Decentralized Systems Aren't

Below the fold is the text of a talk I gave to Berkeley's Information Systems Seminar exploring the history of attempts to build decentralized systems and why so many of them end up centralized.

Competition-proofing

Source

Apart from getting started in the midst of one of Silicon Valley's regular downturns, another great thing about the beginnings of Nvidia was that instead of insisting on the "minimum viable product" our VCs, Sutter Hill and Sequoia, gave us the time to develop a real architecture for a family of chips. It enabled us to get an amazing amount of functionality into a half-micron gate array; I/O virtualization, a DMA engine, a graphics processor that rendered curved surfaces directly, not by approximating them with triangles, a sound engine and support for game controllers. As I write, after a three decade-long history of bringing innovations to the market, Nvidia is America's third most valuable company.

I've written several times about how in pursuit of a quicker buck, VCs have largely discarded the slow process of building an IPO-ready company like Nvidia in favor of building one that will be acquired by one of the dominant monopolists. These VCs don't support innovation. Even if their acquisition-bound companies do innovate in their short lives, their innovations are rarely tested in the market after the acuisition.

Below the fold I discuss a new paper that presents a highly detailed look at the mechanisms the dominant companies use to neutralize the threats startups could pose to their dominance.

Microsoft Keys

Back in 2021 I gave a Talk At Berkeley's Information Access Seminar that summarized two long posts from two years before that:

• Certificate Transparency
• Securing The Software Supply Chain

On Friday 25^th Dan Goodin had two posts documenting that even the biggest software companies haven't fixed the problems I was talking about:

• Renegade certificate removed from Windows. Then it returns. Microsoft stays silent.
• Microsoft signing keys keep getting hijacked, to the delight of Chinese threat actors

Below the fold I update this sorry state of affairs, which I first started cataloging a decade ago.

Techno-feudalism

Source

Two of my favorite authors are making the same point. First, Kim Stanley Robinson in passing during a fascinating interview by Oscar Boyd and Akshat Rathi:

Capitalism is the name of a power relationship of the few over the many. It is a hierarchy. It is feudalism liquidified, where money has replaced land as the source of power, but there's still the powerful and there's still the weak, and there's still incredible inequality in the world system.

Second, in Autoenshittification Cory Doctorow writes:

In his forthcoming book, Techno Feudalism: What Killed Capitalism, Yanis Varoufakis proposes that capitalism has died – but it wasn't replaced by socialism. Rather, capitalism has given way to feudalism:

https://www.penguin.co.uk/books/451795/technofeudalism-by-varoufakis-yanis/9781847927279

Under capitalism, capital is the prime mover. The people who own and mobilize capital – the capitalists – organize the economy and take the lion's share of its returns. But it wasn't always this way: for hundreds of years, European civilization was dominated by rents, not markets.

Below the fold some discussion of this idea.

Anti-trust

Technology markets, and others that share their strong economies of scale, naturally tend to evolve into oligopolies, if not outright monopolies. Brian Arthur described the mechanism in 1994's Increasing Returns and Path Dependence in the Economy. This tendency has been supercharged ever since Richard Posner and George Stigler of the Chicago School got the Reagan administration to hamstring anti-trust enforcement. We see the result in technology and many other markets, dominated by a few giant companies devoted, in Cory Doctorow's memorable coinage, to enshittification:

Here is how platforms die: first, they are good to their users; then they abuse their users to make things better for their business customers; finally, they abuse those business customers to claw back all the value for themselves. Then, they die.

This process applies more broadly than just to platforms, except the part about dying. Below the fold I discuss a recent development that provides an opportunity for you to take action to push back against it.

Flash Loans

I have been generally skeptical of claims that blockchain technology and cryptocurrencies are major innovations. Back in 2017 Arvind Narayanan and Jeremy Clark published Bitcoin's Academic Pedigree, showing that Satoshi Nakamoto assembled a set of previously published components in a novel way to create Bitcoin. Essentially the only innovation among the components was the Longest Chain Rule.

But, for good or ill, there is at least one genuinely innovative feature of the cryptocurrency ecosystem and in Flash loans, flash attacks, and the future of DeFi Aidan Saggers, Lukas Alemu and Irina Mnohoghitnei of the Bank of England provide an excellent overview of it. They:

analysed the Ethereum blockchain (using Alchemy’s archive node) and gathered every transaction which has utilised the ‘FlashLoan’ smart contract provided by DeFi protocol Aave V1 and V2. The Aave protocol, one of the largest DeFi liquidity providers, popularised flash loans and is often credited with their design. Using this data we were able to gather 60,000 unique transactions from Aave’s flash loan inception through to 2023

Below the fold I discuss their overview and some of the many innovative ways in which flash loans have been used.

Dominoes

When important parts of the cryptosphere collapse, such as Terra/Luna or FTX/Alameda, people often ask "is this the end of crypto?". The answer so far is no. But as the "crypto winter" continues, and contagion spreads from exchanges to miners and their financiers, the number of important parts still standing is decreasing.

Below the fold I explain why crypto will effectively end when there are no large, liquid exchanges, and look at the possibility that failures of major exchanges might happen.

No Actual People Were Harmed In The Making Of This Market

FTX Token

The modus operandi of the crypto-bros in responding to criticism and calls for regulation is to talk about "innovation" and gaslighting about hypothetical future benefits, to deflect attention from the actual current costs of their favorite technology (see also autonomous vehicles). Below the fold I point out an egregious example of the genre.

Impossibilities

I'm starting to see a series of papers each showing that some assertion about the cryptocurrency ecosystem that crypto-bros make can't be true. I wrote about the first one I noticed in Ethereum Has Issues, but I have since seen several more. Below the fold I briefly review them, I'll update this post if I see more to maintain a chronological list of these research results.

The Exchange You Can Trust

One of the many ironies about "decentralized, trustless" cryptocurrencies is that they are neither decentralized nor trustless. Since in practice you can neither buy nor sell real goods using them, you need to trust an exchange to convert fiat to cryptocurrency and vice versa. Exchanges range from those you definitely shouldn't trust, such as Binance, through somewhat less sketchy ones such as Kraken (now being investigated for sanctions busting) to Coinbase, which presents itself as a properly regulated, US based exchange that is totally trustworthy.

But recently cracks have been appearing in their façade of respectability, big enough that even the New York Times has noticed. The Humbling of Coinbase by David Yaffe-Bellany and Mike Isaac summarizes the situation:

Coinbase rose to prominence as one of the first major crypto companies, a gateway to the chaotic world of digital assets for amateur investors. But as it has grown from plucky start-up to publicly traded company, its status as an industry leader has been threatened by a series of missteps and a steep decline in the crypto market over the last six months.

Below the fold I probe into some of these cracks.

Are Blockchains Decentralized?

Bitcoin pools 9/1/18

In April 2014, more than 8 years ago, I posted this comment:

Gradually, the economies of scale you need to make money mining Bitcoin are concentrating mining power in fewer and fewer hands. I believe this centralizing tendency is a fundamental problem for all incentive-compatible P2P networks. ... After all, the decentralized, distributed nature of Bitcoin was supposed to be its most attractive feature.

That October I expanded the comment into Economies of Scale in Peer-to-Peer Networks, in which I wrote:

The simplistic version of the problem is this:

• The income to a participant in a P2P network of this kind should be linear in their contribution of resources to the network.
• The costs a participant incurs by contributing resources to the network will be less than linear in their resource contribution, because of the economies of scale.
• Thus the proportional profit margin a participant obtains will increase with increasing resource contribution.
• Thus the effects described in Brian Arthur's Increasing Returns and Path Dependence in the Economy will apply, and the network will be dominated by a few, perhaps just one, large participant.

Ethereum miners 11/07/21

Ever since I have been pointing out that the claim that permissionless blockchain networks are decentralized is gaslighting, and thus the benefits that decentralization is supposed to deliver are not in practice obtained. Real-world permissionless blockchains such as Bitcoin's and Ethereum's have remained centralized all this time.

Now, a DARPA-sponsored report entitled Are Blockchains Decentralized? by a large team from the Trail of Bits security company conforms to Betteridge's Law. They examine this and many other centralizing forces affecting a wide range of blockchain implementations and conclude that the answer to their question is "No". Below the fold I comment on each of their findings (in italic), then discuss Professor Angela Walch's analysis of the problems of using "decentralized" in a legal context.

EE380 Talk

I was asked at short notice to fill in for a speaker in Stanford's EE380 course who had to cancel. Below the fold is a hastily updated version of a talk from last December.

Update 28^th February: the video of this talk is here.

Talk at TTI/Vanguard Conference

I was invited to present to the TTI/Vanguard Conference. The abstract of my talk, entitled Can We Mitigate Cryptocurrencies' Externalities? was:

Bitcoin is notorious for consuming as much electricity as the Netherlands, but there are around 10,000 other cryptocurrencies, most using similar infrastructure and thus also in aggregate consuming unsustainable amounts of electricity. This is far from the only externality the cryptocurrency mania imposes upon the world. Among the others are that Bitcoin alone generates as much e-waste as the Netherlands, that cryptocurrencies enable a $5.2B/year ransomware industry, that they have disrupted supply chains for GPUs, hard disks, SSDs and other chips, that they have made it impossible for web services to offer free tiers, and that they are responsible for a massive crime wave including fraud, theft, tax evasion, funding of rogue states such as North Korea, drug smuggling, and even armed robbery. In return they offer no social benefit beyond speculation. Is it possible to mitigate these societal harms?

The text with links to the sources is below the fold.

Hidden Certificate Authorities

The security of encrypted Web traffic depends upon a set of Certificate Authorities (CAs). Browsers and operating systems are configured with a list of CAs that they trust. The system is brittle, in the sense that if any of the multitude of CAs that your browser trusts is incompetent or malign, the security of all your traffic is imperiled. I've written several times on the topic of misbehaving CAs; there is a list of links at the end of the post.

In Web trust dies in darkness: Hidden Certificate Authorities undermine public crypto infrastructure, Thomas Claiburn reports on an important paper, Rusted Anchors: A National Client-Side View of Hidden Root CAs in the Web PKI Ecosystem by Yiming Zhang et al. This paper looks at what happens when, by fair means or foul, unofficial entries are added to or replace the CAs in the official list that your browser trusts. Below the fold I discuss their findings.

Central Bank Digital Currency

Central bank digital currency: the future starts today, a speech by Benoît Cœuré, Head of the Innovation Hub at the Bank for International Settlements identifies a number of problems that central banks face:

Big techs are expanding their footprint in retail payments. Stablecoins are knocking on the door, seeking regulatory approval. Decentralised finance (DeFi) platforms are challenging traditional financial intermediation. They all come with different regulatory questions, which need fast and consistent answers.

Banks are worried about the implications of CBDCs for customer deposits. Central banks are mindful of these concerns and are working on answers. They see banks as part of future CBDC systems. But make no mistake: global stablecoins, DeFi platforms and big tech firms will challenge banks' models regardless.

Stablecoins may develop as closed ecosystems or "walled gardens", creating fragmentation. With DeFi protocols, any concerns about the assets underlying stablecoins could see contagion spread through a system. And the growing footprint of big techs in finance raises market power and privacy issues, and challenges current regulatory approaches.

Below the fold I discuss the idea of CBDCs

Economies Of Scale

Steve Randy Waldman is a very interesting writer. He has a fascinating short post entitled Economies of scale in which he distinguishes four different types of "economies of scale". In reverse order, they are:

1. Insurance
2. Market power
3. Network effects
4. Technical economies

The effects of economies of scale in technology markets, such as storage media, digital preservation and cryptocurrencies, is a topic on which I have written many times, drawing heavily on W. Brian Arthur's 1994 book Increasing Returns and Path Dependence in the Economy. Below the fold I discuss Waldman's classification of them.

Venture Capital Isn't Working

I was an early employee at three VC-funded startups from the 80s and 90s. All of them IPO-ed and two (Sun Microsystems and Nvidia) made it into the list of the top 100 US companies by market capitalization. So I'm in a good position to appreciate Jeffrey Funk's must-read The Crisis of Venture Capital: Fixing America’s Broken Start-Up System. Funk starts:

Despite all the attention and investment that Silicon Valley’s recent start-ups have received, they have done little but lose money: Uber, Lyft, WeWork, Pinterest, and Snapchat have consistently failed to turn profits, with Uber’s cumulative losses exceeding $25 billion. Perhaps even more notorious are bankrupt and discredited start-ups such as Theranos, Luckin Coffee, and Wirecard, which were plagued with management failures, technical problems, or even outright fraud that auditors failed to notice.

What’s going on? There is no immediately obvious reason why this generation of start-ups should be so financially disastrous. After all, Amazon incurred losses for many years, but eventually grew to become one of the most profitable companies in the world, even as Enron and WorldCom were mired in accounting scandals. So why can’t today’s start-ups also succeed? Are they exceptions, or part of a larger, more systemic problem?

Below the fold, some reflections on Funk's insightful analysis of the "larger, more systemic problem".

Principles For The Decentralized Web

A week ago yesterday the Internet Archive launched both a portal for the Decentralized Web (DWeb) at https://getdweb.net/, designed by a team led by Iryna Nezhynska of Jolocom, and a set of principles for the Decentralized Web, developed with much community input by a team led by Mai Ishikawa Sutton and John Ryan.

Nezhynska led a tour of the new website and the thinking behind its design, including its accessibility features. It looks very polished; how well it functions as a hub for the DWeb community only time will tell.

Brewster Kahle introduced the meeting by stressing that, as I have written many times, if the DWeb is successful it will be attacked by those who have profited massively from the centralized Web. The community needs to prepare for technical, financial and PR attacks.

Below the fold I look at how the principles might defend against some of these attacks.

Talk At Berkeley's Information Access Seminar

Once again Cliff Lynch invited me to give a talk to the Information Access Seminar at UC Berkeley's iSchool. Preparation time was limited because these days I'm a full-time grandparent so the talk, entitled Securing The Digital Supply Chain summarizes and updates two long posts from two years ago:

• Certificate Transparency
• Securing The Software Supply Chain

The abstract was:

The Internet is suffering an epidemic of supply chain attacks, in which a trusted supplier of content is compromised and delivers malware to some or all of their clients. The recent SolarWinds compromise is just one glaring example. This talk reviews efforts to defend digital supply chains.

Below the fold, the text of the talk with links to the sources.

ISP Monopolies

For at least the last three years (It Isn't About The Technology) I've been blogging about the malign effects of the way the FAANGs dominate the Web and the need for anti-trust action to mitigate them. Finally, with the recent lawsuits against Facebook and Google, some action may be in prospect. I'm planning a post on this topic. But when it comes to malign effects of monopoly I've been ignoring the other monopolists of the Internet, the telcos.

An insightful recent post by John Gilmore to Dave Farber's IP list sparked a response from Thomas Leavitt and some interesting follow-up e-mail. Gilmore was involved in pioneering consumer ISPs, and Leavitt in pioneering Web hosting. Both attribute the current sorry state of Internet connectivity in the US to the lack of effective competition. They and I differ somewhat on how the problem could be fixed. Below the fold I go into the details.