Open Building Institute: building under construction

A man, a plan, a red flag: examining the claims of the Open Building Institute

This post is an edited collection of my responses to James Corbett’s interview of Marcin Jakubowski and Catarina Mota of the Open Building Institute.

“You wouldn’t download a house, would you?”  So goes the tongue-in-cheek rhetorical question from James Corbett in his recent interview of Marcin Jakubowski and Catarina Mota of the Open Building Institute (OBI).  The couple’s organization aims to provide free construction plans for modular homes, available on their website.  They claim substantially reduced costs versus traditional construction methods.  Marcin previously headed Open Source Ecology (OSE), a compendium of open-source plans for various construction machines, which has now been merged with the OBI project.

Too good to be true

I like the idea of do-it-yourself and open-source, but we have to be careful about people seeking to capitalize on this trend just by uttering the right buzzwords. Some big red flags stuck out to me about this couple’s presentation:

Open Building Institute: construction workers

Open Building Institute: the secret is free labor

1. Free labor – a large part of construction cost is labor, yet they are getting it for free or even charging people for “immersion” workshops – in other words, trainees build their houses. This doesn’t sound sustainable or scalable at all. It also strikes me as a bit like a cult, where a bunch of people put in free work to build up assets for the dear leader. Marcin owns Factor e Farm, which is the site for these model structures.  At the very least, it is a misrepresentation to the consumers of the real costs of this process, since presumably the people paying for this “immersion” training expect to eventually be paid for their labor.

2. Asking for funding for a large, ambitious, complex project with ill-defined scope. To fund the OBI goals of an economically transformative construction methodology, Marcin and Catarina held a Kickstarter, raising over $115,000.  Unfortunately, this overly-broad goal is a recipe for misaligned expectations and failure to deliver. Every project faces risks, yet their approach multiplies the risk factors of a typical project by orders of magnitude. Better to start small and grow incrementally, before attempting a world-changing goal all at once.

Open Source Ecology: brick press

Open Source Ecology brick press: $5K to build, worth $50K. Only 10 built worldwide.

3. Unexplained failure of previous project. Failure is part of business and is a necessary component of learning about market demand, that ultimately can lead to success. However, they do not give an adequate explanation for why their previous project, the brick-making machine, which was the OSE flagship machine, did not get any adoption. The ostensible reason is that they need to build houses in order to make the machines useful. But, they also mentioned that the market price for these devices is $50k and they are producing them for $5k. If this is true, they should have been able to sell them like hotcakes. It doesn’t add up and is not a good sign for pursuing an even bigger project when the smaller project was not completed to expectations.

I’m very wary about these people, their business model doesn’t make sense to me, there are too many unanswered questions, and not enough critical questions posed to them in this interview at least. This modular home / eco home / tiny home fad is a magnet for hucksters spewing the right words.

A history of deception

Open Source Ecology: workers with machine

Snapshot of life on Factor e Farm

I have researched Marcin Jakubowski and his organization seems to be a scam under cover of a utopian cult.  So far, OSE / OBI seems plagued by failure to deliver, low quality, high turnover of staff, dictatorial management style, and outright fraud. I’ve included the links below, in which these issues are discussed by former volunteers and P2P community members.

“Is there a crisis in Open Source Ecology?”

“Problems with Open Source Ecology: A Perspective” (Google Group discussion thread)

“Open Source Predator: Marcin Jakubowski” (Facebook Group discussion thread)

“Tripping Over Our Bootstraps: Open Source Ecology and the Promise of Liberational Technology”

Marcin Jakubowski trademark registration for “Open Source Ecology”, in his own name – very odd for a supposed “open source” organization.

The ideas of P2P, open-source, DIY, etc. are all good and valuable ideas that should be explored. However, scam artists can also use those buzzwords to take advantage of people.  I am very skeptical of these people and will do further research on their project – I feel like I have only scratched the surface.

Bitcoin pipes

Bitcoin’s dubious utility value

Bitcoin fanbois point to bitcoin’s utility as a payment network. But, unlike Visa, holders of bitcoin don’t get any of the mining revenues, so there is no revenue stream on which to value a bitcoin.
 
Participants do need to have bitcoin to transfer funds, but they don’t need to hold it for longer than the transaction itself. Since bitcoin is limited to ~3 transactions per second, and average confirmation times are several hours, depending on network congestion, there is no need for more than a few bitcoin to accomplish all payments across the network. As an example, assuming 1 bitcoin per transaction, 3/sec * 3,600 sec/hr * 3 hr/confirmation = 32,400 bitcoin to execute all payments on the network.
 
Also, since bitcoin can be divided into satoshi, hundreds of millionths of a Bitcoin, there is no need to hold a particular amount of bitcoin to accomplish a transaction. The bitcoin itself just represents the transaction record, not the value of the contract, just as a record in Visa’s database represents the transaction, and is not in and of itself valuable, beyond the market price of the transaction mechanism (about 1%).
 
Even if holders of bitcoin shared in the mining revenues, the competitive mining market produces a flat fee per transaction, not a percentage fee, which allows the transfer of massive fortunes for a tiny fraction of a percent. It would be a much worse value proposition, for investors, than Visa.
 
The fiat price of a bitcoin arises from an artificial restriction on bitcoin supply & mining, and people’s expectation that these restrictions will entice others to buy their bitcoin in the future at a higher price. The “greater fool” theory. But this is separate from bitcoin’s utility as a payment network.
 
It is no different from other speculative phenomena such as Beanie Babies, baseball cards, and other artificially restricted commodities. People misinterpret the restriction as an ipso facto justification for a high price. Once all available cash & credit has poured into the commodity, there are no further buyers, the mania ends, and the price drops to the utility value of the commodity.  In bitcoin’s case, its utility value is close to zero.
Tether collapse scenario hindenberg style

Tether collapse scenario

Current situation with dumb money buying BTC:

  • Tether prints tethers to buy bitcoin
  • BTC-USDT price skyrockets
  • Arbitrage bots buy BTC-USD, because everyone assumes 1 USDT = 1 USD
  • BTC-USD price matches BTC-USDT price
  • Price increase brings in more dumb money USD to buy BTC, skyrocketing price further
  • Arbitrage bots sell BTC for USD, profit
  • Tether sells BTC for USD
  • Tether is now “backed” by USD — can afford to redeem tethers for the small number of people who convert USDT to USD
  • Tether pockets USD, prints more tethers …

What if the flow of dumb money slows down or stops? (due to higher prices, and simply no more mattress cash to dump into BTC)

  • Tether prints tethers to buy bitcoin
  • BTC-USDT price skyrockets
  • Arbitrage bots buy BTC-USD
  • No more dumb money = no more USD arbitrage profit
  • Less arbitrage = increasing gap between BTC-USDT and BTC-USD prices
  • Now there is arbitrage opportunity the other direction
  • Buy BTC-USD, sell BTC-USDT, sell USDT for USD
  • Tether now has to redeem tethers for USD
  • The bigger the gap, the more tethers they have to redeem
  • If they stop printing tethers, the BTC-USDT price collapses
  • If BTC-USDT price collapses, arbitrage bots buy BTC-USDT and sell BTC-USD, further collapsing BTC-USD
  • If they keep printing, the gap widens and they have to redeem more and more tethers for USD
  • At that point, the game is up and Tether will have no incentive to continue redeeming tethers.  The tether market collapses.  You can redeem 1 USDT for 1 cent.  BTC paper profits are wiped out.  Tether is left with >600 million USD in the bank.

The phenomena to watch out for in this scenario are:

  • Increasing gap between BTC-USDT and BTC-USD prices
  • Increasing volatility of USDT-USD price, followed by collapse

Bitcoin’s paper price bump

What’s behind Bitcoin’s recent price increase? I’ll tell you — and it’s not Bitcoin’s utility as a currency, or wonderful investment opportunity.
 
Bitfinex accounts for the largest share of BTC trading volume. Yet they stopped accepting USD deposits back in April. This inevitably spilled into restricting USD withdrawals.  After that, BTC price on their exchange went up. Why?
 
If you were an account holder, what would you do? I’m not able to withdraw my USD. Therefore, I’ll buy BTC so I can move it to another wallet. Hence, increased demand for BTC on their exchange, and increased price AND volume.
 
Other exchanges did the same; there are not many that allow USD deposits & withdrawals now.
 
This recent BTC price increase is caused by the fact that no one can withdraw USD!
What happens when this bottled-up demand to withdraw finally moves into USD, other fiat, or other crypto?
Updated on 10/20/2017 to reflect USD withdrawal restrictions and supporting link.

Alt-coins are vulnerable to attack

The strength of a cryptocurrency is the share of global processing power it can muster in service of its ledger.  An attack by a significant computational resource (botnet, mining pool, government supercomputer, etc.) could potentially reverse recent transactions or cause a fork of the currency.  The reason the global share matters is that computational power is fungible, and may be used in service of any cryptocurrency.

The less computational power dedicated to mining a crypto, the more vulnerable it is to attack.  Alt-coins that do not command as much hash power as Bitcoin would be first in line.

Processing power over time is governed by the price per computational unit and by the price of electricity.  For example, a spike in electricity prices or transistor prices would increase mining costs, and therefore transaction fees, possibly disrupting the usability of the currency.  A sudden drop in electricity prices or transistor prices would reduce mining costs, increasing the chance of attacks on a currency’s ledger.

Such attacks could be orchestrated, not necessarily to steal the underlying wealth of currency holders, but to accomplish secondary effects beneficial to the attacker.  For example:

  • A large investor in a particular crypto may attack a competing (smaller) crypto intruding in the space.  This implies a first-mover advantage in the cryptocurrency space and stratification of crypto, with one per defensible economic niche.  Eventually, the market may consolidate into one global crypto.
  • Momentarily disrupt the functioning of a crypto at a critical moment in its development, for maximum PR effect, to spread fear & uncertainty to potential investors and adopters.
  • Momentarily disrupt recent transactions to create uncertainty for retailers accepting the currency & consumers using it.
  • Permanently disrupt or fork a smaller currency.

You would only need to bid on computing power for a short time to cause a major disruption.  Miners are very sensitive to transaction fees, so would quickly respond to any change in market demand.  Furthermore, cloud mining operations, and cloud computing in general, provide an easy way to quickly spool up computing power for a short time, disrupt the target crypto, and spool down, thus minimizing costs.

Alt-coins based on a permissionless, global blockchain are very vulnerable to this type of attack. Eventually, even Bitcoin itself may come under attack should there be a revolutionary development in computational hardware, exploited by a group of early adopters, or a government willing to throw massive fiat to kill it once and for all.

Bitcoin is a ponzi scheme

All “cryptocurrencies” based on artificial limits are inherently pump-and-dump schemes.  If they were true free market currencies, the money supply would grow with demand. Instead, they are artificially restricted.  Why?  To create the illusion of limited supply and therefore expectation of future scarcity and speculative profit.

Bitcoin price chart 2017They are fiat currencies, based on nothing but this speculation.  The Bitcoin price chart shows this.  Bitcoin fanboys point to the skyrocketing price as a badge of honor, but all it shows is that it is a speculation, not a store of value.  It has no price stability, and cannot be considered a “currency”.

In the short term, the price will keep going up for various reasons.  Mining is getting more expensive and less profitable, driving out miners and restricting supply.  Use as a pseudo-anonymous money transfer scheme is increasing on the dark web.  A method of circumventing Chinese capital controls.  An investment vehicle for Chinese with not enough local investment options.

But eventually, people will realize NOTHING holds up the value of Bitcoin.  No petrodollar, no USG taxation.  And it will collapse, as will the rest of the currencies that will inevitably fork off this one.  This is even ignoring the major security and regulatory issues that plague Bitcoin.

Currency is a form of social credit.  It’s an implied debt, that someone will pay off with goods & services in the future.  This should be the basis of any cryptocurrency, not arbitrary and artificial limits on supply, and fancy math for its issuance.