energy producers. But mishandling could very quickly kill a historic source of revenue.

Initially, the government made the mistake of temporarily blocking Bitcoin mining equipment imports in 2022 while it tried to come up with new regulations. Then in 2023, it implemented rules about Bitcoin mining as "cryptography" rather than "energy". But in fact, mining involves no encryption in the conventional sense of trying to keep information secret. The computation is basically just a hash function with public inputs and public outputs. It's just a race between miners to get the output faster.  (Even transaction validation, which usually is not even on the miner but in the pool, only involves checking signatures which anyone can do -- no secrets). At one point we were even told that only foreign companies could participate in this industry, which is unconstitutional! Fortunately, over the last couple of months, these errors are getting understood and things are moving in the right direction.

The Ugly

An unfortunate side effect of taking the wrong regulatory approach is potential for corruption.  Bitcoin miners are not all idealistic. Even when they are so inclined, competition is so fierce there's always a temptation to look for legal short cuts. On top of that, many foreigners come with a "this is Africa" attitude. Translation: corruption is a natural feature of the landscape. So they try bulldoze their way in with bribery. If it doesn't work, they try the next place. If it works, they exploit it as fast as possible, and when it inevitably blows up, just pack up and move to the next hunting grounds.

For many countries, oil wealth turned into the infamous "resource curse", undermining governance and even being negative for economic development. In the worst cases, it goes beyond bribery to outright theft: taking the energy and not paying for it. This is a danger with Bitcoin for electricity-rich countries too. Kazakhstan, Angola, and some other countries have experienced this ugly side. Fortunately, there's no evidence of this occurring in Ethiopia yet, but it is perhaps the greatest theoretical danger.

The best way to avoid this is for the government to eschew regulatory micromanagement. Rather than trying to control it through hardware imports, or make it political, or treat it as cryptography, or have too many stakeholders at the table, it should allow this industry to naturally find a win-win buyer-seller relationship with energy. This means allowing flexible electricity capacity allocation and pricing.  

The government's focus should be on monitoring the bigger picture: that the energy security of the country is not compromised. So rather than trying to regulate the details of what miners do, the government should require the power company to regularly report on overall high and medium voltage demand by region, generation and transmission capacity, and provide assurances that supply and demand are sustainably managed across all industries and regions.

Conclusion

So there are a few ways things could go wrong. It's important to understand them. But part of me fears that I have given ammunition to the haters. I hope I've struck the right balance.  Reviewing this post, I see I've devoted a lot more words to the good than to the bad and ugly. And that is as it should be.  We face a historic opportunity for two things I care deeply about: Ethiopia and Bitcoin. May both live long and prosper!

P.S. This post is months overdue! And it's too long. To quote Mark Twain: “I didn't have time to write a short letter, so I wrote a long one instead.”