Author's Note

It's January 31st, we are 20 days into the trading year and I am writing options, committing contracts, enforcing the rule of law through legal, ethical, moral, and outright rogue-ish tactics constrained by all three, in possibility space as fast as I am going to have to write this blog post.

I didn't want to rush this, and I assure you I've prepared quite a bit of research on this topic, because where we're headed, we're gonna need all the time we can get.

But clearly something has been captivating my attention, and in typical Vera fashion, I may die to finish before the deadline, but boy will I take my sweet ass time to do it.

Dedicated to my daughter.

If you ever read between these lines, I hope these tools serve you well.

Decision Making Under Uncertainty

You're sitting in a poker hand with 40 hourly credits behind. You've been sitting there for an hour and you've seen over 60 hands, a shit streak, and you've paid the blinds like 6 times, maybe like 3 hours of rake and another hour for calling stupid hands. So you're down to about 36 hours. You land A5s (A♥5♥) , which isn't bad, but you're on the button which implies you see everyone act first, and you have all the information. Someone bets half an hour. You raise them an hour and a half. You give them 2 to 1 odds that they can beat you. They have to pay an hour just to hold on to the chance of winning the 2 hours that are already in the pot. You're telling the villain they only have to win better than 33% of the time to break even.

You set the game. You set the schedule. They have to perform.

King, Queen, Nine come out. They check to you. The pot is 3 hours. You bet 1.5 hours. They have to pay 1 part to win 3 parts. 1.5 hours to win 4.5 hours. You want to win 75 cents? Pay me a quarter. You have communicated a position of strength. Every game from now until eternity, you are willing to stand there and imply a position of strength that you must represent accurately for the odds to be in your favor. For you to allocate a 75% position with the expectation of winning 25%, you better be telling the truth most of the time. Do you have it with A5s (A♥5♥)? In reality? NO! You don't even have a damn pair! In actuality? YES! You have every high pair on the board! Hell, you have a Jack/10 Straight in your hand!

Your implied allocation is the true representation of your position in the market at any given point in time. But it isn't reflected in reality until you commit to the price and you cross the contract. Until you pick up the offer. Until you have your equity in hand.

It is only then when you have stepped out of the realm of imagination and you truly commit your resources to the future you've laid out in front of yourself. Everyone else will do the same. To understand who made the best decisions under uncertainty, we simply run the clock.

Except humans don't behave like that. Not under the gun. Not when you risk ruin. At that point, the objective becomes expected value under viability, even if the odds on the table don’t change.

Viability sets the boundary. You allocate within the boundary. Then you perform the contract.

Decision Making Under Drift

We're switching timescales, so bear with me.

Let's say you wake up out there on a rocket ship, in the middle of possibility space. You pop out of your sleep capsule at the ripe age of 21, you're hungry, you're tired, and you're gonna need some coffee. Seems like the engine is sputtering and making a lot of noise. You enter the cockpit, the pilot's dead. He's wearing an American pin and the pile of bones has a tattoo on his forearm. "Life, Liberty, and the Pursuit of Happiness", it reads. Wonder what that's about.

He's got his finger on the dashboard, the ship is on autopilot to Nirvana. Seems like he did the work to find it — ETA: 1000 years. Well that's utterly useful, you'll be dead by then, and you need a sandwich.

You check the dashboard. 7 days of time credits. Well at least Neil Armstrong over here, didn't leave you with nothing. Too bad you've only got about 3,000 weeks of life left in you, let's call it 60 years.

You check the med bay, still looking for that sandwich. You find a first aid kit and a fancy syringe, brand name Elysium. Comes with a little note that says, "You might need this", signed, dead pile of bones. Seems like a shot buys you 10 years of life, except the input is 1 ounce of gold. You pull up the ship's inventory and comms link, the going price of an ounce of gold is 400 weekly time credits and you have exactly 0 ounces on board.

Well, at least you found a way to Nirvana. Seems to me like you're going to need to start gold production.

You go to market, you find some work hauling cargo around on this old boat the pile of bones left you. It takes 10 years, you save up 500 weekly credits, but due to 3% inflation your 500 weeks are worth 368 weeks, and because everyone else is also trying to get to Nirvana, the demand for gold has gone up 5% a year and now costs 815 weekly time credits. You're 30 and you can't possibly afford an ounce of gold. You're gonna need a different angle and velocity in possibility space if you ever hope to buy 1 shot before you're dead, much less hit terminal velocity in possibility space.

The Shifting Sands of Time

If you are a bartender in New York City in 2026 you make $11/hour. Your tipped hourly wage can range from $25 bucks on bad days to $45 bucks on good days. Your annual take home pay ranges from $65k to $85k. I know a couple bartenders that clear 6 figures.

In New York City, that is an average middle class income. It is also scraping a living. The median wage in New York City is $150,000. I can't imagine you feel like you have a living wage until you hit $110-120k minimum in that city. Very few manage to save any income below this minimum annually.

In Mexico, the median wage for a family of 4 is $250k-$350k pesos a year, or about $14k-$20k a year. It would take you 10 years to save 20% of your annual income to put up a 20% down payment on a 2.5M MXN apartment. By the time you get there, that apartment will be worth $4.5M at historical Mexican property growth rates since 2010, and well out of your reach. You will have to settle for a shoe box.

But at least you'll own the shoe box, instead of my comrades in New York who will still be renting their lives or will have been priced out of New York City by then.

The Dual Problem

Let's get back to that poker game. Where were we? Pot is worth 4.5 hours after you bet to the villain. You had just let him know he only has to win 25% of the time to win 75%. You sweetened the pot and you lowered his price. Last time you let him know he only had to win 33% of the time to profit 66%! He agrees, he calls your 1.5 hours, the pot is 6 hours.

The turn comes out, an Ace. Well that's nice, you were about to lose and your nearly 0% equity now clears the 75% you were representing just a moment ago. In some situations, 75% of the time, you're right every time. So you bet 3 hours. The pot is now 9 hours. You make the same proposition you made a moment ago. Pay 25% to win 75%. Same odds. Same expected value. Has the game changed? Technically yes, but not by much honestly. His expected value hinges on whether he believes you have an ace, you bluffed him earlier, then you hit.

This kid, on the other hand, is going to fold, and not because of expected value. He sat down at the table with 3 out of his 6 days of life savings. Like you, he paid half a day to the rake, bled another half day on bad calls, and now he’s got 2 days left. He’s about to be in for 7.5 hours total, with 8.5 hours behind.

In his hand he has a Queen, so he has a pair. But he's only now realizing that if he calls you and loses, he doesn’t just lose the hand, he guts his stack. If you fire again on the river and he pays you another 6 hours, he will be down to 2.5 hours at the table and 3 days off the table.

You may not realize it, but you are no longer pressing his expected value. He is weighing the dual problem to expected value, which is: expected value under viability. His liquidity and his survival has a price, and you are straining his capacity to survive out there in the real world. It would be nice not to lose a few days in this one hand, after all, you sat down with 7 days. But you just spent the last 10 years earning 500 weeks, 2 days isn't gonna strain whether you survive here, you already know you're dead in 2000 weeks because you won't be able to afford gold at 800 weeks to extend your lifetime.

So he folds. Because the kid wants to live another day. Each remaining credit in his hand buys him optionality and a chance to extend his runway from the 4 remaining days he has if he walks away from this table, to 2 weeks, to 2 months, or 2 years if he plays his cards right.

He's where you were 10 years ago.

The Risk of Ruin

You can’t sacrifice viability.

You get up from the table and go to the roulette table with your A5s (A♥5♥) winnings. You take a 1 hour credit and you put it on black, because you once heard me tell you to always bet on black.

You run it for a while, you hit a streak and you stack up about 4 to 5 credits. You start sizing up to 2 credits at a time and you get to 8. You size up again and bet 4, you lose. You push 4 and you win, you hit 8. You push 4 and you hit red, you lose. You push 4 and you hit red, you're dead.

On average the odds of a roulette table are 47% and the game is negative expected value. But few people walk away with 47 minutes out of their 50 because people don't size properly and the psychology of volatility gets the best of us, not because the expectation is so terrible. Casinos rely on the sands of time to win over the long run, just as nation states rely on the sands of time to inflate away the value of the currency we save so that as a society we try to beat the rake. On average we lose, yet real growth is typically positive. Societies are on the whole, productive. How is that? Most people lose, some people win big.

The primal problem is that the drift is stacked against society. The dual problem to that is, that you're not an average and you must survive. You can't afford to die. Survival is paramount to the viability of ever reaching Nirvana and staying in the game, to buy another ounce of gold, fire up that shot, and produce another 10 years of time value to run around in possibility space.

So how do you survive, much less, thrive, in a world where the drift is against you. You have limited agency, limited opportunity, and limited processing power to act but you need to make a decision, secure your runway as long as possible, while also enjoying your ride along the way.

Viability Space

When we walk the territory across space and time, the structure of the terrain defines the terrain. If the speed limit is 100km/h, the speed of sound is 1,235km/h, banks only let me withdraw $1,000 a day from an ATM without checking in, and the price of a burger in Manhattan is $15 bucks, well that's just reality.

But are those limits real? Some of them are, certainly the speed of sound seems to be. The speed limit? Well, I see a sign that says 100km/h, and I hear you telling me something about the rule of law and consequences. That's just your opinion man. $15 bucks for a burger in Manhattan? Now, that's closer to physics. But again, if you haven't learned to trade a $10 tip for a burger in Manhattan, I'd suggest you haven't hit the limits of reality yet.

Some constraints are hard limits depending on the space we're in. Some are varying degrees of soft. Some limits can be proven in every single domain, dimension, space, and transcend idea space, possibility space, and the physical realm. In mathematics we might call them inequalities, boundaries, absorbing barriers, proofs, theorems, or a host of other terms depending on the specific context and the strength of that constraint. I'll stick to constraints for now.

Naively, we trust a lot of our assumptions, or we trust where they come from, and only sometimes analyze their efficacy when people describe to us the structure of reality. In some domains we know to be rigorous like mathematics, but in others, such as socio-economic settings, and especially in economics, we kind of throw our hands up sometimes and say, things be like that some times. We chalk events and consequences up to randomness, human behavior, unknowns, unknown unknowns, correlations, and if we don't die because of those events, we kind of move on with our lives and keep puttering around.

We declare, well ya can't know everything! And that's exactly right, but you throw the baby out with the bath water thinking like that. We only see the observables, and never observe people's true allocations, only their manifestations in the physical world as reflected by the inventory we see with our eyes, the prices and metrics that are outputs of those mechanisms, and not the underlying allocation state of an individual, organization, business, or society itself.

But we can make some strong assertions! We have the terrain. We know the rules of the game, and we can see the physical flows, the price action, the observables, and even though we can't see the shadow price of survival directly, we can estimate liquidity constraints, rent constraints, credit card limits, debt limits, moral debt limits, ethical debt limits, etc.

We can start describing the topological structure of the complex network by understanding the terrain and the water that flows through it.

As we invent new types of social networks, value networks, decentralized networks, forms of media, totally new types of products on the market, the structure of the markets on which we transfer value on those networks and between those networks defines the limits at which those networks start to degrade and become less reliable.

When errors occur on those networks that causes access to those networks to go down, we can predict when people who staked their survival on its liveness will move capital or withdraw liquidity in order to defend their own survival.

Instead of predicting, we can act! If we can identify the point at which the participant has to consider the price of survival, applying leverage at that critical point destabilizes the participant into considering the risk of ruin. The constraint rises to the surface and the shadow price of survival comes to light.

Sometimes this is cooperative. Sometimes it’s adversarial.

You can do it in a nice way; you can do it in a collaborative way; you can do it in a healthy, productive way. Start a company! Make an art! Build a commune!

Don’t confuse nice with weak. Most of the time the adversary isn’t a person, it’s drift and the institutions that price your survival.

That’s when you put the fear of god in ’em.

You want to know how you survive against the drift in an unknown probability distribution of possibility space? Then outlast and thrive in an ever changing void as the rules shift out from under you?

You punch above your weight (and yeah, you don't die when you do it, we can talk about that later).

But make no mistake, you're making money by charging someone the price of stability while you cost them the price of anarchy.

This is war. Survival is war. Poker is war.

Even if you avoid the concept, there will come a day when you will have to defend your terrain, your home, your idea space, your tribe, or your principles.

We all need to learn the boundaries of these weapons eventually, because they go to the root of how we defend our life, liberty, and our pursuit of happiness. Money be damned.

If you don't. Someone else will.

But just as these weapons can be used to harm, they also go to the core of how we identify value, meet demand, create productive goods, invent new technologies, reduce volatility, reduce human suffering, and it goes to the heart of how we pool our resources as societies for the caring and feeding of the lovable squishy human beings that we are and everything we want to get up to.

The Operator

So I write to you tonight, to begin to document the body of work I know as the cross-section of Network Theory, Viability Theory, Ergodic Theory, Information Theory, convex optimization problems, stochastic processes, distributed systems, decision theory, and market microstructure in the style and manner that I know how.

The body of work concerns an agent in a multi-layered network called the operator.

The operator may be a participant in the network paying a cost and reaping energy for its contribution to the network. But the operator can also provide liquidity to the risk the network would like to undertake. The act of providing liquidity, whether the operator is big, small, medium, a government, a nation state, an org, or another network, provides support for the network to undertake risk up to the capacity of the operator's liquidity.

In a sense, every other operator in the network does the same. The operator expresses its direction when it clears the price it charges for its liquidity, which creates a reflexive feedback loop in which the operator and the network both learn something about each other's allocations, and every operator recursively does the same.

Too many feedback loops within the network, in one direction or another can shift the sand out from under the operator, and destabilize its position, whether that position forces the operator to consider the dual problem of EV with respect to survival or simply a weaker dual problem of EV with respect to "that volatility is a waste of my time".

Analysis tells us the structure of possible behaviors of participants. Sometimes we can fly around doing what looks like incredibly dangerous things without a care in the world. Sometimes a seemingly perfectly viable looking choice in possibility space is total death and utter decimation. And sometimes, we can't know, and we definitely can't avoid the black hole if we end up in it's gravitational pull, but we might be able to chart where they might be, so we never end up in the same sector.

Very little of this is new information, but everywhere I look, on every scale of the network, I see that our societies and networks are starved for reliability and availability. Proof of liveness.

The best traders, market makers, companies, organizations, and nation states prioritize survival, reliability, and availability. The discipline is vast, deep, and has been innovating quickly in the 21st century.

But these tools are widely applicable beyond just keeping the Internet up, your banks running smoothly, your deliveries arriving on time, or your Robinhood trades firing off at a good price. Everyone up and down the stack that performs this service gets paid incredible amounts of money to reduce latency to meet the demand or supply the demand you didn't know you had yet.

This skill is wasted in the playbooks of every organization at scale and must be made accessible to every individual operator on the network. It is the individual operator who faces mortal danger in the face of uncertainty, more often than not, an organization at scale simply degrades and repairs itself. Humans die.

It is my vision that this collected body of knowledge written from the perspective of street-fighting mathematics will inspire people much younger and much more capable than I, to create tools and weapons for the problems they will face. And the unknown unknowns on the other side of their visible horizon as well.

I call it Freeside.

Welcome to the network.


- your friendly neighborhood op3r4t0r