Cryptocurrency Follies

The cryptocurrency scene has become a shambling wreck, as disaster follows disaster, and the gods are shown to have feet of clay.

There is, of course, the continuous drumbeat of news. Scanning Coindesk, we see regulatory jibber-jabber (Russia bans and then un bans Bitcoin, various jurisdictions rule that cryptocurrency is legally a commodity or else a currency or punts), a comprehensive collection of heists (both inside and outside jobs, and possibly even the police), and a long list of optimistic corporate announcements about blockchain services.

 

If one of the points of Bitcoin is to revolutionize money, to do away will all the crazy uncertainty surrounding “fiat” currency, it’s hard to feel confident that the mission is being accomplished.

While there are plenty of true believers whose faith will not be shaken by any adverse events (see also, “When Prophecy Fails”)  Others are beginning to notice that the edifice is built on sand, the foundations are cracking, and the Earth is quaking.

As I noted in an earlier post, both the Bitcoin scaling debacle and the Ethereum / DAO / “hard fork” disaster illustrate the limits and pitfalls of cryptocurrency “governance”.

Ariel Deschapell discusses fundamental questions about the notion of “decentralized governance” that underlies the entire concept of cryptocurrency. For one thing, the notion of the “decentralized” network is nebulous in itself. What is it exactly that is being distributed? Network nodes? Computational power? Legal ownership? Geographical location? Technological implementations? Something else entirely?

We don’t really know how to measure these things precisely, but we can get some idea of how “distributed” a network is. But, Deschapell comments, we have no idea at all what kinds of “distribution” actually matter. For one thing, we have little understanding of the “attacks” that decentralization is imagined to protect against.

I would add that we don’t even understand what “the network” is. The “core” protocols of cryptocurrencies offer a certain amount of security through cryptography, and the nodes of the network offer at least some comfort through their distribution.

But, as I have pointed out repeatedly, “security” or any other property must be considered end-to-end. So, the network must include user interfaces (“wallets”), financial interfaces (exchanges and other services), and even users (key management). The introduction of executable contracts (which generally aren’t especially “smart”) adds yet another extension to the network.

A chain is only as strong as its weakest link, and we have seen that the edges of the cryptocurrency network are potentially quite vulnerable. Exchanges are hacked, exchanges are pilfered by insiders. Users mess up, users are robbed. Con games and dark commerce thrive. Tulip manias threaten to crash the whole systems.

Notably, we have little grasp of just how “decentralized” the whole network really is. Exchanges are certainly single points of failure. Each user is a single point of failure (lose or reveal your key, and your part of the network is toast.) “Smart contracts” and other add ons are hard to even understand, let alone analyze in this context.

And, finally, the entire “distributed governance” model itself has its own vulnerabilities, as we have seen this year. Distributed governance is relatively untried, especially compared to conventional organizations.   It usually sounds too good to be true to me, and, unfortunately, it probably is. As we have seen this year, when governance fails, the technology will face serious trouble.

“It’s a mad house! A mad house!”

 

Cryptocurrency Thursday

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