Category Archives: Blockchain Technology

Grownups Get Real About Blockchains

The grown ups have found out about blockchains, and are starting to make realistic assessments of the technology.  As usual, they are sucking all the fun out of things.

The US National Institute of Standards (NIST) issued an informative report, which is an excellent overview of blockchain technology [2].  Much of the report is straightforward, but NIST is careful to point out important technical limitations.

There is a high level of hype around the use of blockchains, yet the 
technology is not well understood. It is not magical; it will not solve all problems. As with all new technology, there is a tendency to want to apply it to every sector in every way imaginable.” ([2], p. 6)

I think the most important section of the report is Chapter 9, “Blockchain Limitations and Misconceptions”.  The authors explain many basic points, including the ambiguous nature of “who controls the blockchain” (everyone is equal, but devs are more equal than others), and the hazy accountability of potentially malicious users.

Technically, the blockchain has limited capacity, especially storage. Overall, it is difficult to estimate the resource usage of a blockchain because it is implemented on many independent nodes.

Most important of all, they parse the Nakamotoan concept of “trust”.  It is true that there is no third party that must be trusted (at least in permissionless blockchains), but there are many other elements that must be trusted including the basic fairness of the network and the quality of the software (!).

The report also calls attention to the fact that blockchains do not implement either key management or identity management. Identity is masked behind cryptographic keys, and if you lose your key, there is no way to either fix it or revoke it.  These are either features or bugs, depending on what you are trying to do and the kinds of risks you can stand.

Overall, many of the limitations described by NIST are end-to-end requirements:  no matter how a blockchain works, it only addresses part of the total, end-to-end transaction.

The use of blockchain technology is not a silver bullet,” ([2], p.7)


On the same theme, Bailey Reutze reports in Coindesk on an IBM briefing on the end-to-end engineering of blockchain systems [1].  The talk itself is not published, but Coindesk reports that IBM warns potential customers about the end-to-end security challenges using their Hyperledger technology.

As noted many times in this blog, there have been many hacks and oopsies in the cryptocurrency world, and most if not all of them have nothing to do with the blockchain and its protocols.

IBM approaches the challenge with a thorough threat analysis, that looks at the whole system. This is, in fact, exactly what you need to do with a conventional non-blockchain systems, no?

It seems clear that whatever a blockchain may achieve, it doesn’t “disrupt” IBM’s role as a heavy weight business consultant.

In the Coindesk notes, there is a hint at one more interesting point to think about: the global extent and “infinite” lifetime of the blockchain. Nominally, the blockchain maintains every transaction ever recorded, forever.  This means that, unlike most data systems, a worst-case breach somewhere in the system might expose data far and wide, back to the beginning of time. Whew!


Still, both NIST and IBM agree that there are potential use cases for the blockchain that are worth the trouble, including public records and supply chains. (And IBM will be glad to show you how to do it.)

Blockchains may be inscrutable, they ain’t magic.


  1. Bailey Reutzel (2018) IBM Wants You to Know All the Ways Blockchain Can Go Wrong. Coindesk, https://www.coindesk.com/ibm-wants-know-ways-blockchain-can-go-wrong/
  2. Dylan Yaga, Peter Mell, Nik Roby, and Karen Scarfone, Blockchain Technology Overview. The National Institute of Standards and Technology (NIST) Draft NISTIR NIST IR 8202, Gaithersburg, MD, 2018. https://csrc.nist.gov/CSRC/media/Publications/nistir/8202/draft/documents/nistir8202-draft.pdf

 

 

Cryptocurrency Thursday

Cognitive Dissonance, Thy Name Is Ethereum

Ethereum was awarded the designation as CryptoTulip of 2017, and no small part of that distinction was due to its on-going efforts to deal with the catastrophic results of buggy “smart contracts”.

The DAO disaster of 2016 was “fixed” via an ad hoc hard fork that had the tiny side effect of creating a second, rump Ethereum currency.  Since that time, Ethereum has done several more forks to respond to problems.  And in 2017 a little oopsie resulted in millions of dollars worth of Ether being locked in inaccessible accounts.  This goof has not yet been addressed by a hard fork or any other technical fix.

The underlying problem, of course, is that Nakamotoan cryptocurrencies are designed to be “write once”, with the ledger being a permanent, unchangeable record.  This feature is intended to prevent “the man” from rewriting history to cheat you out of your money.  (This is a key part of the Nakamotoan definition of a “trustless” system.)

Ethereum has implemented executable contracts on top of this “immutable” data, which is where a lot of the problems come from.  Software is buggy, and “smart contracts” inevitably have errors or just plain produce incorrect or unintended results, such as theft.  But there is no way to correct the unmodifiable ledger, except by violating the write-once principle, i.e., a hard fork to rewrite history.

True Nakamotoists deeply believe in the unchangeable ledger not only as an engineering design but as the logical foundation of the new, decentralized world economy.  But Ether-heads have (mostly) acquiesced to multiple ad hoc forks to work around grievous bugs, which to my mind completely trash the whole point of the Nakamotoan ledger. The CryptoTulip Award citation noted “the tremendous cognitive dissonance Ethereum has engendered”.


It is very interesting, therefore, to see current discussions proposing to regularize this recovery process [2]. The idea, of course, is to reduce the risk and delay of ad hoc fixes with a more open proposal and review process.  Unfortunately, this process publicly endorses the very practice that the ledger is supposed to preclude.

This proposal has not been uncontroversial, for many obvious reasons.

In addition to the obvious problem with the whole idea of ever rewriting the ledger, the Ethereum community is dealing with questions about how “decentralized” decision making should work.

Theoretically, anyone on the Internet can have a stake in decisions about Ethereum software and protocols.  However, in the crypto world—and “open source” in general—some people are more equal than others.  Active programmers, AKA, “developers”, have influence and often veto power over technical developments.  And operators of large mining operations have veto power in their ability to adopt or reject particular features.

In the earlier ad hoc forks, the devs decided and then implemented the fork. There was little discussion, and the only alternative was the nuclear option of continuing to use the denigrated fork—which many people did. The result was two Ethereums, further muddled by additional changes and forks.

The proposed new process requires public discussion of forks, possibly including video debates. Critics complain (with good reason) that this is likely to introduce “politicians” into the process. I would say that it also will create factions and partisan maneuvering.  It is not inconceivable that (gasp) vote buying and other corruption might arise.

In short, this public decision-making process will be openly political.  What a development. The governance of Ethereum is discovered to be political!

Politics (from Greek: πολιτικα: Polis definition “affairs of the cities”) is the process of making decisions that apply to members of a group.

The explicit acknowledgement of human decision making creates a tremendous cognitive dissonance with the Nakamotoan concept of a “trustless” system, where all decisions are by “consensus”.  (In practice, “consensus” means “if you disagree, you can split off your own code”.)

But it also clashes with the core Ethereum idea of “smart contracts”, which are imagined to implement decentralized decision making with no human involvement. The entire idea of the DAO was to create an “unstoppable” enterprise, where all decisions were implemented by apolitical code.  When Ethereum forked to undo the DAO disaster, it essentially undermined the basic rationale for “smart contracts”, and for Ethereum itself.

And now, they want to have humans involved in the decision making!

The very essence of this dissonance is capture in a quote from Rachel Rose O’Leary:

For now, no further action will likely be taken on the proposal until ethereum’s process for accepting code changes, detailed in EIP-1, has been clarified.” [1]

In other words, EIP-867 is so completely inconsistent with the decision-making process it isn’t even possible to talk about it.  I guess they will continue to muddle through, ad hoc, violating the spirit of Nakamotoism.

I think that Ethereum is managing to radically “disrupt” itself and the whole concept of Nakamotoan cryptocurrency.


  1. Rachel Rose O’Leary (2018) Ethereum Devs Call for Public Debate on Fund Recovery. Coindesk, https://www.coindesk.com/ethereum-devs-call-public-debate-fund-recovery/
  2. Dan Phifer, James Levy, and Reuben Youngblom, Standardized Ethereum Recovery Proposals (ERPs). Etherium Ethereum Improvement Proposal, 2018. https://github.com/ethereum/EIPs/pull/867
  3. Rachel Rose O’Leary (2018) Ethereum Developer Resigns as Code Editor Citing Legal Concerns. Coindesk,  https://www.coindesk.com/ethereum-developer-resigns-as-code-editor-citing-legal-concerns/

 

 

Cryptocurrency Thursday

Cornell Report on Cryptocurrency “Decentralization”

One of the outstanding features of Nakamotoan blockchains is that it is a “decentralized” protocol—a peer-to-peer (overlay) network produces consistent updates to the shared data with no privileged leader or controller [2].  This property is a significant technical feature of Bitcoin and its extended family, and has even more symbolic and cultural significance for crypto enthusiasts.

“Decentralization” is supposed to impart technical robustness (there is no single point of failure), and political independence (there is no “authority” to be manipulated or shut down).  The absence of a “central” node also means that the protocol is “trustless”—there is no central service that must be trusted in order to do business. (I.e., you only need to trust your counterparties, not the rest of the network.)

In short, Nakamotoan blockchains and cryptocurrencies are all about being “decentralized”.

But what does “decentralized” mean?

In fact, the notion of “decentralized”, as well as the many related concepts, are poorly defined. In the context of a computer network, “centralized” can mean many things.  Indeed, a network transaction may depend on a number of physical and virtual layers, with different degrees of centralization involved simultaneously.  For example, a wi-fi network has various routers, links, switches, firewalls, and so on.  Even the simplest point to point link may pass through a number of shared channels and chokepoints that are technically “central” services, though the overlying service is decentralized, or centralized in a different way.  (Does that sound confusing?  In practice, it truly is.)

However, Nakamotoan “decentralization” is mostly about the logical organization of digital networks, as developed in so called “peer-to-peer” networks.  A classic Internet service is “centralized” in the sense that  client (user) nodes connect with a single server, which manages the whole system.  Clients trust the service to implement the protocol and protect all the data.  Note that so-called “centralized” services often run on many computers, even in many locations.  They are logically a single server, even if not physically a single node. (Does that sound confusing?  In practice, it is.)

Nakamotoan systems replace a single “trusted” service with a peer-to-peer protocol based on cryptography and economic incentives.  One of the critical design features is the use of algorithms that are impossible for a single node to hack.  This is important because In a conventional “centralized” service, once a server is suborned (or subpoenaed), the whole network is controlled.

In contrast, Bitcoin is designed so that the system cannot be controlled unless the attacker controls more than 50% of all the participating nodes.  In this design, security is assured by having a very large number of independent nodes in the network. This widespread participation is made possible by making the code openly available and letting anyone connect to the network.

While the cryptography has a relatively straightforward technical basis, other aspects of this security guarantee are less easy to define and they are actually empirical features of the network that may or may not be realized at any given moment.

For example, everything depends on the Bitcoin network being “owned” by many, many independent people and organizations.  If one person owned 51% of the network, then they would own all the Bitcoin.  And in fact, if one person owned 51% of the computing power (not the number of computers), they would own all the Bitcoin.

The point—and I do have one—is that while the Bitcoin protocol is designed to work in a decentralized network, the protocol only works correctly is the network really is “decentralized” in the right ways.  And there is no formal definition of those “right ways”, nor much proof that various cryptocurrency networks actually are decentralized in the right way.


This winter Cornell researchers report on an imporatant study of precisely these questions on the real (as opposed to theoretical or simulated) Bitcoin and Ethereum networks [1].

there have been few measurement studies on the level of decentralization they achieve in practice” ([1]. p.1)

This study required a technical system to capture data about nodes of the relevant overlay networks (i.e., real life Bitcoin or Ethereum nodes).  In addition, the study examined key technical measures of the nodes, to discern how the overall capabilities are distributed (i.e., the degree of decentralization).  These measures include network bandwidth (data transmission), geographic clustering (related to “independence”), latency (a key to fairness and equal access), and the distribution of ownership of mining power.  The last is an especially important statistic, to say the least.

The Cornell research showed that both Bitcoin and Ethereum have distinctly unequal distribution of mining power.  In the study, a handful of the largest mining operations control a majority of the mining power on the network.  (Since some authorities own or collaborate with multiple mining operations these counts underestimate the actual concentration of power.)   In other words, these networks are highly centralized on this essential aspect of the protocol.  The researchers note that a small non-Nakamotoan network  (a Byzantine quorum system of size 20) would be effectively be more decentralized—at far less cost than the thousands of Nakamotoan nodes ([1], p. 11).

Although miners do change ranks over the observation period, each spot is only contested by a few miners. In particular, only two Bitcoin and three Ethereum miners ever held the top rank.” ([1], p. 10)

These findings are not a surprise to anyone observing the flailing failure of the “consensus” mechanism over the last two years, let alone the soaring transaction fees and demented reddit ranting.  Cryptocurrency systems are designed to be decentralized, but they are, in fact, dominated by a few large players.

By the way, the two networks studied here are likely the largest and most decentralized cyrptocurrency networks.  Other nets use similar technology but have far fewer nodes and often far more concentrated ownership and power.  So thees two are the good cases.  Other networks will be worse.


The general conclusion here is that Nakamoto’s protocol trades off a huge, huge costs in equipment, power consumption, and decision-making efficiency to achieve the supposed benefits of a “decentralized” system.  Yet the resulting networks are actually highly centralized, though in opaque and hidden ways.  I think this is a fundamental flaw in the engineering design, and also in the philosophical underpinnings of Nakamotoan social theory.

I’d love to see similar careful studies of other underpinnings of Nakamotoism, including the supposed properties of “openness”, “trustlessness”, and “transparency”.

A very important study.  Nice work.


  1. Adem Efe Gencer, Soumya Basu, Ittay Eyal, Robbert van Renesse, and Emin Gün Sirer, Decentralization in Bitcoin and Ethereum Networks. arXiv, 2018. https://arxiv.org/abs/1801.03998
  2. Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System. 2009. http://bitcoin.org/bitcoin.pdf

 

Cryptocurrency Thursday

Narayanan and Clark on Bitcoin’s academic roots

For an old grey-headed programmer, Bitcoin has always been a bit weird technology.

The big thing, of course, is that it is deliberately designed to be slow. My whole career has been basically about trying to make software go faster, so the computation that has no purpose except to take a long time just feels wrong.  I understand it intellectually, but it’s just not right, deep down.

The other thing about Bitcoin is that all of the pieces are not new, though the specific way they are used is. For example, I was doing peer-to-peer networks (with hash addresses) before the Nakamoto paper [1], so there was no news there.

So what, exactly is new, about Bitcoin?


I was very pleased to read Arvind Narayanan and Jeremy Clark’s recent article reviewing “Bitcoin’s academic pedigree[2].  N&C review the academic papers that present many of the key technical features used in Nakmotoan cryptocurrencies.

[B]y tracing the origins of the ideas in bitcoin, we can zero in on Nakamoto’s true leap of insight—the specific, complex way in which the underlying components are put together.” (p. 38)

They point to six lines of technical innovations from the 1980s and 90s that are critical to Nakmotoan cryptocurrencies:

  1. Linked Timestamping, Verifiable Logs
  2. Digital Cash
  3. Proof of work
  4. Byzantine Fault Tolerance
  5. Public Keys as Identities
  6. Smart Contracts

Figure 1. Chronology of key ideas found in bitcoin. (from [2,, p. 38)
In some cases, Nakamoto acknowledges the academic predecessors, and in others he doesn’t. In part that is because some of the ideas were so widely known that they seem “obvious” and “common knowledge”, even if they were first written about only in the last forty years.  It is also possible that Nakamoto may have reinvented some of the concepts, perhaps inadvertently reverse engineering from example systems know to him, without tracing their origins.

Nakamoto was obviously following up on earlier concepts for digital money, including hashcash, which used a form of proof-of-work using hashing.  N&C note that there was a lot of academic interest in proof-of-work, and several lines of work seem to have independently converged on ideas about using hashing as proof-of-work in peer-to-peer networks. In the last fifteen years, these efforts have been recognized to be the same idea, and the terminology, including the term “proof-of-work” have been standardized.

Nakamoto also uses widely known public key cryptography (PKI) to implement secure but anonymous digital signatures. The use of public keys as identifiers is central to Bitcoin, and Bitcoin is one of the most successful implementations of that concept. However, Nakamoto actually punts the problem of key management, which has certainly led to issues as well as development of alternative cryptocurrencies that deal with keys and identity in different ways.


N&C argue that Nakamoto’s contribution, his “genius”, was “the intricate way in which they fit together” these pieces from academic and practical research. Nakamoto’s system is a triad, with each piece supporting the logical flaw in the other pieces (p. 42).

Secure Ledger Prevents double spending, ensures the currency has value Needs distributed consensus
Distributed consensus (mining) Ensures security of ledger Needs to be incentivized, i.e., by a valuable currency
Valuable Currency Incentivizes the honesty of nodes Needs a secure ledger

This is an extremely useful insight, which explains why it has been so difficult to describe the “one big idea” underlying Bitcoin.  In fact, it is a clever combination of big ideas, glued together in a specific way that works pretty well in practice.

It would be an interesting follow up to this paper to identify the “innovations”, if any, in various alternative and derivative cryptocurrencies. There have been a number of alternatives to the Nakmotoan proof-of-work proposed and explored.  There have been alternatives to the peer-to-peer topology of the consensus network, as well as many different ideas about incentives. In short, there is probably a landscape of contemporary cryptocurrency design, with many neighbors in Bitcoins’s neighborhood.


I would add that there is a social dimension to the Bitcoin story (besides incentives).  Bitcoin succeeded beyond the simple merits of its technology because it hit a particular time and place (the 2009 global crash) and had supremely effective salesman (“Satoshi Nakamoto”, and the legions of enthusiastic Nakamotoans) who told and retold and still tell the story.

This combination of a clever technology built “just right” from existing concepts, arriving at the right moment, announced by a supreme salesman reminds me of NCSA Mosaic.  I remember that when I first saw the Mosaic browser, I immediately knew all the pieces it was built from.  Yet it was a new wrinkle, combining the familiar technologies, “just right”.  It also hit at the right moment (the Internet was exploding) and found a cheerleader in Larry Smarr—one of the greatest sales-beings I have ever encountered.

Bitcoin too succeeded by having a clever combination of technologies (including the strategically critical “leaving out” of key management), a fortunate historical moment, and an able storyteller.  (We can also see parallels in the overheated claims and financial bubbles of the early WWW and Bitcoin.)


This is a great paper, well worth the read.  N&C give us a better idea of the “genius” of Satoshi Nakamoto, and also insight into ongoing technical and social developments.


  1. Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System. 2009. http://bitcoin.org/bitcoin.pdf
  2. Arvind Narayanan and Jeremy Clark, Bitcoin’s academic pedigree. Communications of the ACM, 60 (12):36-45, November 2017. https://doi.org/10.1145/3132259

 

Cryptocurrency Thursday

Bitcoin’ Unsustainable Energy Consumption

Nakamotoan Cryptocurrencies are designed to suck CPU cycles, which means sucking electricity. The entire concept rests on a deliberately inefficient computation, which prevents replay and other attacks by being too difficult (expensive) to replicate [3].

This is a clever and successful technique, that yields a robust, global ledger at relatively low costs, at least to the end-users.

But there is a massive side-effect, and that is the power consumption of the decentralized network.  Any given node is just a computer, but the whole idea is that there are zillions of notes.

How many?  A lot.

And they use a Iot of electricity.

Eric Holthaus says that the Bitcoin network consumes 100,000 times the power of the top 500 supercomputers, more than many countries, and may be on track to use more power than the USA.  Congratulations, Bitcoin.  You are out consuming the most notorious energy hogs on the planet.

Personally, this kind of thing deeply offends my engineer’s soul.  Inefficient energy usage is bad, but deliberately wasting electricity is bad engineering, and, well evil.

Apologists for cryptocurrency point out that this usage is equivalent to the conventional banking system.  They also say that some miners are using clean energy.  And so on.

These rhetorical points hinge on the assumption that Bitcoin is a good thing, along with the implicit claim that Bitcoin is displacing conventional financial systems.  (There is no sign of that displacement happening any time soon.)

And, of course, most cryptomining isn’t clean energy, and where it is using renewables it is displacing other users from public sources.  It is hard to be happy about precious electricity pouring down a rathole.


It is important to remember that this isn’t just Bitcoin.  There are many cryptocurrencies and blockchains.  They are smaller than Bitcoin, but they add to the load, and any of them can grow if it becomes “successful”.

These days there is also great interest in “smart contracts”, and Distributed Autonomous Organizations.  These CryptoTulips use the same power-sucking technology to implement their applications.  In principle, these things are doing useful work, though the accounting is really screwy.

Part of the point of the blockchain is that transaction costs are low compared to conventional systems.  But one reason the cost is low is that the cost of the electricity is not born by the people using and profiting from the transactions.  That kind of unaccountability is a formula for overconsumption of the unaccounted resources.

I’ll also note that there are increasing levels of derivative activity built on top of cryptocurrency.  The mania for “Initial Coin Offerings” (unregulated securities on the blockchain) and futures trading mean that there is considerable additional resource usage beyond the basic cryptocurrency itself.  Much of this activity uses conventional technology for most of the work.  So the energy footprint isn’t “Bitcoin versus Conventional”, it is “Conventional + Bitcoin versus Conventional”).


The bottom line is that this all seems unsustainable.  Something will have to give.  There will have to be less cryptocurrency mining, less of everything else, or a lot more power generation.  Even if you think crytocurrency is a great thing, the latter two choices are rather bad for humans and the world.


  1. Michael J. Casey, Bitcoin Mining Wastes Energy? What If That’s Good? Coindesk.January 9 2018, https://www.coindesk.com/bitcoin-mining-wastes-energy-thats-good-thing/
  2. Eric Holthaus, Bitcoin could cost us our clean-energy future, in Grist. 2017. https://grist.org/article/bitcoin-could-cost-us-our-clean-energy-future/
  3. Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System. 2009. http://bitcoin.org/bitcoin.pdf
  4. Adam Rogers, The Hard Math Behind Bitcoin’s Global Warming Problem, in Wired – Science. 2017. https://www.wired.com/story/bitcoin-global-warming/

 

Cryptocurrency Thursday

Origin: “The sharing economy without intermediaries”?

There is a lot of confusing and confused talk about “the sharing economy”. The term has been used to describe local resource sharing [4], and also to a variety of “peer-to-peer” businesses, a la, AirBnB and Uber [1].

The social psychology of these disparate enterprises seems to rest on the advantages of personal interaction. As Sensei Claire Marshall puts it, “Things change when money isn’t involved” .

This moneyless transaction is enabled by the Internet and ubiquitous mobile devices, and is realized in various forms of “markets”, which connect consumers with providers.  This is the AirBnB trick. The flexibility and low costs of these systems also enables fine grained transactions (i.e., short term rentals and division of resources).

Digital technology enables, but does not determine how people use it. The “AirBnB trick” can be embedded in a variety of business models. The “Uber” model, popular with many companies, collects a rake-off for the operator of the market. The same technology can, in principle, support cooperative, user owned, business.  There are a variety of efforts to create such “platform cooperatives”, with and without blockchains.


Into this confusion, Origin (which used to unwisely spell its name with a ‘zero’ at the beginning, 0rigin) is adding in the rolling catastrophe that is Ethereum.  Their idea is, “The Sharing Economy Without Intermediaries” [5].

Their idea seems to be that the important problem with “the AirBnB Trick” is that the intermediary that controls and rakes-off from the market. They (Origin) want to build a blockchain-based decentralized system that lets anyone play the AirBnB game.  They are using Ethereum executable contracts, and they say that the system is “open source” (whatever that means in this case).

Another key idea is that they imagine pooling all the users of all the peer-to-peer markets in a single gigantic market. Using Origin, the individual businesses will fish in this vast ocean instead of each one creating their own lake.

Together, these businesses would pay for the maintenance of the infrastructure, but no single company will own or control the use of the technology. (It’s unclear what role the “foundation” and developers would ultimately play in this network.)


I have to wonder about this idea, and not just because Ethereum is iffy, or because “smart contracts” are neither smart nor contracts.

The Origin people are eager to do away with not only the rake-off, but also the control and “censorship” exercised by the “centralized” company.  Their product brief complains about an array of abuses, including unilateral fee hikes, evictions due to “arbitrary” rules, and politically motivated denial of service [3].

Airbnb recently kicked guests out of rented properties and canceled their accounts after discovering those guests were planning to attend a Ku Klux Klan (KKK) rally

The decentralized Ethereum technology will, they say, make it difficult for any authority to impose such coercion on service providers.

What if goods and services that added value to the ecosystem could freely trade at their fair market prices and quantities without tampering from biased third parties?

Well, I think we know the answer to “what if”. See, for instance, 4Chan or various digital Dark Markets.


Even if you accept their diagnosis of the situation, it’s far from clear to me that this technology actually solves these problems.

As Uber, AirBnB, and others have found out, legal and public pressure is applied to the company, not to the technology.  Using executable contracts that “can’t be modified” will scarcely defend a company from the liability for their actions.

For that matter, the notion that blockchains eliminate excessive rents is highly dubious.  Setting aside the experience of cryptocurrencies (which have been captured by large scale mining operations, who are—wait for it—extracting rents), running a business is an end-to-end system.  Sustaining the business means fees, and successful companies and brands will charge premiums, blockchain or no.

Finally, I’ll remind the reader that the key to any of these digitally augmented peer-to-peer businesses is the user experience.  Users neither know nor care about the back end, they care about the interface and the service provided.  The blockchain not only doesn’t solve the UX problem, it often makes it worse.

Blockchain technology is pretty unpleasant to use, it generally has to be encased in conventional technology.  For example, the brilliantly successful CryptoKitties made much of its use of Ethereum. However, the developers actually use a “centralized” server, because, as they say, no one in their right mind would connect a UI directly to a blockchain.

More fundamentally, the supposed virtues of the blockchain, including the lack of any responsible authority and the “trustless” protocol are antithetical to developing the trust of the customers. A successful company like AirBnB works very hard to establish trust among the customers using their system, and this is their important value added.  How does blockchain help this quest for user trust?

My own view is that these businesses will be built with hybrid technologies, and will surely operate almost the same as a blockchainless business. The supposed cost savings from using blockchain (versus, say, conventional cloud based servers) are yet to be demonstrated.

Furthermore, I think the non-blockchain parts of the system will be just as arbitrary, and just as subject to regulation as any other system. Using blockchain will be awkward and inefficient, yet also will not deliver the imagined benefits.

The long and the short of it is, Origin is based on fundamental misunderstanding of technology, business, and society.  I’ll be surprised if they get off the ground.


  1. Robin Chase, Peers, Inc.: How People and Platforms are Inventing the Collaborative Economy and Reinventing Capitalism, New York, PublicAffairs, 2015.
  2. Brady Dale,  Pantera Invests $3 Million in Sharing Economy Token Origin. Coindesk.December 11 2017, https://www.coindesk.com/pantera-invests-3-million-sharing-economy-token-origin/
  3. Matthew Liu  and Joshua Fraser, 0rigin Product Brief: The Sharing Economy Without Intermediaries. 2017. https://www.originprotocol.com/static/docs/product_brief_v15.pdf
  4. Claire Marshall, How to Make Money (and a whole lot more) by Sharing. 2015. http://www.sharestories.net/
  5. Matthew Liu and Joshua Fraser, The Sharing Economy Without Intermediaries. Origin White Paper, 2017. https://www.originprotocol.com/static/docs/whitepaper_v2.pdf

 

Cryptocurrency Thursday

Crypto Tulip of the Year for 2017: Ethereum

The first annual “Crypto Tulip of the Year” is awarded to the cryptocurrency or related technology that was the subject of the most irrational exuberance over the course of 2017

It was a tough decision this year because there is so much silliness.

 

Third place goes to:     Bitcoin

How could the patriarch of the dysfunctional crypto family not be in the running?

Despite grievous engineering problems, and rampant anti-social usage, the exchange rate has exploded with no connection to any known rational justification .

Bitcoin’s case was strengthened by the opening of futures trading on the CME in December, signaling that the gnomes of Chicago are ready to shear the sheep in early 2018.


The runner up is:     Initial Coin Offerings (ICOs)

You know it is an irrational market when every Tom, Dick, and Floyd Mayweather is floating one.

These unlicensed securities flout both the law and common sense—and in many cases are unobtainable by the general public because of insider trading.  Yet these Crypto Tulips have flourished no matter how many grown-ups issue warnings, or how many people are ripped off.

ICOs deserve special mention as particularly pure manifestations of the Nakamotoan ideology.  They aim to “disrupt” the securities market by ignoring regulations and laws, putting the means of financial engineering in the hands of the masses.  What could possibly go wrong?


Finally, drumroll please,  the winner of the 2017 Crypto Tulip of the Year Award is:

Ethereum.

Following the catastrophic “DAO” episode in 2016 that would have killed any normal technology, Ethereum bounced back and grew.  While the distributed autonomous organizations proved to be eminently “stoppable”, enthusiasm for this nutty technology appeared to be invincible.

Late in the year, Ethereum sealed the win with the one-two combination of an “oopsie” that has locked millions of dollars in accounts that cannot be accessed, followed by the emergence of the amazingly successful “CryptoKitties” game, which has flooded the Ethereum blockchain and network with transactions.

The judging also recognizes the tremendous cognitive dissonance Ethereum has engendered.  Ethereum has survived multiple “hard forks”, including one that rewrote history in precisely the way that Nakamotoan cryptocurrency is supposed to prevent.  Users have not only tolerated this bizarre and heretical development, they don’t seem to even care.

Similarly, the success of Crypto Kitties game has swamped the common blockchain, crowding out other “more important” uses. This has caused some anguish from people who have been blocked from exploiting the commons for their own aims.  But, true Nakamotoans do not question the ultimate feasibility of a single, global commons, nor do they judge what others might do in the commons.

Congratulations, Etherheads!  Your irrational exuberance has won the Crypto Tulip 2017, surpassing even the mighty Bitcoin, and the trend ICO.

 

Cryptocurrency Thursday