Category Archives: “About Cryptocurrency Narratives”

The Neverending Ethereum Disaster

This month Bitcoin almost split in two, pulling back from the brink at the last minute. Of course, there is no solution in sight for the dire scaling problems of Bitcoin, but who cares as long as the exchange rate keeps rising against the weakening US dollar?

Etherereum should be so lucky. After the DAO disaster in 2016, followed by several hard forks that rewrote history, you would think that sensible people would have headed for the hills. Of course that’s not happening.

This fall has seen yet another disaster. One of the most used wallets experienced a bug which led to the freeze of a large amount of Ethereum. I don’t really understand the bug itself, but somehow the coins were consigned to accounts that can no longer be managed. You can see your money, but no one can get it.

Just as baffling as the bug, there seems to be little urgency to fix it. It’s been a week now, and there seems to be little idea of what can be done, and shockingly little indication that anything will be done soon.

Stan Higgens writes in Coindesk that “Parity Floats Fix for $160 Million Ether Fund Freeze”, but the actual text indicates that there is no fix in sight except maybe a hard fork due in 2018 [2]. In other words, you are out of luck if you are wanting to use some of those millions of Ether any time soon.

The good ship Ethereum is like the Titanic, except when it sinks they roll back time and sail again—to sink all over again.

It is important to point out that these disasters in Ethereum are mostly not due to the core protocols and cryptography that define the distributed ledger itself. The DAO went down with all hands because of a bug in executable contract code, and the Parity Wallet ran aground due to the wallet code (related to executable contract code, I think), not the ledger itself.

The point is, security is an end-to-end thing <<link>>. People who talk about how invulnerable the core ledger is supposed to be are missing the point: Ethereum or any cryptocurrency is only as secure as the weakest link between two users. And there are a lot of links: wallets, APIs, servers, networks, mobile devices, and OS code, to name a few. And there are people in the chain, too, heaven help us.

At some point, you have to ask whether Ethereum is creating more problems than it is solving.


  1. Stan Higgins, Parity Floats Fix for $160 Million Ether Fund Freeze. Coindesk.November 13 2017, https://www.coindesk.com/parity-floats-fix-160-million-ether-fund-freeze/
  2. Parity Technologies, Parity Technologies Multi-Sig Wallet Issue Update, in Parity Technologies Blog. 2017. https://paritytech.io/blog/parity-technologies-multi-sig-wallet-issue-update.html

 

Cryptocurrency Thursday

 

Bitcoin is More Evil Than Ever

From the beginning, Nakamoto style cryptocurrency was intended to enable unimpeded flows of funds [2]. Cryptocurrencies are specifically designed to be the perfect mechanism for grey and black markets; for tax evasion and for money laundering of all kinds. While crypto-enthusiasts see this as a feature, most of civilized society views this as a serious bug.

In the short history of Bitcoin, we have seen it become a medium for illicit commerce and ransomware. (Even more-or-less legitimate uses, such as digital commerce are being highjacked by a flood of scams, including preposterous “initial coin offerings”, which might as well be called “tulipware”.)

It has become evident that Bitcoin has also become a favorite tool for human smuggling and human trafficking: modern day slave trade. I’m not seeing this as a good thing in any way at all.

As reported in Coindesk [1], this issue was highlighted by Joseph Mari of the Bank of Montreal at the The Pontifical Academy of Social Sciences, Workshop on Assisting Victims of Human Trafficking: Best Practices in Legal Aid, Compensation and Resettlement [4]. (It’s not often that I cite something “Pontifical” : – )) Mari reports that, as conventional financial services move to block illicit commerce, including human trafficking, criminals have moved to use Bitcoin to collect their illicit money.

Cryptocurrency enthusiasts are quick to point out that this is pretty much exactly how Bitcoin was designed to work: it is supposed to be immune to “censorship”. Other cynics like me would also point out that the wealthy get away with this stuff without resorting to frippery like Bitcoin. (See perhaps: England, Queen of, offshore accounts of.)

Of course, the original Nakamoto design was more than a little hacky, and it isn’t completely immune to interference by determined authorities. Companies make good money selling analytics that spot suspicious transactions and, with favorable winds and some luck, might nab some bad guys.

However, this mostly retroactive data mining is hardly adequate. Detecting this stuff after the fact doesn’t stop, prevent, or deter it.

Worse, the tiny successes so loudly touted are technically obsolete, as the dark web moves to far more opaque cryptocurrencies.

Mari is right to be concerned, and it is good to educate conventional banks and other authorities about this technology. But I’m really not sure that there is anything that can be done, at least until quantum computing takes it all down.


  1. Michael del Castillo, Vatican Address to Highlight Bitcoin Use in Slave Trade. Coindesk.November 2 2017, https://www.coindesk.com/vatican-address-highlight-bitcoin-use-human-slave-trade/
  2. Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System. 2009. http://bitcoin.org/bitcoin.pdf
  3. Darryn Pollock , Jamaican Police Take Aim at Human Traffickers’ Bitcoin Pockets, in Cointelegraph. 2017. https://cointelegraph.com/news/jamaican-police-take-aim-at-human-traffickers-bitcoin-pockets
  4. The Pontifical Academy of Social Sciences, Workshop on Assisting Victims of Human Trafficking: Best Practices in Legal Aid, Compensation and Resettlement. 2017: Vatican City. http://www.pass.va/content/scienzesociali/en/events/2014-18/resettlement.html

 

Cryptocurrency Thursday

 

Government Blockchains Coming This Year

Around the world, various governments are experimenting with Blockchain technology. The classic use case is for public records, such as property titles (e.g., the Swedish Lantmäteriet), where the blockchain serves as a cryptographically secured bulletin board.

The general use case is to make these records easy (and cheap) to access via the Internet, while maintaining the integrity of the information. In the classic case of the land registry, the government agency performs its traditional role as authenticator, certifying the record, date, and identities of the parties and assets. Blockchain replaces (more likely duplicates) other forms of records, including databases. In principle, this could be really cheap and really reliable (assuming the records are correct to begin with).

Many governments are trying similar ideas, including my local government in Illinois. (Heaven protect us from these clowns! If anyone can mess up blockchain technology, it’s the Illinois state government.)

Amy  Nordrum reports in IEEE Spectrum about the different approaches in Dubai and Illinois [1]. Both jurisdictions are looking at a variety of uses, generally involving public record keeping. One big hope is that a blockchain can be a really fast and cheap way to publish these records, redusing both public expenditure and friction on commerce.

Nordrum calls attention to the different approaches. Dubai is building a single system (using Ethereum and Fabric from Hyperledger). Illinois is floating multiple pilots, and letting the projects select what technology to use. Illinois is in a “try anything” stage, and explicitly assumes that integration can be done later with no particular cost or problems. (Does Illinois have the remotest clue what it is doing?)

What impact are these innovations likely to have?

Robert Charette, an expert in IT risk management, doubts blockchains will prove to be more effective than a simple cloud database in most cases. “It’s kind of like solving a problem that’s already been solved,” he argues.


First of all, the imagined benefits are pretty unambitious. They are tackling easy problems (for example, land registries have been around since Babylonia, the Lantmäteriet itself is 390 years old), and the main goal is to reduce overhead from existing systems, which maintaining or improving “transparency”. Thus, as long as a blockchain based system at least ties the performance of conventional system, and costs less for all parties, it will be called a success.

On the other hand, the problems are not only already solved, they are scarcely a choke point in the economy or everyday life. Having a property deed appear on line in 30 minutes instead of 30 days matters little to most transactions. Sure, this will make property flipping a bit easier, but why do we care about that? Why do we really want to do that?

Much will depend on how the cost accounting is done. Most governments, and Illinois for sure, will be interested in the reduction of expenses for IT infrastructure. If a blockchain based system eliminates the need for leasing servers and IT support, that would be an important advantage.

Just how much will blockchain technology reduce IT requirements?

It’s hard to predict precisely. The blockchain itself replaces a networked database, e.g., running in a cloud. That’s a good thing, because public facing databases are a significant security risk and also quite costly. Blockchain technology also uses cryptographic signatures, which is a very good thing. Of course, you could use cryptography the same way in any system, but blockchain is a quick and easy way to get this technology deployed more widely.

On the other hand, the rest of the infrastructure will still need to exist. The blockchain records themselves would be used by lots of other software—that’s the whole point.  There will have to be network forms and APIs for getting data in and out of the system, and these run on conventional infrastructure with concomitant risks and costs. In fact, if the blockchain is working well, users will not know that the blockchain is there—everything else will look the same as before.

It seems to me that the blockchain replaces one cloud database and concomitant APIs. This might actually be one part of a larger centralized system. Replacing the database will mean that at least some software will have to be replaced to use the blockchain.

Note that the agency still needs to do its non-digital work, such as  certifying identities, verifying records, and so on.  Publishing the results in only one part of their work, and frankly, it’s the easy part.

If, as seems likely, the organization needs to keep the database (e.g., for auditing and other internal activities, or simply out of caution), then the blockchain software is actually duplicating code, not replacing it. Worse, the parallel systems have to be kept in sync, which is extra code.

However cheap blockchain may be, the cost savings could be quite complicated to assess. I’m sure that politics will simplify the assessment, providing rosy assessments.


My own guess is that the blockchain solutions will no worse than what they replace. They may be better (e.g., because they have newer technology), though they could be worse (e.g., if quality control suffers).

But I guarantee you that the governor of Illinois will declare it a success no matter what.


  1. Amy Nordrum, Illinois vs. Dubai: Two Experiments Bring Blockchains to Government, in IEEE Spectrum – Features. 2017. https://spectrum.ieee.org/computing/networks/illinois-vs-dubai-two-experiments-bring-blockchains-to-government

 

Cryptocurrency Thursday

Yet Another Blockchain Use Case: Sharia Compliant Transactions

Blockchain technology, like classical bookkeeping, is generally culturally and morally neutral. Smart contracts, a la Ethereum, are technical expressions of contract conditions, which can refer to pretty much any body of law or custom.

A new initiative is setting out to develop Sharia compliant contracts on top of Ethereum. The general idea appears to be to encode Islamic principles in the logic of the programs, to ensure that proper rules are followed. These rules are supposed to prohibit charging interest, gambling, and speculation, among other behavior.

The compliant contracts will presumably structure transactions and trades in ways that do not cross the line. Furthermore, the public nature of the contracts and the distributed ledger will make the compliance (or any slippage) visible to anyone—a significant motive for good behavior.

I’m no expert on these topics, but I gather that there are centuries of practice that defines ways to get business done without straying from Sharia. This framework will encode these practices in formal logic and executable code.

That’s pretty neat.

One advantage of using this kind of executable contract is that there are likely to be cases where a transaction needs to be very carefully structured to achieve the goal that might have been achieved by, say, an interest bearing loan, without violating Islamic principles. The digital technology will make it possible to create, validate, and execute even complicated transactions easily and quickly. There should be no performance penalty for complying with Islamic principles, even if there should be extra hoops to jump through behind the scenes.

Of course, there are some interesting challenges.

It’s one thing for programmers to create a logical framework, but its quite another thing to show that it truly, accurately, and completely complies with any given legal principles, Islamic or other. A significant part of this work will surely be careful review and documentation of the logical framework’s compliance. Just what needs to be proven about the logic of the contract, and just what kind of proofs would be adequate? That will be an interesting body of literature, indeed.

Overall, this could be a ground-breaking effort. To date, much of the work on smart contracts has been from a non-Islamic perspective (and sometimes without any legal framework at all). It will be interesting to see how the deep historical principles of Islam are expressed in this a-cultural medium, and it may inspire other religious and ethical frameworks. I am not aware of any other similar efforts.

(For one example, how about encoding the various Creative Commons licenses into standard smart contracts? Perhaps that has already been done.)


This project also makes me think.

I wonder if it will be possible to automatically translate between different executable contracts. Can I have a button to “make this ‘smart contract’ be Sharia compliant”?  Perhaps tools could have a high level specification of what is intended, and then options for creating concrete contracts within one or more legal frameworks.  That would be kind of cool.

One huge caution I would have for this project is to look carefully at the blockchain software and protocol. While any given executable contract might be Sharia compliant, if the transactions are executed and recorded on an open system, the other data there is almost certainly not Sharia compliant. The ethical records will be in the same data blocks with everything else: on-line gambling, speculative bets, interest payments, and so on. And the transactions will be processed by software that also processes all these other activities.

The question will be whether this approach is acceptable or not. Is it OK to handle, at least indirectly, all these other transactions?  Or should the software only be used for compliant transactions?

This concern could be mitigated by a private blockchain that only handles Sharia compliant transactions. (Perhaps Ripple might be a better match than Ethereum, since it already is designed after a Halawa network, and let’s you control who you trust.)

I would also urge that the consensus mechanism be examined carefully. Nakamotoan consensus depends on mining that has an incentive system that may or may not be consistent with Sharia. The Nakamoto block reward strongly resembles a lottery or slot machine, which seems problematic to me.

Ethereum may be moving to a proof-of-stake method, and there are other possibilities. These alternative ‘math problems’ might have significantly different ethical implications.


This project is quite interesting, and will bear watching as it develops. I’d like to see blockchain technology put to socially positive use.


  1. SettleMint, SettleMint to create Sharia compliant financial products for the Islamic Development Bank member countries. 2017. https://www.settlemint.com/project/2017/10/15/settlemint-to-create-sharia-compliant-financial-products-for-the-isdb-member-countries/
  2. Sujha Sundararajan, Islamic Development Bank to Research Sharia-Compliant Blockchain Products. Coindesk.October 20 2017, https://www.coindesk.com/islamic-development-bank-research-sharia-compliant-blockchain-products/
  3. Bernardo Vizcaino, Saudi Arabia’s IDB plans blockchain-based financial inclusion product, in Reuters – Fintech. 2017. https://www.reuters.com/article/us-islamic-finance-fintech/saudi-arabias-idb-plans-blockchain-based-financial-inclusion-product-idUSKBN1CP08W?il=0

 

Cryptocurrency Thursday

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