Category Archives: “About Cryptocurrency Narratives”

Confusing ‘Blockchain’ Projects

“Blockchain technology” is becoming a term with a variety of meanings, some of which have little to do with blocks or chains.

This month Microsoft released a variation on the theme, “proof of authority”.  This concept is a consensus protocol that works on a “permissioned” network, i.e., all the parties have to be registered and therefore are “trusted” to some degree.  Because the parties are vetted, there is no need for the grievous waste of mining.

These features are definitely not Nakamotoan, but they allow the construction of robust decentralized applications similar to the idea of basic blockchains—at a fraction of the computing cost, in principle.

Things are further confused by the fact that this system is deployed on Microsoft’s Azure cloud [1]—the antithesis of the Nakamotoan open, peer-to-peer network.  For example, there is something they call an identity leasing system” (definitely a “centralized” concept), and the usual cloud services that assure high availability, so that, for instance, “[i]n the case of a VM or regional outage, new nodes can quickly spin up and resume the previous nodes’ identities.”   I’m not sure that that means, but it ain’t exactly the classic Nakamotoan open peer-to-peer internet.

Diagram from Microsoft documentation: a network of admins who run the network.  This is surely a non-Nakamotoan architecture.

On the other hand, this system is implemented on top of Ethereum, in the form of “smart contracts” (in fact, adapted from Parity).  So, in between the non-Nakamotoan cloud and the non-Nakamotoan consensus protocol, lies the very Nakamotoan Ethereum network and its school-of-Nakamoto executable contracts.

So, should this be considered a ‘blockchain’ system, or not?  I dunno.

As an engineer, I wonder what the advantage of using Ethereum is.  Obviously, in a permissioned network, it is possible to deploy whatever virtual machine you want. In fact, the system is implemented in VMs on Azure.  So what is the benefit of using Ethereum qua Ethereum?  I dunno.

Is it mainly for fault tolerance?  Microsoft documentation suggests that this might be true:

[I]n private/consortium networks the underlying Ether has no value. An alternative protocol, proof-of-authority, is more suitable for permissioned networks where all consensus participants are known and reputable. Without the need for mining, Proof-of-authority is more efficient while still retaining Byzantine fault tolerance.”

Along those lines, I also wonder what the performance of this wonky hybrid stack really is. The point of the ‘proof of authority’ protocol is efficiency, and using the cloud provides resiliency and robustness and maybe a kind of “trustlessness”.

So, is the overhead of Ethereums’ protocol worthwhile?  How do these layers interact anyway?  Is the “trustless” network relevant, given the “trusted” layer below and above it?

Interesting times.  Baffling. But interesting.

  1. codyborn and Pat Altimore, Ethereum proof-of-authority consortium, in Microsoft Azure – Blockchain Workbench. 2018.
  2. Wolfie Zhao (2018) Microsoft Rolls Out ‘Proof-of-Authority’ Ethereum Consensus on Azure. Coindesk,


Cryptocurrency Thursday

Blockchain Voting is not Democratic

On-chain voting fundamentally degrades to plutocracy” [1]

Well, duh!

That’s the whole idea of cryptocurrency, isn’t it?

This summer, a group of researchers at Cornell look at “on chain” voting and find many fundamental flaws [1].  Aside from the “one dollar, one vote” fundamentals, voting via “smart contracts” is vulnerable to, wait for it, vote buying.  *Gasp*  Who saw that coming?

Look, voting is all about trust.  Any voting beyond a group of people you know personally involves protocols for assuring trust in the votes. So why would a “trustless” blockchain be a good way to accomplish that?

It’s not exactly that simple, of course.  If you can establish adequate protocols to create trust where you need it, then a blockchain might be a useful tool for reliably broadcasting and archiving the results and other important data.  But a blockchain per se doesn’t make a voting scheme “fair” or “free” or anything else without good protocols on top.

And a blockchain is only a useful tool to the degree that it can be “trusted” to not screw up the intentions of the protocols.

The point of the article is that the very design of blockchains is inherently susceptible to several kinds of mischief and cheating.  Worse, the cheating would be invisible and, in that unique blockchain-way, irreversible.

Electronic voting has been studied for decades, and the research shows that it is extremely difficult to get right.  Academic research also shows that they require trusted third parties.  Blockchain voting schemes generally ignore this research, and, in any case, permissionless blockchains cannot implement coercion-free voting.

“The blockchain space today, with predictable results, continues its tradition of ignoring decades of study and instead opts to implement the most naive possible form of voting: directly counting coin-weighted votes in a plutocratic fashion, stored in plain text on-chain.”

(Predictably, the Coindesk report cites a number of such dismissive comments about this report itself [2].)

One of the obvious attacks is vote buying.  This is particularly easy if the voters are weakly authenticated as in many blockchain polls.  The speed and flexibility of blockchains also means that vote buying (perhaps in the form of splitting the payout from the result) are easy to do, and potentially hard to document.

“Vote buying marketplaces can be run efficiently and effectively using the same powerful tool for administering elections: smart contracts.”

It is also interesting to see that trusted hardware is an excellent tool for manipulating blockchain voting.  This is ironic, but actually makes sense.  The purpose of trusted hardware is to constrain and coerce the user to use only certain software and certain behaviors.  A system that say, enforces digital rights, can also enforce an illicit vote buying scheme.  The trusted hardware makes it easier to collude.

The paper describes the design of “hidden” DAOs which autonomously suborn voters, collecting and paying for votes.  This a “dark” DAO, in that the participants and operations can be hidden from everyone.  Thus, these attacks both manipulate the election and serve to deligitimize the process, due to the influence of unknown and undetectable attackers.

The paper discusses a fascinating attack, using blockchains to attack voting, including the consensus process itself (mining), in other blockchains.  This basically amounts to bigger fish-eating littler ones.  It’s actually a pretty important point:

“in a world with only one smart contract system, Ethereum, internal incentives may lead to stable equilibria. With two players, and the underdog incentivized to launch a bribery attack to destroy their competitors, such equilibria can be disrupted, changed, and destroyed.”

In general, the researchres find that blockchain voting degenerates to plutocracy—one dollar one vote.  Specifically, “all on-chain voting schemes where users can generate their own keys outside of a trusted environment inherently degrade to plutocracy”. This is scarcely surprising, since the creators and implementers of blockchains generally subscribe to this aspect of “libertarian” politics, and thus do not see any problem with excluding practically all of the world from decision making, nor with letting founders, scammers, and criminals have vast voting power.

The paper summarizes the core findings in six points:

  1. Permissionless e-voting *requires* trusted hardware.
  2. The space of voting and coordination mechanisms is massive and extremely poorly understood.
  3. The same class of vote buying attacks works for any identity system.
  4. On-chain voting fundamentally degrades to plutocracy.
  5. Hard fork-based governance provides users the only exit from such plutocracy.
  6. Multiple blockchains interacting can break the incentive compatibility of all chains.

And, as noted, they call attention to the important question of the (real) world of multiple blockchains.

“A critical and surprisingly underexplored open area of research is modelling the macroeconomics of competition between blockchains, gaining insight into how exactly such internal equilibria can fail.”

I’ll point out that at the very foundation, voting requires trust:  trust in the process and trust in the results.  Conventional voting systems expend great efforts authenticating voters, assuring fair access to the process (e.g., setting questions), and validating the results.  Proper voting authorities work hard to create trust in the process.  Critically, voting authorities take responsibility for the process.  Responsibility is really important for creating a trusted system, don’t you think?

Blockchains are “trustless”, which means that they not only don’t help with the central problem of voting, but are actually the wrong technology.  To hold trustworthy votes with blockchain, the process will generally replicate many features of non-blockchain systems (authentication of voters, certification of results), but the blockchain isn’t useful for these processes.  And, by the way, the trust in the whole system depends on the whole, end-to-end, process, of which blockchain is a tiny part.

These problems matter quite a bit because the governance of these blockchains is based on these forms of voting.  As we have seen, Nakamotoan consensus doesn’t necessarily work very well when big money is on the line.  This paper suggests that these failures may be partly due to the flawed, non-democratic nature of blockchain voting.  And the paper suggests that the very core consensus process is vulnerable to deliberate manipulation.  Yoiks.

These problems also matter because many people look to blockchains as a mechanism for creating a fairer, more democratic economy and society  (e.g., here, here, here, here, to mention only a few). Sometimes this sentiment is driven by a deep distrust of conventional authorities, often well earned.  But even so, replacing a corrupt political process with a technical system that is susceptible to corrupt manipulation is not actually a solution.

A blockchain is a trustless system.  Noone should trust trustless elections.

It’s just that simple.

  1. Philip Daian, Tyler Kell, Ian Miers, and Ari Juels, On-Chain Vote Buying and the Rise of Dark DAOs, in Hacking Distributed Blog. 2018.
  2. Rachel Rose O’Leary (2018) The ‘Dark DAO’ Threat: Vote Vulnerability Could Undermine Crypto Elections. Coindesk,


Cryptocurrency Thursday

CryptoTulip of the Year: Ethereum Could Repeat

As noted last week, “The ICO” is clearly a strong candidate for this year’s not-at-all-coveted “CryptoTulip of the Year” award.

But it would be a mistake to count out last year’s winner, Ethereum, for a repeat.  For one thing, everything that carried Ethereum to recognition is still happening.  In particular, the Great Oopsie of 2017 is still unresolved, with no resolution in sight.

Nor is the underlying governance crisis settled. In fact, no progress has been made this year [2].   One “innovation” this year has been the “Council of Ethereum Magicians”, <<ink earlier>> which seeks to solve the dilemmas of deadlocked democracy through an unelected group of technocrats, Philosopher Kings.  In this, Ethereum recapitulates Plato’s Republic, described circa 380BCE.  This is also the secret of “success” for the European Union (see [3]) and the Euro.

Of course, Ethereum is also the platform of choice for ICOs, as well as many other crypto manias, including flat out Ponzi schemes and  even an assassination market. There is nothing quite like fraud built on top of a faulty technical platform, with no one in charge!  It’s bogosity all the way down!

“Larry Cermak, an analyst, described the situation on Sunday as “depressing.”

“”Legitimate use cases like [decentralized exchanges] and prediction markets are not gaining any traction while scams and useless games are thriving,” Cermak tweeted.” (quoted in [4])

It’s going to be a very competitive race for this year’s CryptoTulip Award.  We’ll see how the second half of the year plays out.

  1. Brady Dale and David Floyd (2018) Ponzi Games Are Breaking Out on the Ethereum Blockchain. Coindesk,
  2. Rachel Rose O’Leary (2018) Ethereum’s Most Heated Tech Debate Is Proving It’s Far From Over. Coindesk,
  3. Yanis Varoufakis, Adults in the Room: My Battle with the European and American Deep Establishment, New York, Farrar, Straus and Giroux, 2017.
  4. Rachel Rose O’Leary (2018) What Scams? Ethereum’s Vision for Apps Is Only Growing Bolder. Coindesk,
  5. David Floyd (2018) The First Augur Assassination Markets Have Arrived. Coindesk,



Cryptocurrency Thursday

Cryptotulip of the Year: The ICO?

This year may be remembered as the year of the ICO (Initial Coin Offer).  These unregistered securities are marginally legal, but like any method for getting people to send you free money, they are spectacularly popular.

This sociotechnical phenomena involves minting your own tokens, which are sold and traded via cryptocurrency technology.  These days they are often created via “smart contracts” on top of Ethereum or some other blockchain.

What do they do?  Basically, they are shares in some speculative enterprise (no matter how they are dressed up).  The seller gets your cash, and you get a claim on some future something.  Some are also like to coupons, which can be used for discounts on a future something. (Currently, dressing them as tokens is believed to immunize them from regulation as securities–we shall see what regulators ultimately decide.)

Theoretically, the tokens you buy have value and, being essentially cryptocurrency, can be electronically traded.  To the degree that the enterprise is valuable, these tokens will accrue value.  How’s that working out?

Hugo Benedetti and Leonard  Kostovetsky actually use the “T” word in their analysis, finding absurd amounts of cash raised (billions of dollars), and a lot of bubbly froth in the form of jumps in prices immediately after launch [1]. On the other hand, more than half of the ICOs are effectively dead by 4 months after launch.  All the action is the big splashy sale.

In a sign of the times, not only the success but the very existence of the ICO is measured through twitter chatter—unregulated puffery if there ever was.

As the BBC puts it, “Can crypto-currencies last longer than a vase of tulips?” [2]

Another recent report argues that something like 78% of ICO are “scams”—i.e., never intending to do anything other than collect money and fold.  They found that only 15% actually existed after the ICO!  [3][4]  That is, most of the “ICOs” were just announcements, never even completed!  (In these cases, people “invest” in them before launch, but they generally will never be able to cash out until the actual launch.)

On the basis of the above classification, as a percentage of the total number of ICOs, we found that approximately 78 [percent] of ICO’s were Identified Scams, ~4 [percent] Failed, ~3 [percent] had Gone Dead, and ~15 [percent] went on to trade on an exchange,” the report states.” (from [3])

A quick bit of math tells us that 1/8 * ½, or 1 out of 16 ICOs are actually around 4 months after the nominal launch date. The ICOs that survive pay off with maybe 250% returns, but overall, counting the scams, it’s something like 15% return your investment on average—though it’s actually a crapshoot that you lose everything more than half the time.

This is a remarkable collection of statistics, which makes speculation in Tulip bulbs seem like a boring game for old maids.

Basically, cryptocurrency technology, especially “smart contracts”, are the perfect medium for digital Tulipmania.  You can make as many Tulips as you want, sell them off in seconds and disappear without a trace.  Buyers and sellers are almost anonymous, and most communication is via Twitter and other unregulated channels.  The entire enterprise is effectively “off shore” from any legal jurisdicaiton. Furthermore, it takes almost no technical skill to run your own Tulip game, because you can simply copy previous Tulips by reusing “smart contracts”.

“Smart contracts” are the perfect medium for twenty first century Tulipmania.

Clearly, “The ICO” must be a strong candidate for the CryptoTulip of the Year this year!

  1. Hugo Benedetti and Leonard Kostovetsky, Digital Tulips? Returns to Investors in Initial Coin Offerings. SSRN, 2018.
  2. Rory Cellan-Jones, The crypto-currencies that die before they have bloomed, in BBC News – Technology. 2018.
  3. Sherwin Dowlat, Cryptoasset Market Coverage Initiation: Network Creation. SatisGroup, 2018.
  4. Christine Kim (2018) Report: More Than Three-Quarters of ICOs in 2017 Were Scams. Condesk,


Cryptocurrency Thursday

Robin Hood Coop: Offshore Finance for Doing Good?

I worry about this one.  It’s probably OK so far, but I still worry.

The Robin Hood Coop calls itself a “coop”, though it operates as an “activist investment fund”, using an opaque algorithm to automagically manage the investments.  Some of the proceeds are raked off to support the operations.

Investing in a magic algorithm should be done carefully in all cases.  so it is a definite red flag that I can’t find any information about the algorithm (called, “The Parasite”, which somehow fails to reassure me very much).  There certainly nothing published or peer reviewed on their web site.

There are additional warning flags in the promotional materials.  This isn’t just a hedge fund, it is “a cooperative that bends the financialization of economy for the benefit of those who are not the financial elite”.  There are management fees plus a rakeoff to “fund projects that expand the commons”.  And, of course, it is implemented using Ethereum, which is “revolutionary technology for decentralised computing” (so what could possibly go wrong?)

Lot’s of fine sentiments, but impossible to really know what they might mean in practice.

I have to admit that my eyebrows rose at the FAQ item, “Is it Legal?” (Answer: Yes, under the laws of Finland.)  I’m glad that this is a relevant consideration, but it’s still troubling that they think people would be in doubt.

Of course, the answer is actually much more complicated than the FAQ indicates, at least for people not living in Finland. You are transferring money to this Finnish organization, which is investing in the US. If you take money out, it’s another transfer from Finland.  As they say, “When you receive payments from Robin Hood, you will be liable for whichever taxes you would pay for investment income in your country of residence and/or Finland.”  In short, who really knows?

Anyway, this is probably OK, though it seems unlikely to be a particularly profitable investment.  It may be a good way to support the “commons” projects they select, though, again, I don’t really know the implications of such international investments.

In the long run, they might be well advised to create a network of RHC affiliates incorporated in different jurisdictions.

This project has moved to a more troubling RHC2.0, which manages all shares as a private cryptocurrency (RobYns) which is used for trading in various currencies and cryptocurrencies.  This may or may not be a cost effective way to run the service, but it certainly does raise issues of trust. (Do I want to invest via a fund that has no humans in charge, and has no legal presence in my local jurisdiction?)

And if I understand their materials, they correctly are aiming to go even farther, with V3.0 called Robin Hood Unlimited.  This is a member owned (I think) “platform, where anyone could develop financial instruments, and launch them as apps for other members to use”. The goal is to offer “every opportunity to devise different investment strategies and different ways of directing profits or other funding to projects”.

Cooperative or not, this is a description of an offshore, extralegal, money hub, which is not a socially positive animal.   I this an “offshore coop”?  Do the benefits of “cooperative” outweigh the negatives of “offshore”?  Does the “Unlimited” cancel out the “member owned”?

Whether you share my own aversion to hot money in any form, you have to agree that RHC seems to take the motto “think globally, act locally” kind of backwards.  The fund is directing funds from everywhere to a few deserving projects, extracting capital and transferring it. These transactions may be ethical (though we have to trust them on that), but they certainly aren’t local for most of the investors.

The blockchain technology they use not only makes this strategic error easy, it is really the only way that blockchain can reasonably be used.  A global, peer-to-peer network is a primary affordance of blockchain technology, which is just plain the wrong model for local economies. In other words, selecting Ethereum technology is leading down the wrong path.

My basic point is that where ever the investors are, they surely could find local enterprises to invest in.  And that is what we all should do.  Shipping funds off to other continents or to untethered Internet projects is not a good way to make your own community better, which should be a top priority. In fact, it tends to move funds away from local social enterprises.

The new “RH Unlimited” project will likely be much worse. Much, much worse. Sure, it will be possible to create local tokens and local cooperatives, though we already can do that with “some guys in Finland”.  But it will also be trivial to sell and buy shares in anything, with unknowable consequences.

Making it easy for anyone to mess about with financial instruments is really not a way to promote community solidarity, trust, or sustainable development.  How will this be policed, if it even can be?  What happens if the coop is turned into a financial tool for criminals, terrorists, corporate trolls, and/or political shenanigans?

I note that even if you are satisfied that the current leadership is ethical, a decentralized organziation–cooperative or not–can be taken over by nefarious forces.  So watch out.

I probably shouldn’t be too hard on RHC.  There are dozens of variations on these “non-extractive investment” ideas and Ethereum is a favorite technology for these concepts.  To me, this looks like a hammer in search of nails.  We have a technology that lets people build their own financial systems, so obviously we should tackle the problem of ethical finance.

My own view is that the harder problems are social, and they need to be solved by talking and working together, face-to-face, in our own communities.  Imagining that faceless, soulless Internet technology will help in this ground campaign is misguided.  In fact, blockchain technology is antithetical to the personal human contact essential to actual ethical economics.

I’m willing to be proved wrong.  I will leave this as a challenge to RCH and other similar projects.  Let’s see what kind of sustainable “non-extractive” economic activity is actually possible.


Cryptocurrency Thursday

Blockchain support for local solar power generation

Let’s combine two of my interests, Solar Power and Blockchains. The use case here is a peer-to-peer microgrid, buying and selling power from local small scale solar generation. This idea is scarcely new, power cooperatives and co-generation schemes have been around for a long time, and there are a lot of contemporary variations on this theme (and not just for electricity). <<link>>


The blockchain wrinkle is to use a blockchain to track the transactions among the participants.  The idea is that the distributed ledger is an inexpensive and robust way for people to buy and sell power they generate in tiny amounts.  In addition, the decentralized blockchain protocol kind of matches the decentralized group of generators and consumers, so neighbors can share without the overhead or interference of third parties.

This approach has been going for a while in at least a few cases, such as the Brooklyn Microgrid. TBM uses some proprietary technology to connect the solar generation hardware to the software accounting and trading system.  Much of the work is community organizing, recruiting people in the local community to participate and invest.  (This kind of thing is not really a good use of kickstarter or something to dabble in from afar.)

I’ll note that from the start the Brooklyn Microgrid has boasted that it uses blockchain technology.  But you would never know that from the web site, recruiting materials, and mobile apps.  And that is how it should be!  Normal humans should never see a blockchain!  TBM is a good example of just how little the blockchain matters to ordinary users—you could take away the blockchain and no one would know or care.

This summer, the Power Ledger is launching another such effort,  down under [1].  Actually, Power Ledger is more equivalent to the proprietary technology the BM is built on.

PL is actually built on top of Ethereum, which seems like a very plausible technical strategy—Ethereum’s executable contracts are just the thing for this use case.  PL plans to create their own tokens and run markets for electricity.  This would be one of many such token/market systems built on Ethereum, so again, a plausible engineering decision.

(While Ethereum has grievous problems, and is far from idea; for any serious long-term business, it’s better than making up your own blockchain solution from scratch.)

Power Ledger isn’t even in beta yet, so it’s impossible to say how well it might work.  Given the not-particularly-innovative technical path, we can be confident that they will have working software.  But how well will they deliver the dozens of use cases they are excited about, particularly, peer-to-peer solar production?

They seem to believe that what people need and want is some way to sell their excess production in a more or less open market.  Presumably, this is supposed to incentivize installing your our solar panels, and/or help defray the cost.  It’s not obvious how well this will work, or if there would be enough demand to matter.  (Is there really a use for lots of little dribs of electricity?  Is there much use to receiving tiny payments for such dribs?)

It’s not totally clear, but it looks to me like they intend to use the conventional grid, just as previous negative metering systems have done.  This concept depends on political action and, blockchain or no blockchain, is not popular with grid operators.

At this point, their most developed case seems to be aiming to operate charging ports for electric vehicles.  This sounds like a possible business, but doesn’t really require the full generality of the distributed ledger, or create a local microgrid.

As the BM project illustrates so well, the more important part is building the community of users.  And this effort needs well designed services and consumer apps, where “well designed” generally means no visible blockchain.  And, more than anything, it requires community organizing.  PL’s technology is neither here nor there for this part of the solution.

Worse, the project started with an ICO, which raised millions of dollars.   This has absolutely nothing to do with solar power at all.

Reading the tea leaves of Power Ledger’s materials, they call attention to a number of interesting possibilities down the road.  If the distributed ledger can do negative metering and trading among neighbors, then it might also do accounting for a Carbon tax or other offset system.  That would be a neat feature for a “smart meter”, and a blockchain might be a plausible way to do it (maybe).

In the end, though, these are neat ideas but it is far from clear that blockchain technology is the only or best way to implement them.  Yes, the distributed ledger is philosophically simpatico for the desire for peer-to-peer power trading.  But a real peer-to-peer system, a la BM, is about trust, and good service (which is about trust).  Making that happen doesn’t need a blockchain, per se, and, to the degree that the blockchain is “trustless”, it probably doesn’t help.  I’m pretty sure that happy Brooklynites are happy with TBM people and service, not with whatever software lies inside.

So, we’ll see.

  1. Jennifer Bisset, Blockchain helps us take green power into our own hands, in cNet – News. 2018.


Cryptocurrency Thursday

Halaburda on the Blockchain: Blockchain not essential

I’ve been saying for years that blockchain technology per se isn’t necessary for many of the use cases advocated.

In the recent issue of Communications of the ACM Hanna Halaburda makes the same point [1].  “Most of the suggested benefits of blockchain technologies do not come from elements unique to the blockchain.” (p. 27)

Blockchain technology is basically a combination of three technologies, “encryption; automated execution of transactions (“smart contracts”); and distributed ledger, a type of a distributed database. “ (p. 27)  These technologies can be used together (as in Bitcoin or Ethereum), but also can be used separately. (The are also, for the most part, not especially “innovative”.)

Halaburda recounts the many confusions about this technology.  Bitcoin is the most famous and arguably the most successful.  But blockchains don’t have to be public and permissionless (a la Bitcoin), and Bitcoin has very little in the way of “smart contracts”.  And executable contracts a la Ethereum can be implemented by a variety of technologies, not just blockchain.  And so on.

She argues that this point is important for assessing the costs and benefits of blockchain technology.  For example, “smart contracts” may reduce costs, delay, and errors.  But they can be implemented on centralized systems—and have been for decades (e.g., “stored procedures” in database systems).

Similarly, many of the benefits of blockchain technology stem from the use of cryptography and digital signatures.  Bitcoin and its extended family have, quite rightly, turned attention to the value of these technologies. But Bitcoin itself uses standard and widely used cryptography.  (And where cryptocurrencies “innovate” in the area of cryptography, it is generally a catastrophe.)

“Currently, encryption is underutilized in business practice. Bitcoin’s blockchain itself uses standard, well-established cryptography tools. But excitement about blockchain’s safety turned more attention to the new developments in cryptography.” (p. 28)

As to the blockchain itself, it is mainly beneficial where “where reconciliation of contradictory ledgers is costly.”  It’s far from clear when this is a problem, and whether blockchain really is cheaper.

“So far it has not been clearly demonstrated in which circumstances the benefits of employing a distributed ledger outweighs the cost of delays and duplicated storage.” (p. 28)

Blockchain distributed ledger technology is supposed to have additional benefits over other decentralized databases (which have been around for decades).  In particular, the decentralization offers disintermediation, which, theoretically might offer cost savings or other advantages (such as resistance to censorship or tax collection).

These benefits have proved to be hard to realize. As I have pointed out many, many, many times, the “trustless” blockchain essentially pushes the problem of trust out to other parts of the system.  As Halaburda says, assets have to get onto the blockchain in the first place.  (And the many failures of blockchain based systems are mainly failures of these other parts of the end-to-end system.)

She points out that for other use cases, such as property records, the problems do not involve storage or publication of transaction records (e.g., property deeds).   The problems are mainly due to lax (or possibly dishonest) record keeping and transcription errors.  Using a blockchain will not improve these processes, and could potentially make things worse because there is no way to delete or correct errors on a blockchain.

I’ll add that even the most successful use case, digital currency, doesn’t actually require a blockchain per se. It can be achieved by establishing a web of trust, along with robust cryptography and distributed databases.

In the end, Halaburda concludes that cryptography and executable contracts will probably be important innovations, distributed ledger technology may well not be. So the “blockchain revolution” may lead to a new world, but one without blockchains.

“The blockchain revolution may give us new tools and change the landscape of some industries. But since the benefits of encryption and smart contracts can be realized without a distributed ledger, the world after the blockchain revolution may well be a world without the blockchain.” (p. 29)

  1. Hanna Halaburda, Blockchain revolution without the blockchain? Communications of the ACM, 61 (7):27-29, July 2018.


Cryptocurrency Thursday