Category Archives: Politics and Economics

Ethereum Forks Yet Again

It seems to have gone OK…but it wasn’t pretty.

This month Ethereum is executing a perfectly normal software upgrade, which would be absolutely routine for any sensible software. But cryptocurrency software is not normal software, and Nakamotoan blockchains are essentially immune to reasonable engineering.

Ethereum’s new version isn’t forward compatible, so the old software will not work with the new. This is a pretty common occurrence in software land, but for a cryptocurrency it is a “hard fork”, which means that users who keep the old software are effectively using a different currency than the new one. If everyone goes along, its fine. If not, it can be traumatic and potentially catastrophic, as Etherheads should be well aware.

The tension is even higher because no one knows for sure what will happen. Evidently there hasn’t been an upswell of public endorsement for the new fork, leaving the result in question. Things are not helped by the fact that the switch over was triggered at a particular record, which will happen when it happens.

The upgrade seems to have gone smoothly, although there were critical bug fixes right up to the switch over. There doesn’t seem to be a major split in the network (at least not yet, phew!) but there is a lot of software that hasn’t picked up the last minute fixes yet–and a large fraction who may still be using the old, incompatible software. (And how many big bugs will come to light not that they are live?)

In short, no one even knows if the upgrade happened smoothly or not.  Sigh.

This would all be funny if it weren’t for the tens of millions of dollars (at current exchange rates) that could be at stake.


And by the way, Bitcoin, the patriarch of the troubled House of Nakamoto, is scheduled to have its own hard fork in November. The main goal is to address the scaling issues that Ethereum just addressed. Unfortunately, Bitcoin’s upgrade is “adversarial” to quote Bailey Reutzel. Uh, oh!

In the case of Bitcoin, there are tens of billions of dollars at stake (at current exchange rates). This is not even remotely funny.

Why do people put up with this stuff?

 

Cryptocurrency Thursday

Bitcoin Is Designed To Be Wasteful

..and that won’t work for long.

One of the great curiosities of Nakamotoan cryptocurrencies is that the key innovation in the protocol is the use of “proof of work” to implement a truly decentralized timestamp [2]. At the core of this innovation there is a scratch off lottery, in which computers spin and spin, looking for a winning number. This computation is deliberately designed to be inefficient, so that it cannot be cheated or repeated. In fact, there is a “knob” that resets the difficulty to keep it inefficient in the face of technical improvements.

For me, this feature is just plain weird. My whole career–in fact, everybody’s career–has been about making software go faster. Bitcoin not only doesn’t want to go faster, it keeps adjusting the parameters to prevent software from going faster. This is so backwards and so wrong to conventional software engineers.

The underlying reason for this approach is to force real world costs into the protocol, in order to make the system “fair”. There is no back door or magic key for privileged users to game the system.  Only real (computing) work counts.

As a side-effect, these costs create a form of “value” for Bitcoin, which logically must be worth at least as much as the cost of the computing work needed to obtain them. This is a sort of computational labor theory of value, which is no doubt amusing  to twenty first century Marxists.

Unfortunately, the “work” that is used to mine and handle Bitcoin is a crude, brute force algorithm. It is simple and effective, but it sucks down computing cycles like mad, which use up large amounts of electricity.

Peter Fairley writes in IEEE Spectrum about “The Ridiculous Amount of Energy It Takes to Run Bitcoin” [1]. In all, the Bitcoin network does 5 quintillion (5,000,000,000,000,000,000) 256-bit cryptographic hashes every second which he estimates consumes about 500MW of power. In addition, there are other cryptocurrencies and blockchain networks (including multiple versions of Bitcoin itself), with substantial, if lesser, power consumption.

This is quite a bit of power, something along the lines of a small city. Of course, it’s only a small slice of the power consumed by the whole Internet, not to mention the rest of modern life. But the engineer in me hates to see so much power burned off for so little meaningful work.

Fairley argues that a bigger problem is that if Bitcoin or some form of Nakamotoan blockchain succeeds and grows to be come truly ubiquitous, then the power consumption is likely to grow to the point that it is unsustainable. Even if we are OK with expending cycles for this purpose, at some point there will not be enough power to run and cool all the computers.

Predicting the future is difficult, of course. Computers in general are becoming more efficient, so growth in cryptocurrency networks will not lead to a linear growth in their power use. Nevertheless, it seems likely that the crude proof of work algorithm designed by Nakamoto will be difficult to sustain over the long haul.

As Farley discusses, there are alternative methods to achieve the same goal. Many alternatives, in fact.

For one, there is substantial interest in various “proprietary” blockchains, which may work the same way as Bitcoin, but do not rely on the open Internet. These networks trade off the “trustless” and “decentralized” nature of Nakamotoan style protocol in various ways, gaining much more efficient performance as well as other potential benefits, such as legally documented authentication

There are also alternative “math problems” that may be used instead of Nakamoto’s brute force hashing algorithm (e.g., Proof of Stake, or Algorand). It is also possible to utilize special purpose hardware, or even Quantum Computing.

In short, there are alternative technologies that would make a cryptocurrency far more scalable. If Bitcoin were normal software, there would be a strong case for reengineering it.

But Bitcoin isn’t “normal”. Not even close to normal.

Another cunning innovation from Nakamoto is its “decentralized” governance model. Changes to the code are published and users vote on them by adopting or ignoring them. There is no central planning, or any planning at all. Furthermore, changes that are not backward compatible essentially create a “new currency”, which may or may not eliminate the “old” code. These fork events can and do create parallel, competing versions of a cryptocurrency.

The point of Bitcoin’s decentralized decision making is to protect against “the man”. At the core of Nakamotoan ideology is the desire to make sure that no government or corporate cabal can fiddle with the currency, block access, or rewrite history. Changes require “consensus”, and “everyone” has a vote.

Unfortunately, this design also protects from centralized engineering. Technological progress requires decisions, and sometimes the decisions are complicated. Furthermore, good engineering is proactive, not reactive: it is a bad idea to wait until a problem is catastrophic or evident to everyone. Furthermore, rational engineering cannot always make everyone happy.

This is a formula for disaster. Ethereum has not only split into two currencies, one of the forks actually rewrote history. Bitcoin itself has been stuck in a rut, unable to deal with the most basic engineering problem (data structures), and heading for a catastrophic split into multiple versions. For that matter, dozens of other cryptocurrencies have floated, competing with Bitcoin (and sucking down yet more power).

If recent history is a guide, no improvement to Bitcoin is likely to be accepted by the current Bitcoin network. However, it is possible to boot up a technology that successfully competes with Bitcoin (as, say, Ethereum has done), and which might one day overshadow it. But Bitcoin probably cannot change.

At some point, Bitcoin qua Bitcoin will surely crash. Perhaps it will be replaced by other cryptocurrencies. Perhaps politics will keep it marginalized. For example, access to vast amounts of electricity is clearly a potential choke point for such a profligate algorithm. Or perhaps technical changes will break it. For example, Quantum Computing will eventually be able to both crack the encryption and likely will also be able to overwhelm the protocol with replay and other attacks. At that point, the blockchain will be corrupted and Bitcoins will have little value.

One of “Bob’s Rules” is that “All software becomes obsolete, sometimes much sooner than you expect”.

The problem is, Bitcoin is supposed to not be software, it is supposed to be money.  The ramifications of Bitcoin’s inevitable crash are staggering.


  1. Peter Fairley, The Ridiculous Amount of Energy It Takes to Run Bitcoin. IEEE Spectrum, 54 (10):36-59, October 2017. https://spectrum.ieee.org/energy/policy/the-ridiculous-amount-of-energy-it-takes-to-run-bitcoin
  2. Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System. 2009. http://bitcoin.org/bitcoin.pdf

 

Cryptocurrency Thursday

 

Yet Another Local Currency

This year the city of Liverpool launched its own local digital currency [2].   This particular project uses Blockchain technology from Colu. Colu appears to be using the Bitcoin blockchain, though users, developers, and businesses probably never need to know about the blockchain at all.

The idea, of course, is to improve local economies by capturing as much spending as possible within the local community. Setting aside the thorny issue of how to define “local”, the digital payment system is essentially a script system, honored by participating businesses, and ultimately tradable for fiat currency.

The digital system makes it easy to automatically implement rules to make it attractive to keep and use the tokens rather than immediately convert to pounds. If this works as intended, a Colu Pound will be “spent” several times, presumably in local transactions, before entering the wider economy. (Ironically, every transaction leaks fees to Colu—a non-local, private company.)

It is important to note that a local digital currency can be implemented in many ways, with or without a blockchain (and the same idea has been implemented without computers at all).

The success of the project depends on three factors:

  • A good user interface and user experience
  • Participation by enough businesses and people to be useful
  • Trust in the system

Colu is well aware of these requirements, and is working hard to provide all of them.

Using a blockchain may be convenient and cheap, but Blockchain qua Blockchain (colored coins, lightning, Bitcoin, or any other) is pretty much irrelevant to all but the last point.

It is clear that the trust in the system comes not from the software or the protocol, but from the face-to-face interactions of local people and local merchants. You don’t need digital currency for that interaction, this is basically neighborliness.

The main contribution Colu makes to this neighborliness is to nudge you to use the digital currency with participating merchants, workers and suppliers rather than trading for UK Pounds. These nudges don’t require blockchain and most users couldn’t tell the difference how you implement the transactions.

Local digital currencies are an intriguing idea, breathing new life into very old ideas about local economies.

Of course, digital local currencies cannot overcome the historic limitations of local currencies. Historically, local currencies have had difficulty competing with national currencies which are easier to use and offer access to large, cheap markets. Digital currencies can certainly operate cheaply, though the same technology is available for the UK Pound, so there isn’t much, if any, economic advantage.

It is an open question whether using a “trustless” blockchain-based system helps foster “trust” in the local currency. Some people find “decentralized” blockchain protocols more trustworthy than “fiat currencies” managed by banks and backed by governments.  This judgment depends a lot on the local circumstances and history. We’ll see How Liverpudlians parse this question.

For that matter, most of the Colu technology is provided by a private company, which is making a profit and may or may not be trustworthy or even exist in the long run. Users are trading the devil they know (conventional regulated banking) for the devil they don’t know (Colu).


  1. Colu. Colu – Local Digital Wallet. 2017, https://www.colu.com/.
  2. Dougal Shaw, The Liverpool app that sidesteps the banks, in BBC News – Magazine. 2017. http://www.bbc.com/news/magazine-40728550

 

Cryptocurrency Thursday

Blockchain Hardware: Is There Something There?

From the very beginning, Nakamotoan blockchain technology has had a complicated relationship with computing hardware. Much of the case for Bitcoin hinges on the availability of ubiquitous, commodity network and hardware that runs open source software. The Internet is open to all, so the blockchain is both transparent and available to anyone. Furthermore, security and “trustlessness” is assured because it runs of generic equipment [2].

On the other hand, there has been a constant desire to deploy special hardware, including a never ending (and self defeating) arms race in mining technology, and the notion of embedding the computation in everything.  Indeed, some are even splurging on a space program, the ultimate in ‘special’ hardware.

Some special hardware is intended to simplify participation, so everyone can be part of the network without effort. (This notion is philosophically akin to the thinking behind Distributed Autonomous Organizations.). Another intuition is that embedded hardware is a way to accumulate massive amounts of ‘spare’ capacity, running in the background. This argument is something like, ‘While no single light bulb contributes much, a bazillion light bulbs adds up to so much compute power that it will keep the network safe and stable.’

And, of course, corporations are intrigued the possibility of capturing a market by including blockchain in their products. This month Coindesk reports on some of these ideas.


Rachel Rose O’Leary reports that Chinese giant Midea Group is developing capabilities to embed Bitcoin mining in household appliances [3].  O’Leary indicates that their patent is similar to ideas floated by others. Essentially, the excess capacity of the embedded computer would run Bitcoin protocols, and any coins earned will be credited to an account, presumably the owner of the device.

One of the leading proponents of this concept is 21, Inc., and they admit that such a tiny device isn’t likely to generate enough Bitcoins to cover the cost of the electricity.  So, one wonders whether this added power consumption, even while not in use, will be a popular feature.

This news is interesting not because it is innovative or even a good idea, but because Midea is a huge manufacturer who could truly deploy many thousands of such devices around the world.

On another front, Michael del Castillo & Bailey Reutzel report that Intel has been working on a different idea, a blockchain that runs on dedicated “secure” hardware [1]. This was introduced in 2015 as “Sawtooth”, which is a variation on Nakamoto, using a different ‘scratch off’ method (poetically named Proof of Elapsed Time Expended) and using special secure hardware. A quick glance at the explanations suggests that the system sets up an tamper proof timer that implements the ‘race’ in place of repeated hashing. To use their blockchain, you have to have their special chips and the software to run on them. (Intel wants to sell chips.)


I really don’t know about these ideas.

Midea’s idea is far from new, it falls right into some classic dreams of a ubiquitous, unstoppable Bitcoin network. The concept will be vulnerable to all the woes of the Internet of Things, including the likelihood that hackers will try to hijack thousands of toasters to steal the cryptocurrency. Furthermore, the economics of cryptomining don’t appear to support these tiny nodes, so it looks like a dead loss to me.

Is this anything other than a gimmick?

But most of all, one wonders exactly what software these devices might be running. Which version of Bitcoin or other coins would it run? What happens when the protocol changes, or everything splits as it has this year? How will upgrades happen in general?

Given the volatility of the cryptocurrency world, it may not be a great idea to “wire in” a protocol in this way, especially when the units are to be distributed to ordinary people who can’t maintain the crypto features.

Intel’s idea is interesting, but not really a Nakamotoan blockchain at all. It is technically incompatible with public blockchains such as Bitcoin, and philosophically incompatible with the “trustless” notion of many cryptocurrencies. You have to trust Intel. For that matter, you have to buy Intel.

There are probably good use cases for this kind of proprietary blockchain, as well as exotics such as a quantum blockchain. But these use cases are not at all the same as for public blockchains.

The economic case for blockchain is essentially a trade off between efficiency and scale. Intel’s blockchain would be well suited to a small or moderate scale network, but then again so would other, non-blockchain protocols. I.e., if you are going to build a network using special Intel security hardware, you have lot’s of choices besides blockchain.

So is Sawtooth anything other than a gimmick?


My own view is that it is far to early to invest in hardware blockchain products. The protocols are changing rapidly and dramatically, and the economics are highly uncertain. To really work, you have to have zillions of units deployed, which would be challenging to say the least.

Furthermore, many of the hardware approaches fly in the face of various philosophical objectives that drive interest in blockchains. Using a “trusted system” to implement a “trustless” protocol makes little sense. Using proprietary hardware to implement a distributed ledger makes little sense. Having your toaster mine tiny, tiny amounts of Bitcoins is a waste of electricity.  For that matter, your toaster would soon be obsolete, as the cryptocurrency protocols rapidly evolve.

I think that at this point, cryptocurrency hardware is mostly a gimmick.


  1. Michael del Castillo and Bailey Reutzel Silicon Blockchain: Intel’s Distributed Ledger Strategy Is All About Hardware Coindesk.August 23 2017, https://www.coindesk.com/silicon-blockchain-intels-distributed-ledger-strategy-hardware/
  2. Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System. 2009. http://bitcoin.org/bitcoin.pdf
  3. Rachel Rose O’Leary,  Manufacturing Giant Midea Wants to Put Bitcoin Miners in Household Appliances. Coindesk.August 24 2017, https://www.coindesk.com/manufacturing-giant-midea-wants-to-put-bitcoin-miners-in-household-appliances/

 

Cryptocurrency Thursday

What is Coworking? It Can Be Rural

Coworking is generally associated with urban or suburban settings, serving dense populations of independent workers and start ups.

What about rural areas, with much lower population densities, and correspondingly sparser social networks?

It is certainly possible to do digital work anywhere, including out in the country. Many rural areas have technical infrastructure to support remote working, and talented workers. However, in there are fewer people overall, and therefore fewer workers. In addition, many workers migrate to commercial centers.

So, can coworking succeed in a rural area?


Tim Ford blogs about Cohoots Coworking in rural Australia. Cohoots is located in a small town in a rural area, so it has been a struggle to get enough members to pay the bills.

The facility itself is conventional; featuring desks, networking, and events. But they advertise that if you “scratch beneath the surface and you’ll find some magic”. These “magical” features includes the memorable tag, “Members Who Want To Be Here”, i.e., a community of like-minded workers.

Ford is clear that the emphasis and the value added is community. Given the small population (and lack of competition), they have found little point in advertising ‘we have the best space’. Instead, they take what he calls an “inside out” approach. Community is not something that happens inside the coworking space, it connects out into the whole region.


I think this workspace is another example of how flexible and diverse coworking is. The physical and social setting is quite different from urban centers, but there is still entrepreneurship and community happening.

To my mind, this reflects the most important features of coworking. The space itself can be in the Bronx, Santa Clara, or Castlemaine, Victoria; and it can look and feel a lot of ways. What matters in every case is the presence of a thriving community; a group of people with shared interests meeting face-to-face, helping each other.

I’ll also note that this space almost certainly would not exist without the leadership cadre, who are all worked up about coworking and community. You can have the coolest office space in the world, but nothing will happen without community leaders.


Clearly, finances and low population are a challenge for any rural business, not just coworking. However, rural areas have some distinct advantages.

The cost of living is generally lower, and the lifestyle can be attractive. A small town already is a community and a regional center of social networking, so a coworking space fits naturally into the historic cultural patterns.

One of the best things about rural coworking is that it offers opportunities for people, especially young people, who want to stay home. Digital networks make it possible for kids to have a career without splitting for the city. Coworking, in turn, can be the social infrastructure that is a “respite from our isolation” (to quote Zachary Klaas [2]).

One thing that won’t work is a ginormous space like many operations are developing.  Think small and intimate, not large and generic.

But I’m sure that competent local leadership will understand this necessity well enough.


  1. Tim Ford, Rural Coworking – Our Journey, in Cohoots Blog. 2017. http://www.cohoots.info/rural-coworking-our-journey/
  2. Zachary R., Klaas, Coworking & Connectivity in Berlin. University of Illinois at Urbana Champaign Department of Urban and Regional Planning, NEURUS Research Exchange, 2014. https://www.academia.edu/11486279/Coworking_Connectivity

 

What is Coworking

Note:  please stay tuned for my new ebook, “What is Coworking”, coming in 2017.

Cryptocurrency Spins Out Into The Woods?

Is cryptocurrency technology heading down a path to disaster?

This summer Bitcoin is dominated by the ongoing crisis of “governance”, which is leading to fork after fork. It is increasingly evident that Nakamotoan “decentralized” and “consensus” based decision making is less than optimal for something serious like digital money.

The Bitcoin “community” (and we must use the term loosely) is, as Alyssa Hertig trenchantly says, a “Culture of Infighting”.

Sigh.

This has also been a year of multiplying “Initial Coin Offerings”, ICOs. Aided by an ever more automated process, practically anyone can whip up their own tokens, have a quick online auction, and pick up a quick mill or more. Cool!

(And I do mean “quick”. ICOs are infamous for their opaque online auctions that last a few minutes and are sucked up by big players.)

If this sounds like selling unregistered securities (on unregulated markets), the US Securities and Exchange Commission agrees. The SEC Guidance is pretty simple: if it looks like a security, then it is covered by US laws. Period.

Has this dampened enthusiasm? Not much, though it has been a boon for lawyers as people try to thread the needle to avoid regulation, yet still cash in.

As Avtar Sehra comments, the world of ICOs is now exploring various “workarounds” that resemble the “creative” business models of Pachinko parlors. These efforts basically try “to execute undercover securities issuances”.

It’s questionable how well this will work. The SEC tends to be pretty unforgiving of such shenanigans.

And Sehra makes the important point that pouring effort into this penny ante quick money stuff is neglecting the real opportunities that may exist to use this technology within the legal framework.

These workarounds “may be limiting the vision and creativity required to see the true scale of what ICOs and digital tokens could represent; blinding many in the industry to possible risks if they take the wrong path.”

Honestly, it seems to me that cryptocurrency technology is charging down the wrong path, ignoring warning signs and shoving aside the grown ups.


  1. Alyssa Hertig, Bitcoin’s Battle Over Segwit2x Has Begun Coindesk.August 30 2017, https://www.coindesk.com/bitcoins-battle-segwit2x-begun/
  2. Avtar Sehra, The New Pachinko? Exploring the Economics of Initial Coin Offerings Coindesk.August 20 2017, https://www.coindesk.com/the-new-pachinko-exploring-the-economics-of-initial-coin-offerings/
  3. US Securities and Exchange Commission, SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities. 2017: Washington, DC. https://www.sec.gov/news/press-release/2017-131

 

 

Cryptocurrency Thursday

Up, Up, and Away! Cryptocurrency Optimism Files High

Shaking off an endless stream of frauds, thefts, arrests, and convictions; ignoring warnings and regulatory stop signs; and even blowing through the minor glitch of a catastrophic and fatal fatal fork of Bitcoin; the cryptocurrenty community cruises to new heights of techno-optimism.

Even supposedly rational capitalists seem to be carried away.


For examplet, NVIDIA corporation is have another good year, driven by the sales of GPUs. (All alums of Illinois are proud to see how important these descendants of the much laughed at Illiac IV have become.)

Jen-Hsun Huang, the CEO of NVIDIA, recently expressed glowing optimism that GPUs will continue to grow not only for graphics but also for cryptography and cryptocurrency mining.

It’s hard to say what fraction of the $1.9 billion income is attributed to cryptocurrency, though the total amount of Bitcoin mined in a year is less than $200 million. No matter how you slice it, cryptocurrency alone cannot really support a billion dollar hardware industry.

Nevertheless, these results do show that, while cryptocurrency may not be benefitting the world or disrupting money quite yet, it certainly is sucking down computing resources and the requisite electricity to run them.

Overall, the huge GPU industry is sustained by completely imaginary and economically inexplicable activities—such as video games, digital television (including porn), and, evidently, the scratch-off lottery of cryptocurrency mining.

NVIDIA’s Jen-Hsun Huang believes that cryptocurrency and blockchain are “here to stay” and will continue to be an important market for GPUs.  I have to wonder about this prediction. It’s far from clear that the current exuberance is rational, and with the catastrophic forking and reforking of Bitcoin, one wonders when the bottom will drop out.

We also should note that much of the market for cryptocurrency equipment is driven by and dark markets. These folks may remain a robust consumer base for NVIDIA, but it’s hard to see that as a great thing for the world.

Even more important, as quantum computing comes online in the next decade, GPUs will no longer be the top of the line. QC will be overwhelmingly faster, and GPUs will be next to useless for cryptography or cryptocurrency. That means that even if cryptography and cryptocurrency continue to grow, they will no longer be using GPUs, and certainly will not pay premium prices for them.


On another front, the Blockstream company has literally left the planet, with the launch of the first of many satellites designed to make Bitcoin available everywhere. The stated use case is Africa and other places with poor Internet access. In particular, you can’t run a full node (let along a mining operation) without significant network bandwidth, so Bitcoin isn’t fully available in many places.

I think the idea of this scheme is to provide a dedicated satellite network that connects Bitcoin nodes into the global net with relatively low cost ground equipment. This base station would be pretty much dedicated to Bitcoin, and connected to nothing except other Bitcoin nodes.

I have to wonder what use such a node would be to anyone, especially if the ‘last kilometer’ is marginal. I also have to wonder how this could possibly be financially viable. Space programs are obscenely expensive, so this doesn’t seem like the path to low cost connectivity on its face. We’ll see.

I will note that the general scenario would be that with this inexpensive ground station, “you could be transacting globally with bitcoin”. “Transaction globally” means “moving money offshore”, which is probably of interest to some people in Africa, but may or may not be a positive for the local economy and society. Again, we’ll see.


  1. Alyssa Hertig, Blockstream Is Using Satellites to Beam Bitcoin Down to Earth Coindesk.August 15 2017, https://www.coindesk.com/blockstream-using-satellites-beam-bitcoin-earth/
  2. Stan Higgins, Nvidia CEO: Cryptocurrencies Are ‘Here to Stay’ Coindesk.August 11 2017, https://www.coindesk.com/nvidia-ceo-cryptocurrencies-stay/

 

Cryptocurrenty Thursday