The slow, alienated death of blockchain

As a preface to this, there are good people doing great things with blockchain in good faith and this is not an essay targeting these people but a polemic in their defense. There are too many people, though, lost in fog about what blockchain is and not enough people telling the truth about what it is not.

It would be crazy to say you won’t hear about blockchain again, and perhaps the worst blockchain fatigue is ahead of us. Rather, we have arrived at an inflection point where the emerging viral big idea is that blockchain has lost its way, been applied to problems for which it has no utility, carelessly dropped as a buzzword with no meaning, incorporated into all manner of scams, not only over-hyped but radically mis-hyped, and warped by these trends into something that will now struggle to fulfill its original real potential.

The amazing power of blockchain has been its power purely as a word - a word about which one can say anything, arbitrarily disingenuous or poorly informed, and profit from the statement presuming the claim is sufficiently grandiose, intimidating, and FOMO-inducing. There is apparently vast power for “disruption” in using blockchain to record supply chain information where a centralized server would be demonstrably superior. Apparently, blockchain has a unique relationship with quantum computing despite being composed of very conventional classical cryptography. Apparently, blockchain can save your business by “decentralizing” when your business was really an effort at centralization by its very nature and no one can even explain in plain English what decentralization means and why it is good business. Apparently, blockchain can hugely improve your information security by reproducing your sensitive data across many servers each with the same vulnerabilities as any other centralized server. By etymology, to say something is apparent suggests it has appeared, but we are still waiting and we will continue to wait forever because these claims range from optimistic distortions to outright lies.

There are a great many lies that have become so pervasive that they have been widely repeated by honest people. This is a real tragedy, and this essay is not a polemic targeting these people but a polemic in their defense.

Blockchain came into the world in step with “decentralization” and if we actually maintain discipline about what these words mean, this is absolutely sensible and correct. The problem is much of the wealth and power in our society is centralized and the power of blockchain as a word is too useful a tool in chasing it. Corporations are centralized organizations - decentralization is what the Department of Justice does to your firm if it decides you don’t have enough competition to treat consumers decently. Governments are centralized organizations - decentralization is what happens when people decide they’ve had enough and find ways to be governed less and more locally. Venture capital firms are centralized organizations - if you take the money of a group of wealthy investors and centralize it one place to invest all at once, you’re on the way to founding a venture capital firm. One can’t say that blockchain will never have anything to offer these groups, but many promises made could never have been anything but empty because decentralization is contrary to the nature of these organizations. And neither centralization nor decentralization is intrinsically good or bad.

Too many organizations have been presented with blockchain the magical spell, the voodoo word for inciting fear of falling behind the times and missing out. Blockchain has been presented to many in bad faith not as information technology but as psychological manipulation. It is well attested the companies that have merely added blockchain to their name have seen their stock price soar, in some cases criminally (in the literal sense) absent any effort to implement any version of the real technology at all. Any application you might pitch to an investor that involves a database might as well involve a blockchain, and such is the power of the word that many can’t resist. But why did your application need to be on the blockchain? It didn’t, and it may have been a poor architecture decision that it was.

Experimentation in blockchain architecture continues, and while much of it is interesting and valuable, there is a sector that strongly resembles efforts to find a centralized server that resembles a blockchain enough to avoid lawsuits. Why be bothered to work with the challenging, real technology when one can work with the awesome persuasive power of the word alone?

Blockchain is not dying in the sense that it will disappear tomorrow. It is dying in the sense that it is mutating carelessly towards no constructive end, wasting time and money and human intellect and human emotion as it does. The real tragedy is that it is dying not because it has no potential but because no one can resist the potential it does not have.

Whales and Proof-of-Stake

by Alexander Mueller

Proof-of-stake consensus algorithms are touted as the next big thing in blockchain and not for no reason - concerns about massive electricity usage in existing proof-of-work architecture have taken on macro-scale environmental relevance with the success of Bitcoin and others. Proof-of-stake does not require significant real world resources on the margin, so there are in fact much better prospects for limiting energy utilization. However, moving costs into the virtual sphere presents new dangers, particularly to the extent that this makes it easier for “whales” (big-time owners of huge amounts of cryptocurrency) to manipulate markets.

First, let’s rewind a bit: what is proof-of-stake and how does it differ from the original proof-of-work approach? What is commonly called mining is really participation in maintaining the shared, distributed ledger, and all cryptocurrencies work by creating formidable incentives to participate in this maintenance honestly. In the older proof-of-work model, reaping the rewards of mining requires solving a computationally difficult makework problem. An attempt to participate in mining maliciously might not work, but it would still require the expense of solving this makework problem. This system has worked well, but many have become justifiably uncomfortable directing so much energy to open makework.

Proof-of-stake, on the other hand, requires a “stake” of cryptocurrency rather than a solution to a makework problem. If you behave yourself, you get it back, while you lose it as punishment for bad behavior. It is obvious but important that this system is explicitly oriented towards those who already hold cryptocurrency.

There are concerns already that ownership in cryptocurrency is so concentrated - for example, 1,000 addresses control 40% of all Bitcoin, and many smaller currencies are even more dominated by these “whale” crypto one-percenters. (There is also reason to believe that single whales might control multiple addresses and thus more power than is apparent.) These big players have considerable ability to manipulate the price of these assets using the same techniques you would use to manipulate the value of of any other asset, and there is some evidence that they are willfully doing so. Unfortunately, there is potential for proof-of-stake to make this situation worse.

The key issue is the role played by transaction volume in evaluating the health and viability of a cryptocurrency. Networks that are processing lots of transactions, so the conventional wisdom goes, are really being put to work by someone out there and are thus likely to stick around. The danger here is that someone might find a way to submit a macro-scale volume of transactions to and from accounts they control. One can potentially create an appearance of traction and relevance that is not there, and typically this would mean an increase in price.

If I am both a big-time holder and a big-time miner, the fees attached to a transaction may be fees I end up paying to myself. Proof-of-work has an answer to this problem, as I am still on the hook for the electricity bill whether or not my manipulation scheme is successful. Proof-of-stake might not have an answer - the whole point is to eliminate real-world, physical costs, but these costs were also a principal barrier to manipulative self-dealing. Whale miners could very well find themselves in a position where they have every incentive to pay themselves to process transactions from themselves to themselves. On the outside, it looks like blossoming commerce, but the reality is that it is accounting manipulation on the books of a single large whale.

The environmental concerns attached to proof-of-work are real, but equally real are the concerns about how proof-of-stake might make a network more vulnerable to manipulation.