Blockchain: What's Not To Like?

I gave a talk at the Fall CNI meeting entitled Blockchain: What's Not To Like? The abstract was:

We're in a period when blockchain or "Distributed Ledger Technology" is the Solution to Everything™, so it is inevitable that it will be proposed as the solution to the problems of academic communication and digital preservation. These proposals typically assume, despite the evidence, that real-world blockchain implementations actually deliver the theoretical attributes of decentralization, immutability, anonymity, security, scalability, sustainability, lack of trust, etc. The proposers appear to believe that Satoshi Nakamoto revealed the infallible Bitcoin protocol to the world on golden tablets; they typically don't appreciate or cite the nearly three decades of research and implementation that led up to it. This talk will discuss the mis-match between theory and practice in blockchain technology, and how it applies to various proposed applications of interest to the CNI audience.

Below the fold, an edited text of the talk with links to the sources, and much additional material. The colored boxes contain quotations that were on the slides but weren't spoken.

Update: the video of my talk has now been posted on YouTube and Vimeo.

It’s one of these things that if people say it often enough it starts to sound like something that could work,

Sadhbh McCarthy

I'd like to start by thanking Cliff Lynch for inviting me back even though I'm retired, and for letting me debug the talk at Berkeley's Information Access Seminar. I plan to talk for 20 minutes, leaving plenty of time for questions. A lot of information will be coming at you fast. Afterwards, I encourage you to consult the whole text of the talk and much additional material on my blog. Follow the links to the sources to get the details you may have missed.

We're in a period when blockchain or "Distributed Ledger Technology" is the Solution to Everything™ so it is inevitable that it will be proposed as the solution to the problems of academic communication and digital preservation. In the second of a three-part series Ian Mulvaney has a comprehensive review of the suggested applications of blockchain in academia in three broad classes:

• Priority Claims
• Claims about authorship of a paper
• Reviews of articles
• Tracking article versions from preprint to publication
• Claims about generation of data
• Linking research artefacts together
• Claims about facts and micro statements
• Resources
• Access to compute time
• Access to lab time
• Tracking of physical reagents
• Rights
• Rights transfers around copyright, articles or journals

blockchain in STEM - part 2
Ian Mulvaney

• Priority Claims
• Access to Resources
• Rights

Mulvaney discusses each in some detail and doesn't find a strong case for any of them. In a third part he looks at some of the implementation efforts currently underway and divides their motivations into two groups. I quote:

The first comes from commercial interests where management of rights, IP and ownership is complex, hard to do, and has led to unusable systems that are driving researchers to sites like SciHub, scaring the bejesus out of publishers in the process.

The other trend is for a desire to move to a decentralised web and a decentralised system of validation and reward, in a way trying to move even further away from the control of publishers.

It is absolutely fascinating to me that two diametrically opposite philosophical sides are converging on the same technology as the answer to their problems. Could this technology perhaps be just holding up an unproven and untrustworthy mirror to our desires, rather than providing any real viable solutions?

This talk answers Mulvaney's question in the affirmative. I've been writing skeptically about cryptocurrencies and blockchain technology for more than five years. What are my qualifications for such a long history of pontification?

This is not to diminish Nakamoto's achievement but to point out that he stood on the shoulders of giants. Indeed, by 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.

Bitcoin's Academic Pedigree,
Arvind Narayanan and Jeremy Clark

More than fifteen years ago, nearly five years before Satoshi Nakamoto published the Bitcoin protocol, a cryptocurrency based on a decentralized consensus mechanism using proof-of-work, my co-authors and I won a "best paper" award at the prestigious SOSP workshop for a decentralized consensus mechanism using proof-of-work. It is the protocol underlying the LOCKSS system. The originality of our work didn't lie in decentralization, distributed consensus, or proof-of-work. All of these were part of the nearly three decades of research and implementation leading up to the Bitcoin protocol, as described by Arvind Narayanan and Jeremy Clark in Bitcoin's Academic Pedigree. Our work was original only in its application of these techniques to statistical fault tolerance; Nakamoto's only in its application of them to preventing double-spending in cryptocurrencies.

We're going to walk through the design of a system to perform some function, say monetary transactions, storing files, recording reviewers' contributions to academic communication, verifying archival content, whatever. Being of a naturally suspicious turn of mind, you don't want to trust any single central entity, but instead want a decentralized system. You place your trust in the consensus of a large number of entities, which will in effect vote on the state transitions of your system (the transactions, reviews, archival content, ...). You hope the good entities will out-vote the bad entities. In the jargon, the system is trustless (a misnomer).

Techniques using multiple voters to maintain the state of a system in the presence of unreliable and malign voters were first published in The Byzantine Generals Problem by Lamport et al in 1982. Alas, Byzantine Fault Tolerance (BFT) requires a central authority to authorize entities to take part. In the blockchain jargon, it is permissioned. You would rather let anyone interested take part, a permissionless system with no central control.

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.

The Meaning of Decentralization,
Vitalik Buterin, co-founder of Ethereum

The security of your permissionless system depends upon the assumption of uncoordinated choice, the idea that each voter acts independently upon its own view of the system's state.

If anyone can take part, your system is vulnerable to Sybil attacks, in which an attacker creates many apparently independent voters who are actually under his sole control. If creating and maintaining a voter is free, anyone can win any vote they choose simply by creating enough Sybil voters.

From a computer security perspective, the key thing to note ... is that the security of the blockchain is linear in the amount of expenditure on mining power, ... In contrast, in many other contexts investments in computer security yield convex returns (e.g., traditional uses of cryptography) ... analogously to how a lock on a door increases the security of a house by more than the cost of the lock.

The Economic Limits of Bitcoin and the Blockchain,
Eric Budish, Booth School, University of Chicago

So creating and maintaining a voter has to be expensive. Permissionless systems can defend against Sybil attacks by requiring a vote to be accompanied by a proof of the expenditure of some resource. This is where proof-of-work comes in; a concept originated by Cynthia Dwork and Moni Naor in 1992. To vote in a proof-of-work blockchain such as Bitcoin's or Ethereum's requires computing very many otherwise useless hashes. The idea is that the good voters will spend more, compute more useless hashes, than the bad voters.

The blockchain trilemma

much of the innovation in blockchain technology has been aimed at wresting power from centralised authorities or monopolies. Unfortunately, the blockchain community’s utopian vision of a decentralised world is not without substantial costs. In recent research, we point out a ‘blockchain trilemma’ – it is impossible for any ledger to fully satisfy the three properties shown in [the diagram] simultaneously ... In particular, decentralisation has three main costs: waste of resources, scalability problems, and network externality inefficiencies.

The economics of blockchains,
Markus K Brunnermeier & Joseph Abadi, Princeton

Brunnermeir and Abadi's Blockchain Trilemma shows that a blockchain has to choose at most two of the following three attributes:

• correctness
• decentralization
• cost-efficiency

Obviously, your system needs the first two, so the third has to go. Running a voter (mining in the jargon) in your system has to be expensive if the system is to be secure. No-one will do it unless they are rewarded. They can't be rewarded in "fiat currency", because that would need some central mechanism for paying them. So the reward has to come in the form of coins generated by the system itself, a cryptocurrency. To scale, permissionless systems need to be based on a cryptocurrency; the system's state transitions will need to include cryptocurrency transactions in addition to records of files, reviews, archival content, whatever.

Your system needs names for the parties to these transactions. There is no central authority handing out names, so the parties need to name themselves. As proposed by David Chaum in 1981 they can do so by generating a public-private key pair, and using the public key as the name for the source or sink of each transaction.

we created a small Bitcoin wallet, placed it on images in our honeyfarm, and set up monitoring routines to check for theft. Two months later our monitor program triggered when someone stole our coins.

This was not because our Bitcoin was stolen from a honeypot, rather the graduate student who created the wallet maintained a copy and his account was compromised. If security experts can't safely keep cryptocurrencies on an Internet-connected computer, nobody can. If Bitcoin is the "Internet of money," what does it say that it cannot be safely stored on an Internet connected computer?

Risks of Cryptocurrencies,
Nicholas Weaver, U.C. Berkeley

In practice this is implemented in wallet software, which stores one or more key pairs for use in transactions. The public half of the pair is a pseudonym. Unmasking the person behind the pseudonym turns out to be fairly easy in practice.

The security of the system depends upon the user and the software keeping the private key secret. This can be difficult, as Nicholas Weaver's computer security group at Berkeley discovered when their wallet was compromised and their Bitcoins were stolen.

2-year Bitcoin "price" history

The capital and operational costs of running a miner include buying hardware, power, network bandwidth, staff time, etc. Bitcoin's volatile "price", high transaction fees, low transaction throughput, and large proportion of failed transactions mean that almost no legal merchants accept payment in Bitcoin or other cryptocurrency. Thus one essential part of your system is one or more exchanges, at which the miners can sell their cryptocurrency rewards for the "fiat currency" they need to pay their bills.

Who is on the other side of those trades? The answer has to be speculators, betting that the "price" of the cryptocurrency will increase. Thus a second essential part of your system is a general belief in the inevitable rise in "price" of the coins by which the miners are rewarded. If miners believe that the "price" will go down, they will sell their rewards immediately, a self-fulfilling prophesy. Permissionless blockchains require an inflow of speculative funds at an average rate greater than the current rate of mining rewards if the "price" is not to collapse. To maintain Bitcoin's price at $4K requires an inflow of $300K/hour.

Ether Miners 10/10/18

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 Meaning of Decentralization,
Vitalik Buterin

In order to spend enough to be secure, say $300K/hour, you need a lot of miners. It turns out that a third essential part of your system is a small number of “mining pools”. Bitcoin has the equivalent of around 3M Antminer S9s, and a block time of 10 minutes. Each S9, costing maybe $1K, can expect a reward about once every 60 years. It will be obsolete in about a year, so only 1 in 60 will ever earn anything.

To smooth out their income, miners join pools, contributing their mining power and receiving the corresponding fraction of the rewards earned by the pool. These pools have strong economies of scale, so successful cryptocurrencies end up with a majority of their mining power in 3-4 pools. Each of the big pools can expect a reward every hour or so. These blockchains aren’t decentralized, but centralized around a few large pools.

At multiple times in 2014 one mining pool controlled more than 51% of the Bitcoin mining power. At almost all times since 3-4 pools have controlled the majority of the Bitcoin mining power. Currently two of them are controlled by Bitmain, the dominant supplier of mining ASICs. With the advent of mining-as-a-service, 51% attacks have become endemic among the smaller alt-coins.

The security of a blockchain depends upon the assumption that these few pools are not conspiring together outside the blockchain; an assumption that is impossible to verify in the real world (and by Murphy's Law is therefore false). Similar off-chain collusion among cryptocurrency traders allows for extremely profitable pump-and-dump schemes.

Since then there have been other catastrophic bugs in these smart contracts, the biggest one in the Parity Ethereum wallet software ... The first bug enabled the mass theft from "multisignature" wallets, which supposedly required multiple independent cryptographic signatures on transfers as a way to prevent theft. Fortunately, that bug caused limited damage because a good thief stole most of the money and then returned it to the victims. Yet, the good news was limited as a subsequent bug rendered all of the new multisignature wallets permanently inaccessible, effectively destroying some $150M in notional value. This buggy code was largely written by Gavin Wood, the creator of the Solidity programming language and one of the founders of Ethereum. Again, we have a situation where even an expert's efforts fell short.

Risks of Cryptocurrencies,
Nicholas Weaver, U.C. Berkeley

In practice the security of a blockchain depends not merely on the security of the protocol itself, but on the security of the core software and the wallets and exchanges used to store and trade its cryptocurrency. This ancillary software has bugs, such as the recently revealed major vulnerability in Bitcoin Core, the Parity Wallet fiasco, and the routine heists using vulnerabilities in exchange software.

Recent game-theoretic analysis suggests that there are strong economic limits to the security of cryptocurrency-based blockchains. For safety, the total value of transactions in a block needs to be less than the value of the block reward.

Your system needs an append-only data structure to which records of the transactions, files, reviews, archival content, whatever are appended. It would be bad if the miners could vote to re-write history, undoing these records. In the jargon, the system needs to be immutable (another misnomer).

Merkle Tree (source)

The necessary data structure for this purpose was published by Stuart Haber and W. Scott Stornetta in 1991. A company using their technique has been providing a centralized service of securely time-stamping documents for nearly a quarter of a century. It is a form of Merkle or hash tree, published by Ralph Merkle in 1980. For blockchains it is a linear chain to which fixed-size blocks are added at regular intervals. Each block contains the hash of its predecessor; a chain of blocks.

The blockchain is mutable, it is just rather hard to mutate it without being detected, because of the Merkle tree’s hashes, and easy to recover, because there are Lots Of Copies Keeping Stuff Safe. But this is a double-edged sword. Immutability makes systems incompatible with the GDPR, and immutable systems to which anyone can post information will be suppressed by governments.

BTC transaction fees

Cryptokitties’ popularity exploded in early December and had the Ethereum network gasping for air. ... Ethereum has historically made bold claims that it is able to handle unlimited decentralized applications  ... The Crypto-Kittie app has shown itself to have the power to place all network processing into congestion. ... at its peak [CryptoKitties] likely only had about 14,000 daily users. Neopets, a game to which CryptoKitties is often compared, once had as many as 35 million users.

How Crypto-Kitties Disrupted the Ethereum Network,
Open Trading Network

A user of your system wanting to perform a transaction, store a file, record a review, whatever, needs to persuade miners to include their transaction in a block. Miners are coin-operated; you need to pay them to do so. How much do you need to pay them? That question reveals another economic problem, fixed supply and variable demand, which equals variable "price". Each block is in effect a blind auction among the pending transactions.

So lets talk about CryptoKitties, a game that bought the Ethereum blockchain to its knees despite the bold claims that it could handle unlimited decentralized applications. How many users did it take to cripple the network? It was far fewer than non-blockchain apps can handle with ease; CryptoKitties peaked at about 14K users. NeoPets, a similar centralized game, peaked at about 2,500 times as many.

CryptoKitties average "price" per transaction spiked 465% between November 28 and December 12 as the game got popular, a major reason why it stopped being popular. The same phenomenon happened during Bitcoin's price spike around the same time. Cryptocurrency transactions are affordable only if no-one wants to transact; when everyone does they immediately become un-affordable.

Nakamoto's Bitcoin blockchain was designed only to support recording transactions. It can be abused for other purposes, such as storing illegal content. But it is likely that you need additional functionality, which is where Ethereum's "smart contracts" come in. These are fully functional programs, written in a JavaScript-like language, embedded in Ethereum's blockchain. They are mainly used to implement Ponzi schemes, but they can also be used to implement Initial Coin Offerings, games such as Cryptokitties, and gambling parlors. Further, in On-Chain Vote Buying and the Rise of Dark DAOs Philip Daian and co-authors show that "smart contracts" also provide for untraceable on-chain collusion in which the parties are mutually pseudonymous.

ICO Returns

The first big smart contract, the DAO or Decentralized Autonomous Organization, sought to create a democratic mutual fund where investors could invest their Ethereum and then vote on possible investments. Approximately 10% of all Ethereum ended up in the DAO before someone discovered a reentrancy bug that enabled the attacker to effectively steal all the Ethereum. The only reason this bug and theft did not result in global losses is that Ethereum developers released a new version of the system that effectively undid the theft by altering the supposedly immutable blockchain.

Risks of Cryptocurrencies,
Nicholas Weaver, U.C. Berkeley

"Smart contracts" are programs, and programs have bugs. Some of the bugs are exploitable vulnerabilities. Research has shown that the rate at which vulnerabilities in programs are discovered increases with the age of the program. The problems caused by making vulnerable software immutable were revealed by the first major "smart contract". The Decentralized Autonomous Organization (The DAO) was released on 30th April 2016, but on 27th May 2016 Dino Mark, Vlad Zamfir, and Emin Gün Sirer posted A Call for a Temporary Moratorium on The DAO, pointing out some of its vulnerabilities; it was ignored. Three weeks later, when The DAO contained about 10% of all the Ether in circulation, a combination of these vulnerabilities was used to steal its contents.

The loot was restored by a "hard fork", the blockchain's version of mutability. Since then it has become the norm for "smart contract" authors to make them "upgradeable", so that bugs can be fixed. "Upgradeable" is another way of saying "immutable in name only".

Permissionless systems trust:

• The core developers of the blockchain software not to write bugs.
• The developers of your wallet software not to write bugs.
• The developers of the exchanges not to write bugs.
• The operators of the exchanges not to manipulate the markets or to commit fraud.
• The developers of your upgradeable "smart contracts" not to write bugs.
• The owners of the smart contracts to keep their secret key secret.
• The owners of the upgradeable smart contracts to avoid losing their secret key.
• The owners and operators of the dominant mining pools not to collude.
• The speculators to provide the funds needed to keep the “price” going up.
• Users' ability to keep their secret key secret.
• Users’ ability to avoid losing their secret key.
• Other users not to transact when you want to.

So, this is the list of people your permissionless system has to trust if it is going to work as advertised over the long term.

You started out to build a trustless, decentralized system but you have ended up with:

• A trustless system that trusts a lot of people you have every reason not to trust.
• A decentralized system that is centralized around a few large mining pools that you have no way of knowing aren’t conspiring together.
• An immutable system that either has bugs you cannot fix, or is not immutable
• A system whose security depends on it being expensive to run, and which is thus dependent upon a continuing inflow of funds from speculators.
• A system whose coins are convertible into large amounts of "fiat currency" via irreversible pseudonymous transactions, which is thus an irresistible target for crime.

If the “price” keeps going up, the temptation for your trust to be violated is considerable. If the "price" starts going down, the temptation to cheat to recover losses is even greater.

Maybe it is time for a re-think.

Suppose you give up on the idea that anyone can take part and accept that you have to trust a central authority to decide who can and who can’t vote. You will have a permissioned system.

The first thing that happens is that it is no longer possible to mount a Sybil attack, so there is no reason running a node need be expensive. You can use BFT to establish consensus, as IBM’s Hyperledger, the canonical permissioned blockchain system does. You need many fewer nodes in the network, and running a node just got way cheaper. Overall, the aggregated cost of the system got orders of magnitude cheaper.

Now there is a central authority it can collect “fiat currency” for network services and use it to pay the nodes. No need for cryptocurrency, exchanges, pools, speculators, or wallets, so much less temptation for bad behavior.

Permissioned systems trust:

• The central authority.
• The software developers.
• The owners and operators of the nodes.
• The secrecy of a few private keys.

This is now the list of entities you trust. Trusting a central authority to determine the voter roll has eliminated the need to trust a whole lot of other entities. The permissioned system is more trustless and, since there is no need for pools, the network is more decentralized despite having fewer nodes.

1

4

2

7

3

10

4

13

5

16

6

19

a Byzantine quorum system of size 20 could achieve better decentralization than proof-of-work mining at a much lower resource cost.

Decentralization in Bitcoin and Ethereum Networks,
Adem Efe Gencer Soumya Basu, Ittay Eyal, Robbert van Renesse and Emin Gün Sirer

How many nodes does your permissioned blockchain need? The rule for BFT is that 3f + 1 nodes can survive f simultaneous failures. That's an awful lot fewer than you need for a permissionless proof-of-work blockchain. What you get from BFT is a system that, unless it encounters more than f simultaneous failures, remains available and operating normally.

The problem with BFT is that if it encounters more than f simultaneous failures, the state of the system is irrecoverable. If you want a system that can be relied upon for the long term you need a way to recover from disaster. Successful permissionless blockchains have Lots Of Copies Keeping Stuff Safe, so recovering from a disaster that doesn't affect all of them is manageable.

Source

So in addition to implementing BFT you need to back up the state of the system each block time, ideally to write-once media so that the attacker can't change it. But if you're going to have an immutable backup of the system's state, and you don't need continuous uptime, you can rely on the backup to recover from failures. In that case you can get away with, say, 2 replicas of the blockchain in conventional databases, saving even more money.

I've shown that, whatever consensus mechanism they use, permissionless blockchains are not sustainable for very fundamental economic reasons. These include the need for speculative inflows and mining pools, security linear in cost, economies of scale, and fixed supply vs. variable demand. Proof-of-work blockchains are also environmentally unsustainable. The top 5 cryptocurrencies are estimated to use as much energy as The Netherlands. This isn't to take away from Nakamoto's ingenuity; proof-of-work is the only consensus system shown to work well for permissionless blockchains. The consensus mechanism works, but energy consumption and emergent behaviors at higher levels of the system make it unsustainable.

Additional Material

It can be very hard to find reliable sources about cryptocurrencies because almost all cryptocurrency journalism is bought and paid for.

When cryptocurrency issuers want positive coverage for their virtual coins, they buy it. Self-proclaimed social media personalities charge thousands of dollars for video reviews. Research houses accept payments in the cryptocurrencies they are analyzing. Rating “experts” will grade anything positively, for a price.

All this is common, according to more than two dozen people in the cryptocurrency market and documents reviewed by Reuters.
...
“The main reason why so many inexperienced individuals invest in bad crypto projects is because they listen to advice from a so-called expert,” said Larry Cermak, head of analysis at cryptocurrency research and news website The Block. Cermak said he does not own any cryptocurrencies and has never promoted any. “They believe they can take this advice at face value even though it is often fraudulent, intentionally misleading or conflicted.”

Special Report: Little known to many investors, cryptocurrency reviews are for sale
Anna Irrera & Elizabeth Dilts, Reuters

See also: Crypto-shills, Jemima Kelly

A recent example:

The boxer Floyd Mayweather and the music producer DJ Khaled have been fined for unlawfully touting cryptocurrencies.

The two have agreed to pay a combined $767,500 in fines and penalties, the Securities and Exchange Commission (SEC) said in a statement on Thursday. They neither admitted nor denied the regulator’s charges.

According to the SEC, Mayweather and Khaled failed to disclose payments from three initial coin offerings (ICOs), in which new currencies are sold to investors.

Floyd Mayweather and DJ Khaled fined over cryptocurrency promotion
Dominic Rushe, The Guardian

Some idea of the cryptocurrency milieu can be gained from Laurie Penny's Four Days Trapped at Sea With Crypto’s Nouveau Riche. Here's a taste:

The women on this boat are polished and perfect; the men, by contrast, seem strangely cured—not like medicine, but like meat. They are almost all white, between the ages of 30 and 50, and are trying very hard to have the good time they paid thousands for, while remaining professional in a scene where many thought leaders have murky pasts, a tendency to talk like YouTube conspiracy preachers, and/or the habit of appearing in magazines naked and covered in strawberries. That last is 73-year-old John McAfee, who got rich with the anti-virus software McAfee Security before jumping into cryptocurrencies. He is the man most of the acolytes here are keenest to get their picture taken with and is constantly surrounded by private security who do their best to aesthetically out-thug every Armani-suited Russian skinhead on deck. Occasionally he commandeers the grand piano in the guest lounge, and the young live-streamers clamor for the best shot. John McAfee has never been convicted of rape and murder, but—crucially—not in the same way that you or I have never been convicted of rape or murder.

On 7^th December 2018 Bitcoin's "price" was around $3,700.

Bitcoin now at $16,600.00. Those of you in the old school who believe this is a bubble simply have not understood the new mathematics of the Blockchain, or you did not cared enough to try. Bubbles are mathematically impossible in this new paradigm. So are corrections and all else

Tweet from John McAfee, 7^th December 2017

Similarly, most of what your read about blockchain technology is people hyping their vaporware. A "trio of monitoring, evaluation, research, and learning, (MERL) practitioners in international development" started out enthusiastic about the potential of blockchain technology, so they did some research:

We documented 43 blockchain use-cases through internet searches, most of which were described with glowing claims like “operational costs… reduced up to 90%,” or with the assurance of “accurate and secure data capture and storage.” We found a proliferation of press releases, white papers, and persuasively written articles. However, we found no documentation or evidence of the results blockchain was purported to have achieved in these claims. We also did not find lessons learned or practical insights, as are available for other technologies in development.

We fared no better when we reached out directly to several blockchain firms, via email, phone, and in person. Not one was willing to share data on program results, MERL processes, or adaptive management for potential scale-up. Despite all the hype about how blockchain will bring unheralded transparency to processes and operations in low-trust environments, the industry is itself opaque. From this, we determined the lack of evidence supporting value claims of blockchain in the international development space is a critical gap for potential adopters.

Blockchain for International Development: Using a Learning Agenda to Address Knowledge Gaps
John Burg, Christine Murphy, & Jean Paul Pétraud

I highly recommend David Gerard's book Attack of the 50-foot blockchain, and his blog. Others to follow include Arvind Narayanan and his group at Princeton, Nicholas Weaver at Berkeley, Emin Gün Sirer and the team at Cornell who blog at Hacking, Distributed, and Jemima Kelly and the FT Alphaville team.

Every time the word "price" appears here, it has quotes around it. The reason is that there is a great deal of evidence that the exchanges, operating an unregulated market, are massively manipulating the exchange rate between cryptocurrencies and the US dollar. The primary mechanism is the issuance of billions of dollars of Tether, a cryptocurrency that is claimed to be backed one-for-one by actual US dollars in a bank account, and thus whose value should be stable. There has never been an audit to confirm this claim, and the trading patterns in Tether are highly suspicious. Tether, and its parent exchange Bitfinex, are the subject of investigations by the CFTC and federal prosecutors:

As Bitcoin plunges, the U.S. Justice Department is investigating whether last year’s epic rally was fueled in part by manipulation, with traders driving it up with Tether -- a popular but controversial digital token.

While federal prosecutors opened a broad criminal probe into cryptocurrencies months ago, they’ve recently homed in on suspicions that a tangled web involving Bitcoin, Tether and crypto exchange Bitfinex might have been used to illegally move prices, said three people familiar with the matter.

Bitcoin-Rigging Criminal Probe Focused on Tie to Tether
Matt Robinson and Tom Schoenberg, Bloomberg

Social Capital has a series explaining Tether and the "stablecoin" scam:

• Pumps, spoofs and boiler rooms
• Tether, Part One: The Stablecoin Dream
• Tether, Part Two: PokeDEx
• Tether, Part Three: Crypto Island

Tether's problems are in addition to the problems caused by exchanges' habit of losing their customers' coins (already in 2014 it was estimated that 6.6% of all Bitcoin in circulation had been stolen), front-running their trades, money laundering, "painting the tape", preventing customers withdrawing their funds, faking trading volume, and so on.

John Lewis is an economist at the Bank of England. His The seven deadly paradoxes of cryptocurrency provides a skeptical view of the economics of cryptocurrencies that nicely complements my more technology-centric view. My comments on his post are here. Remember that a permissionless blockchain requires a cryptocurrency; if the economics don't work neither does the blockchain.

You can find my writings about blockchain over the past five years here. In particular:

• Blockchain for verifying integrity of preserved content.
• "Immutability"
• Blockchain for storage
• Mining ASICs
• Peer review
• Problem of immutable, publicly writable data
• Why decentralize?
• Economies of scale

More detail on the bugs in The DAO:

The DAO was designed as a series of contracts that would raise funds for ethereum-based projects and disperse them based on the votes of members. An initial token offering was conducted, exchanging ethers for "DAO tokens" that would allow stakeholders to vote on proposals, including ones to grant funding to a particular project.

That token offering raised more than $150m worth of ether at then-current prices, distributing over 1bn DAO tokens.

[In May 2016], however, news broke that a flaw in The DAO's smart contract had been exploited, allowing the removal of more than 3m ethers.

Subsequent exploitations allowed for more funds to be removed, which ultimately triggered a 'white hat' effort by token-holders to secure the remaining funds. That, in turn, triggered reprisals from others seeking to exploit the same flaw.

An effort to blacklist certain addresses tied to The DAO attackers was also stymied mid-rollout after researchers identified a security vulnerability, thus forcing the hard fork option.

The Hard Fork: What's About to Happen to Ethereum and The DAO,
Michael del Castillo, Coindesk

The DAO heist isn't an anomaly; here's a recent example (click through to the Medium post):

ICO token Oyster PRL was exit-scammed by its founder, “Bruno Blocks” — who nobody has ever met — who took 3 million tokens via a deliberately-maintained back door in the smart contract code. How does this keep happening? Fortunately, the developers are on the case … by printing 27 million new tokens for themselves.

David Gerard

Exit scams are rife in the ICO world. Here is a recent example:

Blockchain company Pure Bit has seemingly walked off with $2.7 million worth of investors’ money after raising 13,000 Ethereum in an ICO. Transaction history shows that hours after moving all raised funds out of its wallet, the company proceeded to take down its website. It now returns a blank page.
...
This is the latest in a string of exit scams that took place in the blockchain space in 2018. Indeed, reports suggested exit scammers have thieved more than $100 million worth of cryptocurrency over the last two years alone. Subsequent investigations hint the actual sum of stolen cryptocurrency could be even higher.

South Korean cryptocurrency startup reportedly pulls a $2.7M exit scam
The Next Web

More detail on the lack of decentralization in practice:

in Bitcoin, the weekly mining power of a single entity has never exceeded 21% of the overall power. In contrast, the top Ethereum miner has never had less than 21% of the mining power. Moreover, the top four Bitcoin miners have more than 53% of the average mining power. On average, 61% of the weekly power was shared by only three Ethereum miners. These observations suggest a slightly more centralized mining process in Ethereum.

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. The same mining pool has been at the top rank for 29% of the time in Bitcoin and 14% of the time in Ethereum. Over 50% of the mining power has exclusively been shared by eight miners in Bitcoin and five miners in Ethereum throughout the observed period. Even 90% of the mining power seems to be controlled by only 16 miners in Bitcoin and only 11 miners in Ethereum.

Decentralization in Bitcoin and Ethereum Networks,
Adem Efe Gencer, Soumya Basu, Ittay Eyal, Robbert van Renesse and Emin Gün Sirer

More on the lack of decentralization highlighted by Balaji S. Srinivasan and Leland Lee in Quantifying Decentralization, with their use of the "Nakamoto coefficient":

"Ethereum’s smart contract ecosystem has a considerable lack of diversity. Most contracts reuse code extensively, and there are few creators compared to the number of overall contracts. ... the high levels of code reuse represent a potential threat to the security and reliability. Ethereum has been subject to high-profile bugs that have led to hard forks in the blockchain (also here) or resulted in over $170 million worth of Ether being frozen; like with DNS’s use of multiple implementations, having multiple implementations of core contract functionality would introduce greater defense-in-depth to Ethereum."

Analyzing Etheruem's Contract Topology,
Lucianna Kiffer, Dave Levin and Alan Mislove

More detail on pump-and-dump (P&D) schemes:

P&Ds have dramatic short-term impacts on the prices and volumes of most of the pumped tokens. In the first 70 seconds after the start of a P&D, the price increases by 25% on average, trading volume increases 148 times, and the average 10-second absolute return reaches 15%. A quick reversal begins 70 seconds after the start of the P&D. After an hour, most of the initial effects disappear. ... prices of pumped tokens begin rising five minutes before a P&D starts. The price run-up is around 5%, together with an abnormally high volume. These results are not surprising, as pump group organizers can buy the pumped tokens in advance. When we read related messages posted on social media, we find that some pump group organizers offer premium memberships to allow some investors to receive pump signals before others do. The investors who buy in advance realize great returns. Calculations suggest that an average return can be as high as 18%, even after considering the time it may take to unwind positions. For an average P&D, investors make one Bitcoin (about $8,000) in profit, approximately one-third of a token’s daily trading volume. The trading volume during the 10 minutes before the pump is 13% of the total volume during the 10 minutes after the pump. This implies that an average trade in the first 10 minutes after a pump has a 13% chance of trading against these insiders and on average they lose more than 2% (18%*13%).

Cryptocurrency Pump-and-Dump Schemes
Tao Li, Donghwa Shin and Baolian Wang

A summary of the bad news about vote-buying in blockchains:

The existence of trust-minimizing vote buying and Dark DAO primitives imply that users of all on-chain votes are vulnerable to shackling, manipulation, and control by plutocrats and coercive forces. This directly implies that all on-chain voting schemes where users can generate their own keys outside of a trusted environment inherently degrade to plutocracy, ... Our schemes can also be repurposed to attack proof of stake or proof of work blockchains profitably, posing severe security implications for all blockchains.

On-Chain Vote Buying and the Rise of Dark DAOs
Philip Daian, Tyler Kell, Ian Miers, and Ari Juels

Source

Here is a typical day on the Bitcoin blockchain. It is averaging 3 transactions/sec, and has a queue of an hour's worth of them waiting to be confirmed. Back in 2010 testing showed:

VisaNet handles an average of 150 million transactions every day and is capable of handling more than 24,000 transactions per second.

Eight years ago that was about 5,800 times as many transactions/sec on average, using much less electricity than Austria to do it.

Source

S&P500 companies are slowly figuring out that there is no there there in blockchains and cryptocurrencies, and they're not the only ones:

Still new to NYC, but I met this really cool girl. Energy sector analyst or some such. Four dates in, she uncovers my love for BitCoin.

Completely ghosted.

Zack Voell