Blockchain Blockchain Blockchain Blockchain

In which I remember that I have a blog and can host Opinions on it.

This take recently scrolled across my feed:

The post is surprisingly restrained for someone working at a blockchain-adjacent startup. I think it’s still wildly optimistic.

Firstly, and least importantly, decentralised applications are already widespread. They’re just called federated systems, and have been widespread for decades, from the venerable SMTP to the shiny new IPFS. The novel aspect for cryptoassets is the uses-the-the-tokens-for-payment part, not the no-single-operator part.

The author identifies that decentralised applications are structurally inferior to centralised applications in a number of ways:

  1. They are slower
  2. They are more expensive
  3. They are less scalable
  4. They have worse user experiences
  5. They have volatile and uncertain governance

Additionally, they also suffer from the problems of federated systems, namely that they are difficult to evolve.

In return for this, decentralised applications offer “censorship resistance”1, and the author speculates that maybe people will value this in the future, just as encrypted chat apps have become entirely mainstream. I’m sceptical. Encrypted chat has been available approximately forever, but only became mainstream after the new suite of chat applications - iMessage, Signal, WhatsApp, and so on - provided a user-experience that’s at least as good as existing chat applications. Maybe it’s possible to ameliorate these problems to the point where decentralised apps provide an experience no worse than existing systems - encrypted chat was arcane and entirely user-hostile until it wasn’t - but I think that widespread use will only happen after it happens. If indeed it’s possible. Even then, there’s a problem.

The problem is that decentralised applications offer less censorship resistance than, say email2.

Because blockchain! applications depend on a centralised data store, they by necessity restrict the data stored there. Bitcoin won’t store a transaction where you spend a balance you don’t have. But that means that some authority must be in charge of determining what a valid submission looks like. Determining what a valid submission looks like is exactly equivalent to censorship - if the network is set up so that transactions to Bob’s Bitcoin address are invalid, then Bob can’t receive Bitcoin. If the network is set up so that transactions from Bob’s Bitcoin address are invalid, then Bob’s lost any Bitcoin associated with that address.

This is where the fifth inferiority - volatile and uncertain governance - makes things worse. Sometimes you need to make changes to how the network works. Such as the DAO hack where a programming error allowed someone to drain tens of millions of dollars worth of Ethereum from a crypto instrument. That was mostly resolved by voting, with votes proportional to wealth (with all the problems that entails).

But it was also resolved by capital voting. For all the proof-of-work consensus schemes the ultimate authority is the miners. Control 51% of the workforce and you have a great deal of control. The Etherium miners could have3 vetoed the change. This would also not be such a problem, were it not for the economics of mining driving extensive centralisation. Bitcoin has had multiple periods where it was discovered that a single mining group controlled more than 51% of the mining power.

In those cases the dominant miner voluntarily reduced their capacity over time. People have advanced an argument that this is the only economically rational approach a miner could take: that using its power to mess with the blockchain would forfeit their investment in Bitcoin. I don’t buy this for two reasons: the first, is that we’re very obviously in a crypto bubble; if people were rationally considering economic risks and rewards they wouldn’t be buying Bitcoin. The second is that this is a failure of imagination - while destroying the market for Bitcoin would indeed forfeit the miners’ investment in Bitcoin, there are a number of other ways to profit. Most simply: short Bitcoin, then tank the price. It only works once, but it only has to work once! Or, if a company has extensive Bitcoin assets, prevent them from being sold and take advantage of the company’s reduced liquidity. Or so on.

That’s crypto-currency: a not-very-good solution to a not very useful problem with significant inherent downsides over alternative systems.

[1]I don’t like this term; it’s highly embedded in the corrosive political ideology underlying the blockchain-Silicon Valley-disruptive-dudebro ecosystem.
[2]Yeah, because SMTP runs on a distinguishable port you can block all email, but the same is true of Bitcoin.
[3]And, indeed, some did; and thus was Ethereum Classic born.
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