Bitcoin on the Brink

While TheDAO blazes merrily, melting down the Ethereum network, the Ur-coin, patriarch cryptocurrenty Bitcoin is heading for catastrophe.

For one thing, the entire “no one controls it” concept has been unmasked as factually incorrect. Nathaniel Popper reported in the NYT that four Chinese based consortia control not 51% but more like 69% of the “votes” in the “decentralized” Bitcoin network. (This was not a secret, but the NYT report makes it “official”.)

The notion that “running the software on a zillion tiny computers will assure that no one can dominate the network” was a hand-wavy argument from the start, and it has been proven to be empirically false. (As many of us said from the start.)

Aside from the moral effect of this development, this situation is a drag on innovation (as dramatic income inequality always is). For a year now, Bitcoin has been facing a serious technical issue, as the basic shared data structure (the blockchain) is being overwhelmed by growing traffic. This is a perfectly normal problem to have, and there are technical responses to mitigate the situation. This will require choosing one of the alternative fixes, and changing the code. A perfectly normal process.

But Bitcoin uses a radically “decentralized”, libertarian, “market-based”, approach to both decision making and software modifications. Rather then arguing and then deciding on direction and then implementing the direction, the process is to argue, implement, and then see how many users accept the proposed changes.

In this case, there are two huge problems that arise. First, there are multiple plausible solutions, each with a reasonable amount of support, and all of them mutually incompatible. Second, as noted, the “voting” is done by the network, which not only has multiple interests (which may conflict), but also is dominated by a few large players. The largest miners can effectively veto any changes, and have shown willingness to protect their own financial interests as they see them.  The result has been a chaotic and gridlocked argument about direction.

There is a third problem with this approach to governance. The process is modeled on open source software projects. In these projects, developers always have the option of “forking”, starting a separate, incompatible, version of the software. Developers have to choose to use one or both versions, which is annoying but probably matters little to most users.

Bitcoin has the same process, and there are two and possibly more incompatible versions of the code in development. But unlike a normal software package, it is not possible to use more than one version. Furthermore, transactions (i.e., money) processed by one version do not exist and have no value in any other branch of the family tree. For this reason, forking may have huge financial implications, and a long term or permanent split effectively “breaks” Bitcoin into multiple competing currencies. Not good.

These sorts of challenges are survivable for many kinds of software. Unix/Xenix/Linux has existed for nearly fifty years, in dozens of versions, and is still going strong. Phasing in IPv6 and IPv4 out is taking decades, but it will happen.

But Bitcoin’s function as “currency” throws a wrench in these laissez faire processes. It’s one thing to have some data be incompatible, or require multiple versions for different “forks” of linux. It is another thing entirely to have some set of programmers decide that your money doesn’t count.

And this is what could happen with Bitcoin. And the concentration of computing power based votes means that this set of unelected dragons can decide whose money counts. This prospect erodes the entire ideological basis for Bitcoin as a morally pure virtual gold.

And for the final garnee, much of the “discussion” is done on the elevated plane of Reddit.  Over the top rhetoric is normal, death threats considered a reasonable argument, crude censorship is common, and vigilante hacking attacks considered romantic.  It’s a chaotic mess, and no wonder that grown ups don’t want anything to do with this stuff.

I’d say that Bitcoin is already past its prime, and could well be irrelevant in a couple of years.  Most likely, there will be multiple rump Bitcoins, all claiming to be the “real Bitcoin”.

Sigh.

 

Cryptocurrency Thursday

Bitcoin Flap Of The Month

In a sad but not really unexpected development, key Bitcoiner Mike Hearn resigned—noisily—from the Bitcoin Foundation. His blog post is a bitter indictment of the Bitcoin “community”, and the project itself.

“The fundamentals are broken”, he asserts.

His post is a long, well informed, exposition of many things that are really messed up with Bitcoin qua Bitcoin (though not necessarily with the base technology or other implementations). He has basically two points:

1. “the community has failed. …[it has become] a system completely controlled by just a handful of people”
2. “the network is on the brink of technical collapse.”

The technical collapse he refers to is due to the much discussed scaling problems which I view as inherent in the peer-to-peer technology. Resolution of this problem requires commitment to significant changes to the software and protocols, and, based on three decades of experience with distributed systems, there are at least several plausible approaches that would work. But any solution requires a decision by and action from the community, which has turned out to be very difficult.

Much of Hearn’s post discusses the many eccentric and sub-optimal behaviors of the Bitcoin so-called “community” over the last year. To date, efforts to address the scaling issues have not succeeded because the community has not, and perhaps cannot, make or execute such a change.

I would say that the problem is baked into the fundamental design of this “Distributed Autonomous Organization”, and “organization” that operates by consensus among unaccountable and nearly anonymous participants. Furthermore, the technology is opaque and “trustless”—features that militates against rational problem solving. Add in financial incentives and a gold rush mentality, and it is hardly surprising decision making is a problem.

In the case of Bitcoin, decisions about the proposed engineering changes have been approached through a byzantine process, along the lines of:

1. imagine a solution
2. implement it
3. Post the new version as a replacement for the currently operational system
4. Each node on the network decides, independently, whether to accept the new implementation or not. During this “voting” period, there are two or more versions of the system running at the same time (a bad situation for a financial system)
5. If and when a large majority accept the new version, it becomes the de facto standard. If too few accept it, then it will be thrown away.

Experienced software and systems engineers cringe at such a methodology. It is unpredictable and irrational. It also isn’t necessarily economically sustainable, given the “work first, vote second” process, and the fact that the engineering is no funded by the major financial beneficiaries of the system. Myself, I prefer to know that the customers, or at least the funders, actually want my software before I sink megahours into making it work. That is not always possible, but the Bitcoin “consensus” process is about as risky as any I’ve seen.

In addition to this crude and ineffective decision making structure, Hearn complains that the community has become dysfunctional in several ways, including the emergence of a handful of giant players (who dominate any “consensus” vote), an opaque nest of financial interests, and suppression of information. The latter complaint is particularly stinging, for a technology that has, from the beginning, pretended to be “transparent”.

Hearn goes on to complain about the atrociously low level of “argument”, including censorship, death threats, and general childishness. Here, I can only say, “what’s new?” Bitcoin was born a “reddit” project, and has never really grown up from that trashy beginning.

The NYT headline describes this as “A Bitcoin Believer’s Crisis of Faith”, which is right on the mark. The underlying technical proposals are fairly standard stuff, each with advantages and disadvantages. But this has not been a technical argument, it has turned into a religious schism.

In his article, Hearn hiself cites scripture (Sensei Nakamoto) to justify his own position, and condemns a significant opponent because “he did not believe in Satoshi’s original vision”, and should have been have been “fired”, driven out of the project if such a thing were possible.

At the same time, Hearn has been criticized, censored and attacked by others for his own ‘heresy’. His technical proposals have been seen by some to change Bitcoin in ways that depart from the correct meaning of Bitcoin. This has led to suppression of any mention of Hearn’s proposal, as well as personal abuse and threats.

It’s an ugly, ugly mess. No grownups are involved that I can see. At this point, I don’t think I would use the term “community” any more to describe this disorderly mob.

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Hearn’s blast attracted a lot of attention, including “mainstream” (reality based) media. (e.g., Popper in the NYT.). Many “outsiders” took Hearn’s blast sign off as a sign that Bitcoin is finished, which I think is a fair inference. Given that the Bitcoin Foundation has been shattered and broke since last spring, Hearn’s departure can only be punctuation on this process. Whether Bitcoin can function without the Bitcoin Foundation or a replacement is an open question.

Bitcoin apologists were very unhappy at the negative press, and tended to circle the wagons while repeating the same arguments. Rallying the faithful to the holy cause is usually the sign of the last gasps of a technology, so this rhetoric only reinforces Hearn’s general point about the fundamental messed-up-ness of the “community”.

My own view is that most of what Hearn says is nothing we didn’t know already though there are some details that are worse than I realized. Some of the things he is unhappy about have been there from the beginning, even if he couldn’t see them.

His comments about the dysfunction of the community offer interesting insights in to the kinds of problems that DAOs may expect to encounter. So many advocates of DAOs hold naïve or disingenuous theories of how people will behave in anonymous, opaque, unaccountable collaborations. My own view is that the Bitcoin disaster is a prototype for what will really happen.** This must call into question the whole notion that a “trustless” system (if such could ever be built) is feasible or desirable.

Is Bitcion dead? Almost certainly. Are the underlying technologies dead? Far from it. But we will need to find one or more social systems that can successfully use it.

 

**I note that other open source and cryptocurrency communities have suffered similar humiliating collapses.  Dogecoin comes to mind.

 

Cryptocurrency Thursday

Books Reviewed 2015

Here is  housekeeping post, collecting all the books reviewed here in 2015.

Looking back at this list, I see that this year saw Terry Pratchette’s last book (a wrenching experience), and new novels by old favorites Stross, Perry, Macguire, Holt, Gaiman, among others. I also read older but still good histories by Goodwin and Graeber. I read several books about banking, Papal and otherwise, and overlapping works about Italy, fictional and (supposedly) real.

Over the year, I reviewed a sampling of important books about contemporary digital life, including cryptocurrency, the “sharing economy”, social media, and “mind change”.   These works covered a spectrum from enthusiasm to dark worry, giving us much to think about. There are many more I did not have time or energy for. (I will say more on this topic in another post)

Throughout 2015 I continued my ongoing investigation of the question, “what is coworking?”, including reviews of two recent (self published) books about coworking by practitioners. (More on coworking in another post.)

Shall I name some “Best Books” out of my list? Why not?

Fiction:

There were so many to pick from. I mean, with Neil Gaiman in the list, how can I choose? But let me mention two that are especially memorable

Radiance by Catherynne M. Valente
Very imaginative and well written, and, for once, not so horribly dark. This book lodged in my memory more than others that are probably equally good.

Telegraph Avenue by Michael Chabon
Published a few years ago, but I didn’t read it until this year. A wonderful, intricate story. The flight of the parrot is still in my memory.

Nonfiction:

There were many important works about digital life, and I shall try to comment on them in another post. But three books that really hit me are:

Debt: The First 5,000 Years by David Graeber
From several years ago, but I didn’t read it until this year. Highly influential on the ‘occupy’ and other left-ish thinking. This is an astonishingly good book, and long form anthropology, to boot. Wow!

Reimagination Station: Creating a Game-Changing In-Home Coworking Space by Lori Kane
An exlectic little self-published book about “home coworking”, which I didn’t know was a thing. Kane walked the walk, and made me think in new ways about community and coworking.

Fangirl’s Guide to the Galaxy by Sam Maggs
Unexpected amounts of fun reading this short book. It does an old, graying nerd no end of good to see that at least some of the kids are OK. Really, really, OK.

List of books reviewed in 2015

Fiction

A Darkling Sea by James L. Cambias
After Alice by Gregory Maguire
Aurora by Kim Stanley Robinson
Bats of the Republic by Zachary Thomas Dodson
Book of Numbers by Joshua Cohen
Chasing the Phoenix by Michael Swanwick
Candy Apple Red by Nancy Bush
Chicks and Balances edited by Esther Friesner and John Helfers
Corsair by James L. Cambias
Count to a Trillion by John C. Wright
Diaspora by Greg Egan
Distress by Greg Egan
Electric Blue by Nancy Bush
Forty Thieves by Thomas Perry
Futuristic Violence and Fancy Suits by David Wong
Get In Trouble by Kelly Link
Good Omens by Terry Pratchett and Neil Gaiman
Karen Memory by Elizabeth Bear
Koko the Mighty by Kieran Shea
Luna: New Moon by Ian McDonald
Mort(e) by Robert Repino
Numero Zero by Umberto Eco
Radiance by Catherynne M. Valente
Rebirths of Tao by Wesley Chu
Redeployment by Phil Klay
Satin Island by Tom McCarthy
Secondhand Souls by Christopher Moore
Seveneves by Neal Stephenson
Shark Skin Suite by Tim Dorsey
String of Beads by Thomas Perry
Telegraph Avenue by Michael Chabon
The Annihilation Score by Charles Stross
The Best Science Fiction & Fantasy of the Year Volume Nine ed. by Jonathan Strahan
The Buried Giant by Kazuo Ishiguro
The Enchantment Emporium by Tanya Huff
The First Bad Man by Miranda July
The Fortress in Orion by Mike Resnick
The Future Falls by Tanya Huff
The Good, the Bad, and The Smug by Tom Holt
The Mark and the Void by Paul Murray
The Relic Master by Christopher Buckley
The Rook by Daniel O’Malley
The Shepherd’s Crown by Terry Pratchett
The Three Body Problem by Cixin Liu
The Unfortunate Decisions of Dahlia Moss by Max Wirestone
The Water Knife by Paolo Bacigalupi
The Wild Ways by Tanya Huff
Time Salvager by Wesley Chu
To Say Nothing of the Dog by Connie Willis
Trigger Warning: Short Fictions and Disturbances by Neil Gaiman
Ultraviolet by Nancy Bush
We Are Pirates by Daniel Handler
Witches Be Crazy by Logan J. Hunder
Zer0es by Chuck Wendig

Non Fiction

Arrival of the Fittest by Andreas Wagner
Blue Mind by Wallace J. Nichols
Debt: The First 5,000 Years by David Graeber
Digital Gold by Nathaniel Popper
Fangirl’s Guide to the Galaxy by Sam Maggs
God’s Bankers by Gerald Posner
LaFayette in the Somewhat United States by Sarah Vowell
Let’s Be Less Stupid by Patricia Marx
Live Right and Find Happiness by Dave Barry
Merchants in the Temple by Gianluigi Nuzzi
Mind Change by Susan Greenfield
Mindsharing by Lior Zoref
Modern Romance by Aziz Ansari
No More Sink Full of Mugs by Tony Bacigalupo
Not Impossible by Mick Ebeling
Pax Technica by Phillip N. Howard
Peers, Inc by Robin Chase
Reimagination Station: Creating a Game-Changing In-Home Coworking Space by Lori Kane
Speculative Everything by Anthony Dunne and Fiona Raby
Team of Rivals by Doris Kearns Goodwin
The Age of Cryptocurrency by Paul Vigna and Michael J. Casey
The Art of Forgery by Noah Charney
The Next Species by Michael Tennesen
The Reputation Economy by Michael Fertik and David C. Thompson
The Social Labs Revolution by Zaid Hassan
The Ugly Renaissance by Alexander Lee
Twentyfirst Century Robot by Brian David Johnson
Women of Will:  Following the Feminine in Shakespeare’s Plays by Tina Packer

 

Book Reviews

 

 

 

 

 

 

 

 

 

 

Popper on Internet Archive Federal Credit Union

This week Nathaniel Popper published a rather one sided and shallow exposition of the woes of Brewster Kahle’s ill fated Internet Archive Federal Credit Union. The thrust of his NYT story is “how difficult it can be to try out anything new in the heavily regulated industry”.

From the article, it isn’t clear exactly what Mr. Kahle was trying to do, or exactly why he needed a federally insured Credit Union to do it. The two innovations highlighted in the article are lending to low income residents and working with Bitcoin businesses.

Both of these things are fine things, but  neither is necessarily what a credit union per se should be doing, and the regulators were rightly concerned. We definitely don’t want insured institutions messing about with Bitcoin businesses—aside from the reputational risks, cryptocurrency is not really a “local” enterprise.  (We don’t encourage local credit unions to deal in, say, commodity trading or currency exchanges, either.)

I’ll also point out that in the last bubble there were very troubling problems with “community banks”, that aimed to aid poor communities but ended up broke and bailed out by insurers. There are also huge problems with unregulated predatory lenders in poor communities (which I’m sure Kahle hoped to displace with an honest CU). It is small wonder that credit union regulators do not want to see those problems migrate to their bailiwick.  “Trust me, this time it’s different” is not much comfort to the people who will have to pay out the rescue.

We don’t have enough information to judge the alleged interactions, reported nonsense, and supposed bad calls by the regulatory agency. We only have one side of the story here, and it is form a very unhappy camper. I have to suspect that the regulators tried to tell him that “this isn’t something that a chartered credit union should be doing”, and he failed to listen.

I also suspect that this public relations effort is fed by right wing deregulatory ideology, typified by the reported remarks of one of the regulators, J. Mark McWatters, “who has said that the agency has been too focused on protecting its insurance fund for credit unions from any losses and has consequently prevented credit unions from growing and serving customers.”.

How dare the insurer try to protect the insurance fund! Which is their job. Whish I pay into. And who said we want credit unions to “grow”? The whole idea is for them to be the small, locally run, alternative to growth-oriented banks.

Doesn’t anyone remember history? In the 1980s, the US deregulated the Savings and Loan industry, which then used their insured deposits to create a massive bubble, requiring a huge bail out. In the 2000’s the by then deregulated conventional banking system did the same thing.

The only sane part of the US banking system are credit unions. Do we really want to deregulate them, and see them “innovate” into a big crash? With federal insurance to bail them out?

No way this is a good idea.

I encourage Mr. Kahle to seek innovative solutions to these problems. But not backed by my deposit insurance fund, please.

Books Reviewed Third Quarter

Books Reviewed Third Quarter

A bit of housekeeping:  here is a list of all the book reviews that appeared in this blog in Q3 2015.  Mostly new or recent releases, with a few old but good thrown in.

Fiction

Aurora by Kim Stanley Robinson
Book of Numbers by Joshua Cohen
Chasing the Phoenix by Michael Swanwick
Chicks and Balances edited by Esther Friesner and John Helfers
Good Omens by Terry Pratchett and Neil Gaiman 
Koko the Mighty by Kieran Shea
Secondhand Souls by Christopher Moore  
The Annihilation Score by Charles Stross
The Best Science Fiction & Fantasy of the Year Volume Nine ed. by Jonathan Strahan
The Good, the Bad, and The Smug by Tom Holt
The Rook by Daniel O’Malley 
The Water Knife by Paolo Bacigalupi
Time Salvager by Wesley Chu 
To Say Nothing of the Dog by Connie Willis 

Non fiction

Reimagination Station: Creating a Game-Changing In-Home Coworking Space by Lori Kane
Digital Gold by Nathaniel Popper
Let’s Be Less Stupid by Patricia Marx
Mind Change by Susan Greenfield 
Modern Romance by Aziz Ansari
Peers, Inc by Robin Chase
Team of Rivals by Doris Kearns Goodwin 
The Art of Forgery by Noah Charney
The Next Species by Michael Tennesen 

 

Bitcoin Ransom Demands Up, No Sign of Interest From Law Abiding Public

While Silicon Valley remains enthusiastic about cryptocurrency technology, including Bitcoin and blockchain based technology, and the financial industry is sauntering cautiously into the room, the general public has shown little interest in “disrupting” money.

Part of the challenge is that cryptocurrency is solving problems that people don’t really care about. Case in point, Gallup released a poll indicating little interest in “digital wallets” of any kind, let alone Bitcoin wallets. The headline is brutally clear, “Digital Wallets Don’t Deliver What Consumers Need”. Aside from not trusting digital phones and phone companies (a well deserved distrust, in my opinion), digital wallets do no better than tie compared when other technologies for convenience.

It doesn’t help that Bitcoin is increasingly identified with scams, illegal online gambling, online drug sales, and, on the front page of the Sunday New York Times, Nathaniel Popper (author of “Digital Gold“) reports “For Ransom, Bitcoin Replaces the Bag of Bills”. Ouch.

It is true that all these criminal activities existed without Bitcoin, but the fact is that cryptocurrency is absolutely ideal for illicit commerce—it was designed to be so. And the Internet makes us all one neighborhood, so there is no “safe part of town” where crime is limited to “those people”.

To date, the damage has been relatively limited, not least because Bitcoin itself isn’t terribly useful. There isn’t much you can do with Bitcoin, so you need to buy stuff or convert to other “real world” assets, which requires entering into conventional systems. The police operate in this “real world”, and identities are uncloaked, so there are arrests, lawsuits, and shutdowns.

In this light, it is obvious why there is increased interest in government and bank operated cryptocurrencies. These alternatives offer the possibility of getting many of the benefits of cryptocurrency, with far less of the wild west stuff we don’t want. Furthermore, I expect people may trust digital currency that is backed by their insured baking system, more that something backed by unknown “guys on the Internet”.

Note: See also Coindesk reports on these issues over the past month and, I’m sure, continuing.

 

Cryptocurrency Thursday

Book Review: “Digital Gold” by Nathaniel Popper

Digital Gold by Nathaniel Popper

Nathaniel Popper writes for the NYT, and this book is a piece of long form journalism. He focuses on the stories of the people involved in the Bitcoin “community”, focusing on their motivations and relationships. Based on journalistic research and lots of personal interviews, the result is relatively light on technical discussion (which there are plenty of elsewhere) and very heavy on the insides of business development.

As such, Popper makes a valuable contribution to understanding the sociotechnical phenomenon that is Bitcoin. There are many events and arguments that made little sense to normal people in the real world, but can be understood from the motivations and characters of the people involved.

In fact, many things make so much more sense when filled out with the details Popper gives us. For instance, I’ve never groked Xapo at all, but Popper does a nice job of tracing where it came from and what it is trying to do. I still don’t really need the service, but at least I get the point of it now.

One big weakness in the book is Popper’s Bitcoin-centric bias. (I’m pretty sure this reflects the attitudes of people he talked to.) He barely considers the broader picture of cryptocurrencies, especially the extended family of alt-coins. He appears to have drunk the cool-ade, and believe that Bitcoin is the only cryptocurrency. Of course, that isn’t true.

Through Popper’s journalistic/historical treatment, the book gives us some insight into the various sub-communities surrounding Bitcoin. We see the technologists, represented by Gavin Andresen and his colleagues. We see the libertarian, “blow up the government” guys, such as Roger Vers and Erik Vorhees, and the VC crowd including Marc Andreessen and the Wikievoss twins.. We also see the bumbling, ramshackle early “innovators”, including Jeb McCaleb, We see the different enthusiasms in Argentina, led by Wences Casarea and in China, represented by the Lee brothers. We also see the blatent misbehavior and criminality of Mark Karpeles, David Shrem, and Ross Ulbricht.

Popper chooses to tell the story of this community through the eyes of these “great men” (and yes, they are all men). “The community” to him means these big shots who gather at (and invite him to) their posh private resorts. The only exception to this patter is the brief mention of the programmers who contributed so much (for little, if any, repayment) to the open source core software. I’m pretty sure that these acknowledgements came via Gavin Andresen, who is a straight up guy, and not interested in being the poster child.

I must say that the emphasis on the business activities got very old. Aside from the fawning treatment Popper gives these privileged men (the only women in the story are government people or girlfriends), it is just plain boring to read about their self-centered and self-important dealings. The more money you have, the more important your opinion in this book. And so on. It’s worse than wrong, it boring.

In addition to this “great men” history, Popper tries to impose a narrative arc on what is an organic and chaotic set of events. If you knew nothing but what appears in this book, you would be under the impression that Bitcoin was progressing, apparently naturally, from an infantile libertarian, “hobbyist” project, through an adolescent “fringe users” (such as drugs and gambling), to adulthood in the financial elite. He also perceives a “Silicon Valley versus Wall Street” contest, which is part of the larger New York versus California contest that is so salient to New Yorkers, if not to the rest of us. He has difficulty fitting the Chinese and Argentinian stories into this picture, as well as the rest of real life.

Popper is correct that there are many “narratives” built around Bitcoin, and they are inconsistent, incompatible, and even in conflict. Throw in competing alternative cryptocurrencies and other technologies, and you have a very complex sociotechnical story.

As I have said before, many of these “cultural narratives” have incorporated cryptocurrency into their own, already existing stories. They each tell a story about Bitcoin (or an alternative cryptocurrency), and invite people to enact a role in this participatory theater. For example, the libertarian secessionists are invited to mint money and operate an economy without banks. Bitcoin trading invites everyone to play the game of (international) currency arbitrage. And so on.

These narratives exist and persist at the same time, but there is no “arc of history” here. That is a journalistic bias, and bad history. It will also lead you badly astray if you thin you know where cryptocurrency is headed based on this notion: cryptocurrency is heading in many directions at once, driven by technical, political, economic, and social factors

In this respect, cryptocurrency is an ambiguous Rorschach test, upon which people project their own hopes and anxieties. This is, in fact, the most interesting thing about Bitcoin. Note that this is definitely not a case of “technological determinism”, in fact, quite the opposite!

Altogether, this book is an important contribution, but should not be read in isolation.

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1. Popper, Nathaniel, Digital Gold: Bitcoin And The Inside Story of The Misfits and Millionaires Trying to Reinvent Money, New York, HarperCollins, 2015.
2. McGrath, Robert, You Shall Not Crucify The Internet On This Cross of Bitcoin, in Very Much Wow. 2014: Albuquerque. p. 34-37. http://issuu.com/verymuchwow/docs/vmw3/35?e=11558635/8421855

 

Cryptocurrency Thursday

Bitcoin Transparency? End-to-end Arguments

Earlier this week I commented on End-to-end arguments about Bitcoin.

Later this week we saw this same issue very clearly in the testimony at the New York financial regulator’s hearings (eg. see NYT report). These hearings are chewing over how to make Bitcoin fit into the existing financial system.

For those of you not familiar with the term, “end-to-end arguments” in engineering refer to a a very general issue in system design.  I generally refer people to an excellent old paper,

Saltzer, M., D. P. Reed, and D. Clark, End to end arguments in system design. ACM Transactions on Computing Systems, 2 (4):277-288,  1984. ((A similar paper is available online.)

The essential point is that it is critical to trace communication or data movement (the same thing, of course) all the way from one end to the other.  In the case of privacy, this means that you need to establish a private channel from the sender (human) to receiver (human).  The paper makes clear that is it not sufficient to have parts of that transaction private.  For example, encrypting the mailbox on a server does not make the email private, unless the channels to and from the server are encrypted. In fact, encrypting on the server is nearly useless as far as privacy is concerned.  Look at the paper for a very clear explanation.

This principle must be applied to Bitcoin and other online transaction systems.  In particular, there are various claims about the protocol and systems, such as “secure”, “transparent”, and so on.  These claims must be analyzed in an end-to-end framework.

The hearings in Manhattan aired various claims and critiques about Bitcoin from different points of view.  One thing that came out of the hearings, aside from the fact that some people are more interested in “free” and others in “lawful” commerce, is how end-to-end analysis is critical for thinking about these issues.

The clearest case is in the claims of “transparencey”. Bitcoin is supposed to be both anonymous and transparent (which seems contradictory on the face of it).  The “transparency” refers to the fact that all transactions are known, and can be traced.  This is an essential property of Bitcoin and similar systems, and without it, Bitcoin would not work.

Proponents argue that this also makes criminal behavior unlikely, because everything can be known and proven by law enforcement.

But law enforcement witnesses counter that the open ledger can trace only the specific computer address (and anonymous public key), not to the person or organization acting.  From the point of view of investigators, this is not transparent at all, and is a boon to criminals, tax evaders, and terrorists (these are not equivalent, but all share the desire to hide money from governments). (See earlier post about hard core financial warfare.)

My view is that both of these points of view are correct, though they are using different definitions of “transparency”.

Within the Bitcoin system, everything is, indeed, completely transparent.  It is a beautifly elegant system, and pretty much impossible to cheat–from wallet to wallet.  It would not be wise to try ti hack Bitcoin, or to try to cheat people within the system.  You will be caught, probably before any gain.

From the point of view of financial regulation, though, the “system” extends from sender to receiver, person to person. Bitcoin has no information about the people. By its very design, Bitcoin ends at the “wallet”.  Anyone can send BC to anyone, and there is no way for anyone to know who is who from the Bitcoin system.

So, to make Bitcoin “transparent” is the same way that conventional banking is transparent will require mechanisms outside Bitcoin, which will be the same mechanisms used in conventional banking, because goal and problems are the same: to prevent anonymous financial flows.

Or, as some people would see it, Bitcoin is going to have to follow the same rules as everybody else.  Sorry to tell you that, kids.

It is very, very important to understand the “end-to-end argument” here.  Not only are their different points of view, “transparency” of the Bitcoin protocol and system is essentially irrelevant to the requirements for “transparency” from sender to receiver. It is not sufficient, and not even necessary. (Read the paper I cited.)

I note that at least some grownups are beginning to talk sense.  For example, Fred Ehrsam of Coinbase is quoted in the NYT to say “Regulation could be a good thing.”  I agree.  No way is Bitcoin going to operate outside the international banking system.  Not. Going. To. Happen.

So let’s get things worked out reasonably, and get Bitcoin inside the tent.