Tuesday, July 5, 2022

It's Still Not About The Technology

I, like many others, signed the Letter in Support of Responsible Fintech Policy, saying:
We strongly disagree with the narrative—peddled by those with a financial stake in the crypto-asset industry—that these technologies represent a positive financial innovation and are in any way suited to solving the financial problems facing ordinary Americans.
In response, famed cryptographer Matthew Green, who I'm told HODLs ZCash and is involved in a blockchain startup, posted In defense of crypto(currency), basically arguing against regulating cryptocurrencies because, although their current state is rife with crime and is cooking the planet, better technology is possible.

Bruce Schneier responded with On the Dangers of Cryptocurrencies and the Uselessness of Blockchain. Below the fold, I argue that both of them have missed the most important point.

Schneier starts by summarizing Green's points:
  1. Yes, current proof-of-work blockchains like bitcoin are terrible for the environment. But there are other modes like proof-of-stake that are not.
  2. Yes, a blockchain is an immutable ledger making it impossible to undo specific transactions. But that doesn’t mean there can’t be some governance system on top of the blockchain that enables reversals.
  3. Yes, bitcoin doesn’t scale and the fees are too high. But that’s nothing inherent in blockchain technology—that’s just a bunch of bad design choices bitcoin made.
  4. Blockchain systems can have a little or a lot of privacy, depending on how they are designed and implemented.
Schneier doesn't really disagree with these points, although I definitely disaagree with point #3, but instead writes:
To me, the problem isn’t that blockchain systems can be made slightly less awful than they are today. The problem is that they don’t do anything their proponents claim they do. In some very important ways, they’re not secure. They doesn’t replace trust with code; in fact, in many ways they are far less trustworthy than non-blockchain systems. They’re not decentralized, and their inevitable centralization is harmful because it’s largely emergent and ill-defined. They still have trusted intermediaries, often with more power and less oversight than non-blockchain systems. They still require governance. They still require regulation. (These things are what I wrote about here.) The problem with blockchain is that it’s not an improvement to any system—and often makes things worse.
I agree with Schneier here, but I argue that here he falls into the trap Green lays by framing the problem as being about the quality of the technology. He gets closer to the real argument against Green when he writes:
blockchain does nothing to solve any existing problem with financial (or other) systems. Those problems are inherently economic and political, and have nothing to do with technology. And, more importantly, technology can’t solve economic and political problems. Which is good, because adding blockchain causes a whole slew of new problems and makes all of these systems much, much worse.
As I argued in Can We Mitigate Cryptocurrencies' Externalities? the real question that needs to be answered is "how to reduce the harms the technology is imposing on the world?"

It would not be a surprise if Green's startup could produce better technology than Bitcoin or Ethereum. Since their advent, many thousands of cryptocurrencies have launched. Many of them can credibly claim better technology than either Bitcoin or Ethereum. None of them have made a significant dent in Bitcoin's or Ethereum's market share. So why would Green think that the fix for the current problems is better technology? It is because he has a hammer and sees the problem as a nail.

Back in 2018, in the context of discussions of decentralizing the Web, I wrote It Isn't About The Technology, arguing that the problem wasn't developing better technology, which already existed, and it wasn't even inventing a viable business model, which didn't exist, but that even if you had those things, the problem was persuading people to switch.

We have the same problem in cryptocurrencies. The reasons for cryptocurrencies to exist, and thus to cause all the harms, are the speculation and the scams. Speculators go where the other speculators are. Scammers go where their victims are. Launching yet another cryptocurrency with better underlying technology but no speculators and no victims would have no effect on the harms. Launching a better permissionless blockchain without a cryptocurrency won't work, as I pointed out in You Can't Have One Without The Other.

And in any case, the arena for the big-time speculators and scammers isn't the Bitcoin and Ethereum spot market, where the technology might be thought to matter, but in the roughly ten times bigger derivatives market, where it clearly doesn't. Nothing will dent the market share of Bitcoin and Ethereum unless it is rife with speculators and victims. Even if you could create yet another arena for speculation and scams it wouldn't be a solution to the problem we face.

Green's plea that regulation not suppress the potential for better technology to emerge is, based on the history of better technology emerging, futile. Even if the potential better technology emerges it would not solve the problems Green concedes, because It Isn't About The Technology.

Finally, I have to thank Schneier for this:
EDITED TO ADD: Nicholas Weaver is also adamant about this. David Rosenthal is good, too.


Marc Kwiatkowski said...

blockchain technology could get better but it can never be the best transaction-processing technology.

Imagine a goldilocks transaction processing system (TPS). It has just the right amount of compute capacity, network bandwidth and redundancy to achieve whatever level of transaction throughput and availability customers desire for the least cost per transaction.

If that TPS were blockchain based, it could not be a goldilocks system, because it must do extra work to prevent sybil attacks (PoW, PoS...) and that extra work implies extra cost per transaction. At best, the goldilocks TPS is a blockchain-based one, minus all the stuff that makes it permissionless and decentralized.

So the only use case where a blockchain-based TPS would be better than a conventional one are those that are not possible in conventional ones, namely black-market transactions. Those users would clearly have incentive to use a blockchain-based TPS. No one else would - ever.

David. said...

Marc, you're still arguing about the quality of the technology, which I'm arguing is irrelevant!

Isa said...

Hi, David! I hope you are well.
I’ve been reading about blockchain and it happens that when you are trying to get knowledge about something you end up only reading good things about it and all the “bad” things are hidden away. I like reading your blog because you show the other side of blockchains that enthusiasts don’t want to see.
While I understand the enormous potential that cryptocurrencies generate for scammers, I am currently optimistic about some uses of the blockchain technology to decentralize centralized things. For example, the Helium network is an interesting example of a blockchain used to incentivize people to host hotspots at their residence in exchange for tokens, which can then be exchanged for fiat money. I think it’s an interesting model because it decentralizes wireless network, letting ordinary people to provide network coverage while making money out of it. Obviously, people have to purchase hotspots and do the math to calculate the breakeven of the investment, but still, I see it as an interesting use case of blockchain. Also, I’ve been looking into the idea of on-chain gaming, where gamers will be able to control the narrative of the game, contribute to the game play experience and be in control of the game, instead of having to depend on a game company that might do whatever they want with the game without considering the game community playing it. Yes, gaming can be considered a “waste of time and resource”, but I like playing games and the thought of having an “infinite” game on chain controlled solely by the players sounds very interesting to me.
I’m not an expert in blockchain or anything, nor am I an investor in cryptocurrencies, but it feels that most of the criticism I read about blockchains are tied to cryptocurrencies scams, speculation and lack of scalability (which allegedly some L2 technologies are already addressing), leaving other potential features behind.

David. said...

I'm, sorry, Isa, you need to read my blog some more. You have been taken in by the gaslighting. These systems are not decentralized so the benefits claimed for decentralization just don't happen. Lets take your examples, Helium and on-chain games.

Helium is a scam:

"Helium ($HNT) is the “first legitimate, decentralized challenge to entrenched telecom giants.” Truth: Helium is a utility token ICO scam where you mine HNT to pay for long-range/low-bandwidth wireless connectivity. To start mining, you have to buy $80 worth of gear from a Helium-approved vendor marked up to $600. Some miners report making less than $1 per day. HNT has lost 85% of its value since November."

The idea that "gamers will be able to control the narrative" flies in the face of the Gini coefficients of cryptocurrencies - it is the whales who will control the narrative. And I can't believe that you are selfish enough to prioritize an enhanced gaming experience against funding North Korea's nuclear program and ruining people's lives.

Isa said...

Hey, David! Thanks for replying.
You could be right that I have been taken by gaslighting, but if that is true, then I'm at least trying to see the other side of things (reading your blog for example). So there might still be hope for me! :)
Regarding Helium, I think saying that is a scam based on i) miners saying that they are making less than $1 per day and ii) HNT has lost 85% of its value is not correct. Yes, there could be miners making less money than they had anticipated, but what is the percentage of those? Aren't they making less money because they are in an area full of other hotspots? Anyway, I don't have an answer for that either, but we cannot assume it's a scam based on a Reddit thread without any metrics or statistics. About HNT having lost 85% of its value, AMZN has lost 60% of its value and it's not a scam. The markets are in a correction trend and that correction has affected several stocks and cryptocurrencies as well. Again, HNT having lost its value is not enough to say it's a scam. By the way, it could be a scam, but I just don't have enough knowledge to state that.
Regarding on-chain gaming, I definitely wasn't referring to Axie Infinity, which is a play-to-earn game (not my kind of game). I was referring to a new on-chain game model governed autonomously. I don't have enough knowledge of how it'll work (I still need to learn the coding in which it was built and read the documentation) and I don't know what is the business model (could it be taken over by whales that will have full control? Yes, it could be, but since it's a new model, I have to do my research to understand it before making judgments).
Anyway, as I said, I'm not an expert, I'm just trying to gather information to make up my mind about the blockchain technology and understand if there's anything good that could be taken out of it.

David. said...

Liron Shapira completely dismantles Helium's economics in a must-read thread. Here's the start:

"@Helium, often cited as one of the best examples of a Web3 use case, has received $365M of investment led by @a16z.

Regular folks have also been convinced to spend $250M buying hotspot nodes, in hopes of earning passive income.

The result? Helium's total revenue is $6.5k/month"

There's Web3 for you!

David. said...

Matt Binder's Web3 darling Helium has bragged about Lime being a client for years. Lime says it isn't true. shows how typical a Web3 company Helium is:

"Since 2019, the decentralized wireless network service, which bills itself as a peer-to-peer network for the Internet of Things, has touted rideshare company Lime as one of its marquee clients, claiming the company uses its service to geolocate rentable escooters. There are numerous mentions of this partnership on its website, along with the presence of Lime's company logo, and in press coverage with various news outlets.

There's just one problem: That partnership never really existed.

"Beyond an initial test of its product in 2019, Lime has not had, and does not currently have, a relationship with Helium." Lime senior director for corporate communications Russell Murphy said to Mashable."

David. said...

Niko performs a valuable public service in I Looked Into 34 Top Real-World Blockchain Projects So You Don’t Have To:

"TL;DR: The top #1 Google result for “blockchain production users” (and related queries) lists 34 individual “real world blockchain” projects. One would expect some actual functioning projects that have an impact on every-day consumers — outside of cryptocurrency & NFTs. Looking into all 34, I found that 13 are already dead (including one that has been killed by the SEC), 6 are only useful within the crypto & NFT ecosystems and not in the “real world” and 14 use Blockchain in a way where removing the blockchain would not impact functionality at all, or make the product better. The remaining project is Chainalysis, which has real-world impact by helping law enforcement de-anonymizing blockchain users."

David. said...

Mitchell Clark points out that Helium wasn't just lying about Lime in Helium says its crypto mesh network is used by Lime and Salesforce — it isn’t:

"Now, Salesforce, whose logo appeared on Helium’s website right next to Lime’s, says that it also doesn’t use the technology. “Helium is not a Salesforce partner,” Salesforce spokesperson Ashley Eliasoph told The Verge in an email."

Way to do due diligence, A16Z!