There Is No Planet B: Part 1
30 November 2023 | 4:00 pm

Anything Elon Musk says must be treated skeptically. This is particularly true of anything involving timescales (see Tesla robotaxis). And it is even more true of Musk's plans for visiting and eventually colonizing Mars.

Below the fold in part 1 of this two-part post, I apply some arithmetic just to the logistics of Musk's plans for Mars. Part 2 isn't specific to Musk's plans; I discuss two attempts to list the set of "knowns" about Mars exploration, for which the science is fairly clear but the engineering and the economics don't exist, and the much larger set of "known unknowns", critical aspects requiring robust solutions for which the science, let alone the engineering, doesn't exist:

Amateurs talk strategy, professionals talk logistics
Attributed to General Omar Bradley
Chris Young reported that Elon Musk: SpaceX will build over 1,000 Starships to move 1 million humans to Mars:
The plan is to "build 1000+ Starships to transport life to Mars. Basically, (very) modern Noah's Arks," Musk wrote, reiterating a statement he had made during a recent interview with TED curator Chris Anderson. In that interview, he stated that SpaceX would achieve this goal by 2050.
Wikipedia reports that:
SpaceX and Musk have stated their goal of colonizing Mars to ensure the long-term survival of humanity, with an ambition of sending a thousand Starship spacecraft to Mars during a Mars launch window in a very far future.
SpaceX's Starship is claimed to be able to "carry more than 100 tons of payload to the lunar surface in a single flight" and, using on-orbit refueling, "up to 100 tons all the way to Mars". The Mars mission depends upon refueling the Starship on-orbit from fuel tankers launched beforehand on the Super Heavy booster.

"Musk has predicted that a Starship orbital launch will eventually cost $1 million" but a more realistic estimate is about $1.5M, or $10/Kg. Each launch requires a lot of fuel. "Roughly four hundred truck deliveries are needed for one launch"

The problem with refueling on-orbit is that getting the fuel up for one mission requires a lot of launches. For a manned Moon landing the Government Accountability Office said that SpaceX would "require 16 launches overall". So delivering 100,000 tonnes to Mars would require 16,000 Super Heavy launches costing around $24B and involving 6.4M truck deliveries. One might think that the launches could take the whole of the 780-day interval between Mars launch windows, or a rate of just over 20/day. But because the fuel in the orbital tanks boils off over time, the launches have to happen much faster than that, perhaps around 50/day. in 2022 the Falcon 9 launched 60 times, or 0.16/day. Getting to 50/day requires scaling up over 300 times.

SpaceX's Falcon 9 has an astonishing 99.3% success rate. If the Mars vehicle had the same rate, an extra 113 launches would be needed to cover the failures. Of the 1,000 manned launches, 7 would be failures, carrying 7,000 people.

1000 Starships carrying 1,000,000 people is 1,000 per Starship, which can deliver 100 tons to Mars. That is 220lb/person, so apart from the person and the spacesuit they will need to disembark, they won't have many carry-on bags in the overheads, let alone the air and food needed for the journey. Everything they need to survive on Mars must already have been delivered by earlier missions. Lets guess that each person needs 10 times their weight in life support and other equipment. So the 1M person launch window must be preceded by 10 similar launch windows delivering freight. Now we are talking $264B in launch costs alone, or $264K per person. Even for Elon Musk, over a quarter-trillion dollars is real money. Even that may not be enough. The history of Mars missions shows that Mars landing is a high-risk endeavour. It is very unlikely that all 10,000 freight missions would be successful.

10 launch windows is 7,800 days or more than 21 years. So if Musk wants to land a million humans by 2050 he needs to start launching 50 Starships a day in 2029, a bit more than 5 years from now. Fortunately, he has time to experiment. There are two launch windows before the one when he needs to start in earnest.

If the Starships are to be reused, they have to be re-fueled on Mars using fuel made locally from Martian resources. Each Starship requires 1,200 tons of fuel. Thus unless the Starships are to be expended, during the 2024 and 2026 launch windows Musk needs to deliver a factory to Mars capable of producing 1.2M tons of fuel every 780 days, or nearly 1600 tons/day. Clearly, the factory must weigh several times its daily output. Lets guess it weighs 20 times, or 32,000 tons. So in each of those two launch windows Musk needs to send another 160 Starships to Mars, requiring another 2,560 launches.

But there's another huge problem with Musk's fantasy. The 1,000 Martian emigrants will spend something like 180 days cooped up in each Starship's payload bay, which has a volume of 1,000m3. The average human's volume is around 0.06m3. The cabin volume per passenger of a 1-class 737 is around 0.22m3, so each emigrant will spend 180 days in the equivalent of 4 seats in coach in a 737. I think people paying more than a quarter-million dollars in launch costs alone would be imagining something more like business class! The migrants will end up fighting each other long before they arrive.

And, of course, once the million people land on Mars the story isn't over. They will still be dependent upon supplies from Earth until they can build a completely self-sustaining ecology. They may not need 100,000 tons of supplies every 780 days, but there will still need to be a lot of launches to get fuel into orbit to get a smaller number of Starships with supplies to Mars.

Look, I totally understand that what people like Elon Musk and Jeff Bezos really want is to call up the Magratheans and order one of their custom-made luxury planets lovingly made to their exacting specifications, so they don't have to deal with taxes, government, competitors or people who disagree with them. Let alone having to survive in a 2.5C warmer world racked with war, migration and starvation that is depleting their support staff. It must be really frustrating that niggling little issues like the speed of light mean that the only planet they can afford isn't just a long, slow, expensive commute, but also needs a lot of work to make it a suitable home for a multi-billionaire. That work is the subject of part 2.

All it took for me to get this level of understanding of just the logistics of Musk's fantasy was his own numbers, an Internet connection, a couple of hours, and basic arithmetic. Given Musk's notorious lack of credibility when it comes to schedules, it is disappointing that as far as I can tell no journalist made the effort to inform the public that Musk was BS-ing. Chris Young expressed mild skepticism, "just not very realistic" and "risks putting him in similar territory as he was with Tesla's progress on Level 5 autonomy". But that is a long way from explaining Musk's specific implausibilities.

Decentralized Finance Isn't
28 November 2023 | 4:00 pm

A major theme of this blog since 2014's Economies of Scale in Peer-to-Peer Networks has been that decentralized systems aren't, because economic forces overwhelm the technologies of decentralization. Last year I noted that this rule applied to Decentralized Finance (DeFi) in Shadow Banking 2.0 based on Prof. Hilary Allen's DeFi: Shadow Banking 2.0? which she summarizes thus:
TL;DR: DeFi is neither decentralized, nor very good finance, so regulators should have no qualms about clamping down on it to protect the stability of our financial system and broader economy.
And also DeFi risks and the decentralisation illusion by Sirio Aramonte, Wenqian Huang and Andreas Schrimpf of the Bank for International Settlements who write:
While the main vision of DeFi’s proponents is intermediation without centralised entities, we argue that some form of centralisation is inevitable. As such, there is a “decentralisation illusion”. First and foremost, centralised governance is needed to take strategic and operational decisions. In addition, some features in DeFi, notably the consensus mechanism, favour a concentration of power.
Below the fold I look at new evidence that the process of centralizing DeFi is essentially complete.

In DeFi Is Becoming Less Competitive a Year After FTX’s Collapse Battered Crypto Muyao Shen highlights the situation:
A small number of participants are dominating the world of decentralized finance as the crypto sector, which seeks to replicate financial markets without middlemen, still hasn’t recovered from FTX’s collapse a year ago.
Shen uses research from a "crypto-risk modeling company":
Most categories in DeFi — from peer-to-peer lending to decentralized exchanges — are seeing capital largely held in a few major projects, according to data compiled by crypto-risk modeling company Gauntlet. The firm used a popular measure of market concentration and competition called the Herfindahl-Hirschman Index.
Wikipedia explains the HHI thus:
HHI is calculated by squaring the market share of each competing firm in the industry—expressed as either fractions, decimals, or whole numbers—and then summing the resulting numbers ... The result is proportional to the average market share, weighted by market share. As such, it can range from 0 to 1.0, moving from a huge number of very small firms to a single monopolistic producer.
In Shen's graph above the HHI is expressed in "points" from 0 to 10,000. Shen comments:
Based on the metric, the most competition exists between decentralized finance exchanges, with the top four venues holding about 54% of total market share. Other categories including decentralized derivatives exchanges, DeFi lenders, and liquid staking, are much less competitive. For example, the top four liquid staking projects hold about 90% of total market share in that category, according to Gauntlet.
Protocol Revenue Market
  $M Share %
Lido 304 55.2
Uniswap V3 55 10.0
Maker DAO 48 8.7
AAVE V3 24 4.4
Top 4   78.2
Venus 18 3.3
GMX 14 2.5
Rari Fuse 14 2.5
Rocket Pool 14 2.5
Pancake Swap AMM V3 13 2.4
Compound V2 13 2.4
Morpho Aave V2 10 1.8
Goldfinch 9 1.6
Aura Finance 8 1.5
Yearn Finance 7 1.3
Stargate 5 0.9
Total 551  
Shen provides a breakdown of the last 180 days revenue of DeFi projects, which I reformatted into this table. It shows that the top project, Lido, has 55% of the revenue, the top two have 2/3, and the top four projects have 78%. This is clearly a highly concentrated market, typical of cryptocurrency markets in general.

Why does the centralization of Defi matter? First, for all the bad things concentration causes in general markets — see for example Matt Stoller's Big. But more importantly, because the technologies of decentralization impose massive costs over and above those of equivalent centralized systems. The incentive to pay these additional costs is to reap the profits centralized systems sacrifice to regulation. If you are paying the costs but not evading regulation, what is the point? I discussed this in Economic Incentives.

I've argued many times, most recently to the IOSCO DeFi Working Group, that regulators should ignore the alleged "decentralization" of cryptocurrency systems and go after the major players in each area. With lawsuits against FTX' management, Coinbase, DCG/Genesis and Gemini, Kraken, and Celsius and Alex Mashinsky, and now their $4.3B criminal conviction of Binance and CZ, the US regulators no longer seem to be going after the small fry. Presumably, they used winning against the small fry to build precedents they are now using against bigger fish.

If despite claims of "decentralization" regulators can shut down the few big players in a market, the decentralized systems will be paying the massive extra costs but not reaping the unregulated profits. Of course, there is a Whac-A-Mole aspect; kill a big player and one or more smaller players will get bigger enough to be worth taking out. But it won't take many of these cycles for the market to get the message.

Desperately Seeking Retail
21 November 2023 | 4:00 pm

The SEC has a long history of refusing to approve spot Bitcoin ETFs, on the reasonable basis that the Bitcoin market was heavily manipulated. Crypto-skeptics like Bitfinex'ed and Davd Gerard have been pointing out obvious instances of manipulation for many years, and there is a considerable academic literature demonstrating manipulation, such as Crypto Wash Trading by Lin William Cong et al, which demonstrates:
abnormal first-significant-digit distributions, size rounding, and transaction tail distributions on unregulated exchanges reveal rampant manipulations unlikely driven by strategy or exchange heterogeneity. We quantify the wash trading on each unregulated exchange, which averaged over 70% of the reported volume.
Unfortunately, despite knowing about the manipulation, the CFTC approved Bitcoin futures ETFs. Among the requests that the SEC refused was one from Grayscale Bitcoin Trust. Grayscale sued the SEC and, back in August, the panel of judges ruled in their favor:
The court's panel of judges said Grayscale showed that its proposed bitcoin ETF is "materially similar" to the approved bitcoin futures ETFs. That's because the underlying assets— bitcoin and bitcoin futures - are "closely correlated," and because the surveillance sharing agreements with the CME are "identical and should have the same likelihood of detecting fraudulent or manipulative conduct in the market for bitcoin."

With that in mind, the court ruled that the SEC was "arbitrary and capricious" to reject the filing because it "never explained why Grayscale owning bitcoins rather than bitcoin futures affects the CME’s ability to detect fraud."
The prospect of the SEC approving this ETF and others from, for example, BlackRock and Fidelity led to something of a buying frenzy in Bitcoin as shown in the "price" chart, and in headlines such as Bitcoin ETF Exuberance Drives Four-Week ‘Nothing for Sale’ Rally:
Bitcoin is climbing for a fourth consecutive week, with the digital token’s price lingering just below an 18-month high of $38,000, as more investors bet that US exchange-traded funds that hold the largest cryptocurrency are on the verge of winning regulatory approval.
Below the fold I look into where this euphoria came from, and why it might be misplaced

There already are spot Bitcoin ETFs, just not in the USA. I believe the first launched in:
February 2021, when the Purpose bitcoin ETF launched in Canada. Unlike GBTC, which trades over-the-counter, Purpose trades on the Toronto Stock Exchange, close to NAV. At 1%, its management fees are half that of GBTC. Within a month of trading, Purpose quickly absorbed more than $1 billion worth of assets.
So why would a US-based Bitcoin ETF be a big deal? The thesis is that by making it easier for US investorsgamblers to put money into BTC it would increase demand and thus the price. This anticipated flood of retail money would solve the long-standing problem for cryptocurrency exchanges and whales, the Greater Fool Supply-Chain Crisis. There is a shortage of suckers:
The number of over-the-counter desks has declined, with mainly the more conservative ones remaining, according to Tegan Kline, co-founder of Edge & Node, which developed a crypto project called The Graph. That, combined with the erosion of leverage, has sapped liquidity.

“Leverage is gone,” Kline said. “A lot of people have pulled money out of the system or they have money stuck at FTX.”
The "price" has been soaring, even though the anticipated flood of retail dollars hasn't yet, and may never, show up. That is the real problem, as shown in the graph of Coinbase's trading volume. Volume, and thus liquidity, has collapsed since the heady days of 2021. In Coinbase Q3 earnings: Regulatory clarity is all we need. And a miracle or two, Amy Castor and David Gerard lay out the recent history of Coinbase's income from trading fees, which I have re-formatted into a table.

Quarter Retail
Q4 2021 2,185.8 90.8 4.2
Q1 2022 965.8 47.2 4.9
Q2 2022 616.2 39.0 6.3
Q3 2022 346.1 19.8 5.7
Q4 2022 308.8 13.4 4.3
Q1 2023 352.4 22.3 6.3
Q2 2023 310.0 17.1 5.5
Q3 2023 274.5 14.1 5.1
The numbers show three things clearly:
  • Retail trading fee income has collapsed, down 87% from its peak.
  • Institutional trading fee income has collapsed 84% from its peak.
  • Coinbase is wholly dependent upon retail traders, who account for around 95% of its fee income.
Castor and Gerard write:
Trading volume is the lifeblood of a crypto exchange — and Coinbase’s is through the floor. The exchange saw $76 billion in total trading volume in Q3, down from $92 billion in Q2. (They did $547 billion in trading volume in Q4 2021, their last profitable quarter.)
So volume is down 84% from its peak. No wonder Coinbase laid off staff in June 2022 and January 2023. And why just raised money at less than half its valuation in 2022.

The problems are exacerbated by the fact that last June the SEC sued Coinbase for:
selling unregistered securities and running an exchange, a broker-dealer, and a clearinghouse as part of the same operation — and without registering any of these.
Castor and Gerard point out that:
If the SEC wins, Coinbase may have to stop trading in any cryptos other than CFTC-regulated commodity coins such as bitcoin. There isn’t enough volume in those for Coinbase to live on.

This is why Coinbase is so insistent on trading blatant unregistered securities — it’s all they have left for a business model.
Lynn Parramore transcribes an interview with Jim Chanos in Jim Chanos: “The Crypto Ecosystem Is Well-Suited for the Dark Side of Finance.” that expresses the famed short-seller's skepticism:
JC: ... The last iteration that you just touched upon is the hope by aspects of Wall Street that crypto gets institutionalized because the one thing that Bitcoin really has — and we’ve pointed this out to our clients — is ridiculous levels of transaction fees associated with it. So Coinbase, for example, which is one of our shorts, charges customers over 4% per round trip trade to transact in a so-called currency.

LP: Why would people be willing to pay that?

JC: Well, exactly. They think the asset price is going to go up. It’s like a Nasdaq stock, not a currency. So they’ll pay, and Wall Street wants the fees. The cost structure in crypto is quite high and so the fees are really high. You need retail investors because institutions aren’t going to be paying 4% per round trip to buy and sell Bitcoin. Mom and Pop are, so Wall Street needs to keep the public interested in the crypto space. The paradox, of course, is that if BlackRock and Vanguard and whoever do get ETFs, it’s actually going to force fees down, not up, because ETF fees will be a fraction of the cost of what Coinbase or Binance charge. It’s like mutual fund fees and stock trading fees: they’ve all converged to zero.
So, even if there is a flood of retail money into Bitcoin ETFs, the exchanges' fee income isn't going to recover. Chanos' students share his skepticism about the industry:
LP: Are your Wisconsin students still excited about crypto?

JC: They were much more enthusiastic in 2021, 2020, 2019. There’s a lot less enthusiasm now in terms of students going to work for a crypto startup or whatever. I had a number of them in 2020 and 2021 who said they were going to work in the digital currency or blockchain space. I don’t hear that as much anymore.

LP: How about your Yale students?

JC: The last two springs, they’ve been skeptical. During the spring semester of 2022, Bankman-Fried’s now-infamous interview with Bloomberg dropped about an hour before my class started. I ran to the audiovisual department to see if I could get the interview up on our screen because to me it was such a bombshell. This was where Bankman-Fried basically called the crypto ecosystem a giant Ponzi scheme. I told the class it was very rare to get an industry leader telling you that his industry is a Ponzi scheme. That was seven months before the collapse.
Will the flood happen? Teresa Xie's Former Crypto Day Traders Say No Thanks Even as Bitcoin Roars Back presents some negative evidence:
Craig Murray, who estimates he made almost $200,000 in the market, says he escaped losing everything to FTX by a hair after friends in the industry heard whispers about its imminent collapse. By that point, the 23-year-old — who lives in New York and recently dropped out of Vanderbilt University — had made up his mind.

“That kind of put me over the edge,” Murray said. “I just decided it wasn’t worth it. Why would I have my money in this space when there’s a chance that one day it could just all go away?”

Another sign that retail investing in crypto isn’t returning to previous levels can be seen in weekday versus weekend volumes, with the presumption that the typical person trading on a weekend is a day trader.

“It’s not unusual nowadays to see weekday trading volume average 50% higher values than weekend trading volume, whereas in the past this ratio was almost 1:1,” said Fredrick Collins, chief executive and founder of crypto data platform Velo Data.
So it seems unlikely that there will be a huge flood of retail dollars into the market. Even if there were, they would go into Bitcoin ETFs, which would present the exchanges with two big problems:
  • much less retail trading, because it would migrate to ETFs for low fees and the security of dealing with institutions like BlackRock,
  • and a much higher proportion of very low fee institutional trading.
It seems likely that even if the cryptosphere's hopes for ETFs materialize the exchanges will end up in an even worse position than they now are.

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