Category Archives: “Smart contracts”

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

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

Ethereum CryptoPets Are Proliferating

As I predicted earlier, CryptoKitties has led to copycats (!), including puppies and multispecies.

Obviously, one has to doubt that there is an infinite appetite for these utterly useless digital “collectables”, so we’ll have to see just how many such games succeed. Of course, I would never have predicted the phenomenal success of Pokeman or Minecraft, so I wouldn’t care to bet one way or another.

Alyssa Hertig reports in Coindesk that CryptoKitties is actually notable as the first implementation of “ERC721”, a standard for “Non-fungible Tokens”. Most Ethereum projects have been using fungible tokens (which, I learn, is supported by the “ERC20” standard), but CryptoKittese are, by design unique and not interchangeable—i.e., non-fungible.

As Hertig says, this technical accomplishment is interesting because it opens the way not only for clones of the Kittie game, but possibly other applications that track ownership of uniquely identifiable objects.  This might include tracking ownership of real world objects, as has been discussed for a long time.

It remains to be seen if Ethereum executable contracts are a good technology for these apps.  After all, there are already (several) provenance tracking systems, and even digital asset licensing.  These earlier systems use cryptographic signatures and publish records on a blockchain, but do not rely on Ethereum-style executable contracts.

At a very abstract level, the principle technical difference between CryptoKitties and say, Ascribe, is that CK has pushed some of the transaction logic out into the Internet. But only some of the logic.  Key parts of the system run on conventional servers.

More important, both CryptoKitties and Ascribe require users to trust the company, and both organizations take steps to earn and keep that trust.

Using the “trustless” blockchain is supposed to make the system “more trusted” by eliminating the “centralized” services that are a point of failure.  In these hybrid architectures, that certainly is not 100% true.  Or even close to 100% true.  (I have yet to see any non-trivial system that is completely decentralized and also works.)

What, then, is the advantage to using the slow, balky blockchain?

I dunno.

Perhaps we shall see.


  1. Alyssa Hertig, Crypto Collectables? Ethereum’s Next Killer App Is on Its Way. Coindesk.December 15 2017, https://www.coindesk.com/crypto-collectables-ethereums-next-killer-app-is-on-its-way/
  2. Shirley, Deter, ERC: Non-fungible Token Standard #721. Ethereum Foundation, 2017. https://github.com/ethereum/EIPs/issues/721

 

Cryptocurrency Thursday

More on CryptoKitties

Continuing the saga of CryptoKitties:

Last week I wondered about the business model and governance of the Ethereum swamping CyptoTulipsKitties game.  This week we learn a bit more.

Rachel Rose O’Leary reports that the game isn’t quite as “decentralized” as many might assume from it use of the Ethereum blockchain and executable contracts. It is mostly open source, with a few bits of game logic kept secret (for sound reasons of playability).

She reports that there are also some secret commands that lets the “core” organization (“Kitty Corp”) backdoor everything.  And playing the game requires agreeing to conventional terms and conditions that give the “core” the right to terminate or modify your assets as they will.   She also reports that the interface actually runs on a conventional server, i.e., a “centralized” architecture.

In short, in many ways, this is a conventional game that uses Ethereum as a database. This is a shocking betrayal of the basic philosophy of crypto, though, it appears to be good game design.

O’Leary quotes developers who endorse this design because “trying to run an app on the ethereum blockchain without using some help from central servers is UX suicide.” (quoting Griff Green)  I.e., as I said “smart contracts” are heinously slow and gawky, and completely unsuitable to use in a game.

So, this highly successful game “Isn’t Quite Ethereum’s Vision for Apps”.  Worse, it is sucking down resources, crowding out others from the common blockchain and consensus protocol.

Furthermore, as I noted last week, there is no barrier to cloning the game. In fact, the open source code means that pretty much anyone can make their own version of this tulip factory. Ethereum may be able to survive one CryptoKitty app, but how will it handle hundreds or thousands of them?

The bottom line is that Ethereum is by far the leader for CryptoTulip of the year.


  1. Rachel Rose O’Leary,  Scratch That: CryptoKitties Isn’t Quite Ethereum’s Vision for Apps. Coindesk.December 13 2017, https://www.coindesk.com/scratch-cryptokitties-isnt-ethereums-vision-apps/

 

David Gerald: Bitcoin Is a Joke

Picking on many points that I have also made this year (and some I hadn’t seen), David Gerald (who blogs at “Attack of the 50 Foot Blockchain”) reviews cryptonews for 2017.

He quips that Bitcoin is “the one true, digital, comedy gold.”

His piece is delicious, leaving few unscathed.  He hits the nail on the head when he says,

The bitcoin world is relentlessly optimistic, in the face of all news, positive or … differently positive.

No matter what the reality, cryptoenthusiasts are excited about their digital tulips.

Commenting on the explosion of exciting opportunities to buy into opaque ICOs, he quips:

(ME: Why am I doing this book rubbish, I could just set up an ICO and —
WIFE: No.
ME: But it could be —
WIFE: No.)

My own version of the joke is something like:

ME:  Great news!  I bought some numbers today!
WIFE:  Really??
ME: It’s OK, they’re really valuable!
WIFE: Where are they?
ME: It’s great!  They’re out there on the Internet!
     Etc.


  1.  David Gerard, 2017: The ‘Butt’ of Bitcoin’s Joke. Coindesk. December 12 2017, https://www.coindesk.com/2017-butt-bitcoins-joke/

 

Cryptocurrency Thursday