I'm not the first to critique Johnson's work. Bryan Clark's What the NY Times got wrong about Bitcoin is obviously written by a Bitcoin believer, because he missed the whole point of the article. It isn't about Bitcoin, it is about decentralizing the Web.
Johnson understands that the driving force behind the centralization of the Web has been economies of scale:
The self-reinforcing feedback loops that economists call “increasing returns” or “network effects” kicked in, and after a period of experimentation in which we dabbled in social-media start-ups like Myspace and Friendster, the market settled on what is essentially a proprietary standard for establishing who you are and whom you know. That standard is Facebook.But Johnson appears to believe that somehow, magically, blockchain-based systems are immune from economies of scale, increasing returns or network effects despite the fact that they are visibly, powerfully in effect in the Bitcoin ecosystem. He writes:
What would prevent a new blockchain-based identity standard from following Tim Wu’s Cycle, the same one that brought Facebook to such a dominant position? Perhaps nothing. But imagine how that sequence would play out in practice. Someone creates a new protocol to define your social network via Ethereum. ... That way of defining your social network might well take off and ultimately supplant the closed systems that define your network on Facebook.The best he can offer is that it "might well take off". Given Facebook's likely reaction to losing its user base, it won't. And even if it did, as Roger McNamee points out, it would be unlikely to cause users to abandon Facebook:
consumers, not the platforms, should own their own data. In the case of Facebook, this includes posts, friends, and events—in short, the entire social graph. Users created this data, so they should have the right to export it to other social networks. Given inertia and the convenience of Facebook, I wouldn’t expect this reform to trigger a mass flight of users. Instead, the likely outcome would be an explosion of innovation and entrepreneurship. Facebook is so powerful that most new entrants would avoid head-on competition in favor of creating sustainable differentiation. Start-ups and established players would build new products that incorporate people’s existing social graphs, forcing Facebook to compete again.And, given network effects, even if the users did abandon Facebook, they would congregate at some other centralized site.
Johnson repeats the blockchain enthusiasts claim for security:
In this one respect, the Bitcoin story is actually instructive: It may never be stable enough to function as a currency, but it does offer convincing proof of just how secure a distributed ledger can be. “Look at the market cap of Bitcoin or Ethereum: $80 billion, $25 billion, whatever,” Dixon says. “That means if you successfully attack that system, you could walk away with more than a billion dollars. You know what a ‘bug bounty’ is? Someone says, ‘If you hack my system, I’ll give you a million dollars.’ So Bitcoin is now a nine-year-old multibillion-dollar bug bounty, and no one’s hacked it. It feels like pretty good proof.”There are at least four reasons why this claim is complete BS:
- The Bitcoin blockchain has been been hacked. At least one successful block withholding attack has taken place. There have been times when a single pool controlled 51% or more of the mining power. The Ethereum blockchain has been hacked; someone found a vulnerability and stole "$60M".
- The "market cap" of a cryptocurrency is a joke. Its the result of multiplying the number of coins by the price of the last trade. Lets ignore that the price is subject to manipulation. Assume someone hacks the Bitcoin blockchain, and steals Satoshi Nakamoto's 1M Bitcoins. Now that the blockchain is vulnerable, what is the price of the next trade? So what are the 1M Bitcoins worth to the miscreant? By hacking the blockchain the miscreant has destroyed the value of the loot.
- Lets assume that the miscreant can steal the 1M Bitcoins and, despite the fact that Nakamoto's wallet is now empty and this is visible in the blockchain, no-one notices and the price isn't affected. Since you can't buy Lamborghinis (or pretty much anything else legal, even registration at a Bitcoin conference) with Bitcoins, in order to enjoy his ill-gotten gains the miscreant now needs to obtain fiat currency by selling the 1M Bitcoins. How big an effect on the price would a sell order for 1M Bitcoins have? Once the Bitfinex theft of 120K BTC hit the headlines, Izabella Kaminska wrote Time to reevaluate blockchain hype:
The mark-to-market value of the stolen coins is roughly $70m, but again who can really tell their true worth. Bitcoin is an asset class where the liquidation of 119,756 (approximately 0.8 per cent of the total bitcoin circulation) can move the market more than 20 per cent, suggesting a certain fantastical element to the valuation.
- Finally, the bad guys don't need to hack the blockchain to steal money from the general populace. They're already hacking wallets, manipulating the markets, conducting Ponzi schemes (PonziCoin!), peddling ICOs and printing their own "US Dollars". Why kill the goose that lays the golden egg?
But he too drinks the Kool-Aid:Blockhain technology isn’t inherently more secure than a third-party server. In the case of corporate titans like Facebook and Google, it’s almost certainly not. Cryptography is cryptography, and whether its principles are used to secure a server or a blockchain, one isn’t necessarily better than the other.It’s also not, not better than the other. There are simply too many factors involved to make this claim.
It does, however, offer a compelling proof of concept as the world’s largest bug bounty program.They should pay attention to Vitalik Buterin (a co-founder of Ethereum), when he writes in The Meaning of Decentralization:
In the case of blockchain protocols, the mathematical and economic reasoning behind the safety of the consensus often relies crucially on the uncoordinated choice model, or the assumption that the game consists of many small actors that make decisions independently. If any one actor gets more than 1/3 of the mining power in a proof of work system, they can gain outsized profits by selfish-mining. However, can we really say that the uncoordinated choice model is realistic when 90% of the Bitcoin network’s mining power is well-coordinated enough to show up together at the same conference?The security of a blockchain depends upon an assumption that is impossible to verify in the real world (and by Murphy's Law is therefore false).
The level of magical thinking throughout Johnson's piece is well illustrated by this paragraph:
As many critics have observed, ordinary users on social-media platforms create almost all the content without compensation, while the companies capture all the economic value from that content through advertising sales. A token-based social network would at least give early adopters a piece of the action, rewarding them for their labors in making the new platform appealing. “If someone can really figure out a version of Facebook that lets users own a piece of the network and get paid,” Dixon says, “that could be pretty compelling.”So why exactly is it better for the mass of the users for the value to be captured by a few early adopters than by a huge corporation? Even if "users own a piece of the network and get paid", experience with Bitcoin and ICOs shows that the early adopters leave only crumbs for the mass of users.
"Hackers stole several hundred million dollars' worth of a lesser-known cryptocurrency from a major Japanese exchange Friday.
Coincheck said that around 523 million of the exchange's NEM coins were sent to another account around 3 a.m. local time (1 p.m. ET Thursday), according to a Google translate of a Japanese transcript of the Friday press conference from Logmi. The exchange has about 6 percent of yen-bitcoin trading, ranking fourth by market share on CryptoCompare.
The stolen NEM coins were worth about 58 billion yen at the time of detection, or roughly $534.8 million, according to the exchange." according to CNBC:
"Coincheck management said in the press conference that it held the NEM coins in a "hot" wallet, referring to a method of storage that is linked to the internet."
That is why no-one is interested in the alleged billion-dollar "bug bounty". There are wallets connected to the internet with a half-billion dollars ripe for the picking. That is, if you believe the NEM valuation.
«the driving force behind the centralization of the Web has been economies of scale:»
But that describes network effects, not economies of scale, and while network effects are sometimes called "demand side economies of scale" they are nothing like economies of scale.
"Economies of scale", as "economies" says, is about having "economies", that is lower costs, as the amount of production increases. But network effect don't in any way reduce costs, they increase instead the value of the output as more output gets produced, even if it is a constant cost.
That really matters because "economies of scale" are very important and whether they exist or not matters a lot.
For example there are papers that show that in banking there are no economies of scale beyond a fairly small size of bank, and I am not sure about this, but I am fairly sure that there are also no economies of scale in online businesses beyond a pretty small scale, whether the business is Google search or Amazon (there may be economies of specialization for Google search or of scope for Amazon though).
With "coin" exchanges hacking is indistinguishable from embezzling, and viceversa.
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