Hi! If you’re new to this blog, let me introduce myself. I’ve written some code for Dogecoin Core.
You might remember me from the Dogecoin Core 1.14.6 release announcement on Reddit or the “get ready for 1.14.6” Tweet that, as of the time of this writing, has 110k impressions on Twitter.
What I’m about to write may seem like an appeal to authority fallacy, but I hope I can convince you otherwise. I’m going to make an argument and point to links where you can do your own research. You don’t have to trust my analysis of the links; you only have to trust that I’m pointing you to trustworthy links.
That seems fair to me. Do we have a deal?
Wait, You Promised to Write About Passive Income!
Okay, let’s talk about passive income.
Suppose you have 1000 Doge sitting in a wallet somewhere. That’s pretty cool! What are you going to do with it?
If you believe some cryptocurrency exchanges or projects with “doge” somewhere in the name (projects that aren’t Dogecoin Core, that is), you can participate in some sort of lending or staking system where you give up some rights to those coins in your wallet in some way, and you’ll earn 3% or 5% or 10% over a period of days, weeks, or months.
That also sounds pretty cool. All you have to do is sign up, the story goes, and the Doge will start rolling in!
I don’t know how this works, and that makes me suspicious. Let me explain why I’m suspicious.
A Cheesy Saying From Parmenides
Let’s use the example of a 5% annual return on your Dogecoin stake. In one year, you’ll have your 1000 Doge and you’ll have earned a cool 50 Doge on top of that.
Where did those coins come from?
If there’s a fundamental rule of blockchain technology, it’s the old incantation ex nihilo nihil fit. Nothing comes from nowhere.
This is a lie, of course. If you read Mastering Bitcoin, 2e, “Bitcoin Economics and Currency Creation”, you’ll read “each block, generated every [Bitcoin-specific, not Dogecoin-specific, time duration], contains entirely new [coins], created from nothing". I added that emphasis.
This is true, and yet it’s not true in another important sense. These coins did appear where there were no coins before, but they appeared in an entirely predictable and auditable fashion. Every minute or so, the Dogecoin network produces a coinbase transaction, where these freshly-minted coins get distributed as a reward and incentive to miners who validate and propagate transactions across the network.
That’s two links right there: a description of how Bitcoin and Bitcoin-derived coins work, and a link to the code in Dogecoin Core released the other day that implements this behavior. You don’t have to take my word for it; check out those links. (Why 10,000? You’re looking for a function called GetDogecoinBlockSubsidy.)
This is all well and good, and most people agree with what I’ve written here, but why does it matter?
Because those 50 Doge you’re expecting as your 5% reward for staking/lending had to come from somewhere, and ultimately they had to come from a coinbase transaction.
Unless you’re actively mining Dogecoin yourself, you receive your coins in one of two ways:
- someone gives them to you
- someone sells them to you
In both cases, someone had to have them already and has to make a specific transaction from their wallet to yours. (In one sense, that’s what a coinbase transaction is: a transfer from the magical bag of infinite holding to miner wallets.)
Where did the person selling/giving Dogecoin get them? From someone else and someone else and ultimately a miner who mined a coinbase transaction.
Where do these 50 Dogecoin you’re going to get at the end of the year come from? The same rules apply, however, they apply in a very specific way.
For any subnetwork that does staking/lending, that subnetwork has to receive a steady influx of Dogecoin to pay out the interest rewards. For your stake of 1000 Dogecoin, 50 more koinu have to enter that subnetwork somehow.
We know those 50 ultimately have to have come from the standard Dogecoin network. How do they get into the staking/lending system?
Peter and Paul Pyramid a Peck of Pickled Peppers
You put in 1000 Doge. I put in 1000 Doge. If I end up with 950, you can end up with 1050, but that’s not great for me.
You put in 1000 Doge. I put in 1000 Doge. Someone else puts in 1150 Doge. Now we all end up with 1050 Doge, but that third person will say “I expected a positive return on investment”, and who can blame them?
It’s theoretically possible for someone more clever than ethical to keep a steady flow of incoming koinu to pay off early investors and outrun later investors, especially if they ratchet down the expected payout rate, but that seems less than ideal.
It would be possible to perform arbitrage and hedge against Doge prices, perhaps saying “I control 1000 Doge per person for 10 people, and am willing to sell them to you for $x dollars”, waiting until prices go down, and then buying back at least 5% more Doge, but if you could predict prices accurately, why borrow someone else’s resources to do it?
More importantly, you can’t predict future prices accurately.
It would be possible to use the staked/lent Doge to buy into a mining system, but mining a block means generating one of an infinite number of random numbers that satisfies a mathematical equation, so any miner is competing with any other miner, and if you could predict these numbers and the relevant difficulty of mining and the amount of competition you’ll have in the future, you’re a time traveler and have bigger things to worry about anyhow, like fixing the last two and a half seasons of the Battlestar Galactica remake.
So where do these coins come from?
Accept No Imitations
If you were really unethical, you’d pay out rewards in a currency you control in a predictable way. In other words, the currency would be completely untethered from the Dogecoin network, so you wouldn’t have to worry about the fickle unpredictabilities of mining or other people.
Pun completely intended.
This, of course, could go one of two ways. In the best case, this Advanced Doge Substitute is worth the same as Doge, or more, so you don’t mind getting your rewards in something that is almost, but not quite, entirely unlike Doge.
In the worst case, it’ll end up worthless. At least, it’ll be worthless to everyone but the people who created and control it, because they’ll retire to some beach somewhere and drink drinks with fancy umbrellas in them and try not to let the creOeping soul-crushing darkness deep inside of them bubble up too much.
Don’t Rent Out Your Seed Corn
Why does this matter?
Dogecoin’s utility is not that coins sit around and magically produce more coins. Miners produce coins, as you can read in Dogecoin Core Proof of Work code. It’s the process of validating transactions that creates coinbase transactions. Even if you controlled 99% of all Dogecoin in existence, you’ll only get more if you mine them yourself or receive them from a miner or someone who themselves received them from a miner and so on.
Your reward for holding Dogecoin is that you can use them.
That’s it. It’s all about utility. Nothing more, nothing less.
So why does someone want you to give them control over your Dogecoin? What are they going to get out of it?
It’s hard to say.
Unless and until they can answer the questions how you get your rewards and where those rewards come from, eye them with extreme suspicion.
Any promise of earning passive income with Dogecoin is not part of the Dogecoin network, standard, consensus, or codebase in 2022. Guard yourself accordingly.