Bitcoin and Technological Progress

The rise of cryptocurrencies in 2017 brought attention to the technology powering them, called “blockchains” or “the blockchain.” This article will assess why this technology became popular and what kinds of problems it both solves and creates.

What is Blockchain?

Blockchain is best explained through analogy. Think of the website of a newspaper like The New York Times. The contents of the site are stored on servers in a centralized location. Imagine if instead of that, everyone had a full copy of the site stored on his computer with no central server. Every article, comment, and image was there. If a reporter wanted to submit a new article, he would have to get the approval of the rest of the journalists (perhaps in some automated way).

Let’s say one journalist contacts another and submits his post. The other journalist would verify this post using a mathematical technique known as hashing, solving a difficult mathematical puzzle to chain this post with a previous one. Other verifiers would check his solution, and if correct, the article would go live on NYT and the verifier would get a reward. This is the process known as “mining.” Note that all parties are equal and no one has special privileges; anyone can submit articles and verify other articles. Individuals can also verify posts that they themselves contribute, though in practice, due to its computational intensity, a miner/verifier will designate a computer that exclusively performs that task.

The key insight of this analogy is that the system is fully decentralized. As such, no trust is needed between any two parties. Because of the mathematics associated with hashing, mainly that it’s an irreversible one-way function, it’s impossible to cheat the system. If someone tries creating a fake hash, other verifiers will know and the post won’t be approved. The only way to hack a blockchain is to gain control of 50% + 1 of the computers in the network, which is nearly impossible, as it consists of thousands of computers spread across the world.

Why Did Blockchain Become Popular?

The trustless, decentralized nature of blockchains is their primary appeal. At its core, blockchain technology is addressing an important problem: humans’ loss of trust in each other. Among other reasons, greedy banks, government surveillance and authoritarianism, and monopolistic corporations have caused this. People around the world increasingly feel that the institutions do not work for them.

Some people have attempted to use technology to make up for this lack of trust. Cryptocurrency enthusiasts envision a future without banks, greedy people on Wall Street controlling our money, and corrupt politicians interfering in our lives.

The idea was to build and shore up a new system—for everything from payments and banking to health care and identity—that was either a replacement for the old one, or at least an alternative to it, one that was borderless, independent of state control and of exploitation by Big Tech…

The terms [of a contract] are enshrined in and triggered by code, rather than by someone’s interpretation of legal language or fit of pique. The proposition is that computer code, unlike, say, Hammurabi’s or the Federal Reserve’s, is impartial—that it can eliminate, or at least greatly reduce, the role of toxic subjectivity. This could cover a simple exchange of digital money, or the sale of a house, or an insurance payout, or a bet. [1]

Cryptocurrency enthusiasts envision a future in which this technology can be used to solve many problems and make the world a better place.

Advantages and Disadvantages of Blockchain

Blockchain-based systems claim to solve some of the problems described above. The most common use is to keep track of financial transactions. This is where the blockchain becomes a cryptocurrency: a form of digital cash whose transactions are recorded in a distributed ledger. Cryptocurrencies work without needing oversight from a bank, government, or any other centralized institution. Moreover, they’re “trustless:” functional even if individuals in the network have ill intentions, as they couldn’t hack the system even if they tried.

However, blockchain technology often creates more problems than it solves. Tremendous energy is being wasted with Bitcoin (and other cryptocurrency) mining. According to one calculation:

If Bitcoin were to cease trading tomorrow, 0.5% of the world’s electricity demand would simply disappear. This is roughly equivalent to the output of ten coal-fired power plants, emitting 50 million tonnes of CO2 per year – which would cover one year’s worth of the carbon emission cuts required to limit temperature rises this century to 2C. [2]

This is Bitcoin alone. Add in Litecoin, Ethereum, Bitcoin Cash, Zcash, and the other major cryptocurrencies and it’s clear that the environmental cost of cryptocurrencies is enormous. Some have proposed alternative algorithms that don’t waste as much energy, but such alternatives compromise the trust free nature of the blockchain.

Another issue with the blockchain industry is the large number of frauds, hacks, and illegal activity in the space. Having a decentralized system is advantageous in that it avoids authoritarian governments, but in doing so, it possesses potential for the opposite extreme. Moderate government oversight is necessary in any financial system to make sure people aren’t committing serious crimes.

The fact that a theoretical blockchain is nearly impossible to hack does not prevent hacks from happening. In practice, few people have the computational power to run a full blockchain node and keep up with all transactions at all times, so they use third-party services like Coinbase, and credentials are often stolen. Furthermore, there are often bugs in the code written on the blockchain, which can lead to hacks even if the blockchain concept is mathematically sound.

A third problem with blockchain is its lack of scalability. Due to its decentralized nature, computers in the system have to be in constant communication and exchange lots of data, while also solving difficult mathematical puzzles in order to verify transactions. This means a blockchain can only process a few transactions per second (in the entire system, not per user). As such, it cannot function as a peer-to-peer digital payments system, because the requisite throughput for such a system would be orders of magnitude higher than what blockchain provides.

Proposed Solutions

Cryptocurrency’s lack of viability as an actual currency has been widely noted. Some have responded by proposing that instead of using bitcoin for payments, perhaps it can be used as a “store of value” instead, like buying a brick of gold and storing it in a vault. However, wild price fluctuations experienced by cryptocurrencies make it undesirable for a store of value.

Others have proposed solutions the slow, inefficient nature of cryptocurrency transactions. One example is the Lightning Network that has been discussed since 2015. To continue the original analogy, this is analogous to two journalists opening a shared draft and making edits together and then going through the publication later. It allows the two to share content quickly until they eventually arrive at a final version that goes out to everyone. While it’s useful where applicable, the actual use cases of this technology are limited and it doesn’t turn Bitcoin into a scalable peer-to-peer digital payments system.

Some have likened the current inefficiency of cryptocurrencies to the early days of the internet, when dial-up speeds were measured in Kilobits per second. They argue that the technology will naturally improve over time. They ignore that blockchain faces a unique problem: the impossibility of reliable distributed consensus has been proven. Blockchain gets around this by adding a slowdown: it makes nodes in the network solve difficult arbitrary mathematical puzzles when verifying transactions. This is used to make consensus highly probable, although still not fully guaranteed. Thus, the slow, inefficient nature of cryptocurrencies is a feature, not a bug. It’s not something that can ever truly be solved.

This doesn’t mean that cryptocurrencies won’t increase in value in the future or that companies and institutions won’t continue to invest in blockchain research. Rather, what this analysis reveals is that the main use of blockchain technology – as a distributed ledger for financial transactions – is inadequate.

Why Did the Cryptocurrency Boom Happen?

It’s worth reflecting on the news of the past few years and analyzing how the rise and fall of cryptocurrencies happened. How could a technology with so many flaws become a global sensation, rise to hundreds of billions in market capitalization, and be hailed in countless media takes as the future of finance? The answer to this is modern society’s perception of technology and its role in improving the world.

Many believe that technological progress can solve all our problems. This is due to a belief inherent in liberalism and progressivism: the belief in progress. Because society and concurrently, technology, progress and improve over time, it follows that new technology is correlated with making the world a better place.

The assumption that more advanced technology will inherently improve the world is understandable. The past few decades have seen tremendous improvements in people’s lives due to modern technology, including medicine, travel, and communication. Obviously, these are all good things. Nevertheless, the problem is when we view technological progress as inherently good, and not something to be evaluated based on the specifics of a particular technology.

Cryptocurrency promoters often describe it as the future and current financial systems as obsolete. This article is not an endorsement of the current financial system, but a call to examine blockchain on its merits alone and to resist the old vs new rhetoric. We must be willing to confront the possibility that blockchain is simply a flawed technology that became popular for bad reasons. Otherwise, we will continue to lose money, energy, and resources.

 

Works Cited:

  1. Paumgarten, Nick. “The Prophets of Cryptocurrency Survey the Boom and Bust.” The New Yorker, The New Yorker, 16 Oct. 2018, http://www.newyorker.com/magazine/2018/10/22/the-prophets-of-cryptocurrency-survey-the-boom-and-bust.
  2. Gallagher, Andrew. “Bitcoin Must Die.” Slugger O’Toole, 12 Oct. 2018, sluggerotoole.com/2018/10/12/bitcoin-must-die/.

About the author: Yousuf is a software engineer with an education in computer science, including distributed computing systems. He is also a member of a blockchain analysis and advocacy group. His interests include science, technology, religion, and politics. You can follow him on Twitter here.

One thought on “Bitcoin and Technological Progress

  1. Reblogged this on Yousuf's Blog and commented:

    Salaam all,

    I recently wrote this post about Bitcoin, the blockchain and cryptocurrencies for Traversing Tradition. I explain what the technology is, the idea and justification behind it, and some of the issues it comes with. I also talk about how we often get taken in by hype related to technological progress, which arguably applies to other things such as AI and Internet of Things as well.

    Anyway, read, share and leave your feedback!

    Like

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