Governments and banks use blockchain, you won’t BELIEVE what happens next!!!

Source: Jerry CumminsSource: Jerry Cummins

Disclaimer

This writer, along with almost every commentator who has published on the internet (which is several hundred thousand) or with a relatively reputable press (which is one… maybe), has a very basic grasp of blockchain technology. This writer has only mined sweet coin in colourful crypto-dreams, though they are the proud owner of a mediocrely performing portfolio of several unstable cryptocurrencies. They also, however, think blockchain could spell bad news for democracy, and that is the purpose of this article.

Stanford, Princeton, NYU and Duke now teach courses on blockchain and cryptocurrency. People have had their marriages written into blockchain. According to the Guardian, The World Economic Forum predicts that, within a decade, 10% of global GDP will be stored on blockchains. How can such an impact have been made by something that the world had never thought about until so-called ‘Satoshi Nakamoto’ invented it 10 years ago? Is blockchain a revolution on the same level as the mainframe computer and the internet?

What is blockchain technology? If you know, skip this (even more) boring part

There are countless YouTube videos and online articles, so I won’t spend long describing blockchain here. But what are the key aspects of it? Briefly, what blockchain does is store information. The best way to think of a blockchain is as a shared database. Until now, data has been held in centralized silos. For example, if you use iCloud then your data will soon be stored in a 500acre Apple server farm (or data centre) in County Galway, Ireland – a vast industrial mass of servers, backup generators, cooling systems and security systems. If the data centre were to be destroyed, a huge amount of data would be lost. Blockchain is decentralized and peer-to-peer, leading to NYU’s Arun Sundararajan including blockchains in his 2016 study of The Sharing Economy. Instead of data being stored centrally, everyone who joins the blockchain network receives a copy of it.

A simplistic way to think of blockchain is like a Google Doc, which users can all edit. The major differences are that all edits can be made anonymously, and that once someone has made an edit and it has been verified (bear with me on that), that edit will then be written into the ledger (its block) for good – it is unalterable unless someone is capable of going back through the data (the blockchain) altering any record of its existence without any other ledger user noticing what they are doing. Because there are so many users of the blockchain (especially ones such as Bitcoin or Ethereum), the chances of that happening are essentially zero.

However, the problem is that some edits may be false, much like when a Wikipedia user changed Jeremy Corbyn’s photo to a stained-glass window of Jesus. This is the main problem that blockchain ‘solves’; users who may not stick to the spirit of only recording the facts on the ledger. In computing, this is called the Byzantine Generals problem. In brief, Byzantine generals surrounded a city in order to attack it simultaneously. They send messages between each other to coordinate the attack time, but some generals are traitors and thus do not obey the command, and some even send a false attack time to other generals. The solution that blockchain offers is to get rid of the middlemen – the envoys relaying the messages – and instead to have a decentralized system of communication. Then, as long as there is a consensus (51% or more) between the generals what the correct attack time is, the loyal generals will attack at the same time. If the majority of generals are traitors, then the problem cannot be solved using a blockchain. Likewise, a majority of Wikipedia users may consider Corbyn to be the Messiah and thus actually choose to back the above edit as ‘truth’, in which case, Corbyn’s depiction would remain Messianic. This is sometimes called a 51% attack, and how some blockchains try to overcome it is explained in a second. In the blockchain context, perhaps the biggest incentive for a 51% attack would be rewriting the data-history so as to erase one’s previous transactions, meaning one could re-spend coin they have already used.

Jeremy Corbyn was a member of Boy Better Know according to Wikipedia, with his sole addition to the discography being ‘The Labour Manifesto’

Jeremy Corbyn was a member of Boy Better Know according to Wikipedia, with his sole addition to the discography being ‘The Labour Manifesto’

 

First, however, we should understand how the information (which could be contracts, transactions, or text such as marriage agreements typed in an information box attached to a transaction), is recorded permanently in the blockchain. The main two approaches are ‘Proof-of-Work’ (PoW) and ‘Proof-of-Stake’ (PoS). Bitcoin uses PoW, which works by a bitcoin miner ‘hashing’ – i.e. reducing the vast amounts of data into a concise 32-digit ‘hash’ (and a ‘nonce’, but if you want to know more about that you can do your own research as it is complex). This effort takes a huge amount of processing power and thus cost (hence why bitcoin ‘mines’ use so much electricity, and, cleverly, have sometimes been based in cold climates such as Siberia where at least the excess heat generated can be used to heat homes above the ‘mine’). The benefit of ‘hashing’ is that data can be converted into something which is easily verifiable by other users, but cannot be reversed or ‘unhashed’. Bitcoin miners compete to reach the correct ‘hash’ first (the correct value is predetermined in the coding of the blockchain) – and they are rewarded for doing so with Bitcoin.

However, the problem with PoW is that with lots of Bitcoin owned by a small group of talented miners, there is the danger of a 51% attack. To solve this issue, Ethereum, another blockchain, uses ‘Proof-of-Stake’, which means that, in order to mine 5% of the blockchain, you must have a 5% stake of the value of that blockchain’s coin. Therefore, if you did own 51% and you tried to hack the blockchain, you would simply be damaging your own interests. Neither PoW nor PoS is perfect, and blockchains will often combine the two.

Will Blockchain change the way we do politics?

Die-hard blockchain advocates cite endless advantages, many explicitly political – from ‘rebuilding democracy’ (whatever that means), to making government so much cheaper that we will be able to introduce a Guaranteed Basic Income.

Amongst these advocates, there are two main camps. Though there are interesting figures in both camps, some of whom have real-world experience, both camps are, perhaps more than you would expect, largely comprised of mountebanks and nutters. We can broadly call the two camps: 1. Silicon Valley/investment banker types, and 2. The Anarcho-Libertarians.

The Silicon Valley/investment banker types want to stress how much blockchain will make democracy and the economy more secure, and that a rising tide will lift all boats. Speaking of boats, father and son duo, Alex and Don Tapscott, co-founders of the ‘Blockchain Research Institute’ and generally annoying businessmen-banker-guru-types, unsurprisingly like boats.

One hopes that, too busy posing, the Tapscotts are here seen driving another of their investments into a brick wall

One hopes that, too busy posing, the Tapscotts are here seen driving another of their investments into a brick wall

 

Another prime candidate is Melanie Swan, who deserves a huge amount of credit for starting the ‘Institute for Blockchain Studies’, which I think we all wish we had thought of founding so that we could also write ‘Founder of Institute for Blockchain Studies’ on our CVs.

These types suggest the following advantages: integrity, distributed power, saving cost, increasing privacy and security, and grander schemes such as decentralized government services and something called ‘Franchulates’, which was genuinely a concept lifted from a science fiction novel called Snow Crash that portrays anarcho-capitalism as a dystopian future (this is where the first camp starts to blur into the anarcho-libertarian camp). However, unlike the anarcho-libertarian, they think blockchains can help to increase government security and help protect property and intellectual property rights – such as land titles in unstable regions, or helping singer-songwriters, such as Imogen Heap, using blockchain technology to sell their music; a system Heap calls ‘fair trade’.

What should we make of these claims? Well, it is true that voting systems could be made more secure using blockchain technology. In the 2004 US Presidential Elections, a voting machine aiding in Carteret County, North Carolina was accidentally set to store 3000 votes, and thus lost 4,438 votes in a race that was decided by a difference of only 2,287. If blockchain technology had been used – i.e. a shared ledger – then such mistakes could not happen. However, if the blockchain technology is itself poorly designed, then mistakes can still happen. Moreover, just because blockchains cannot really be hacked, there is nothing about blockchains that will stop bribery, factually questionable marketing and other influences of big money over the voters themselves.

Nonetheless, Estonia has famously been using e-voting to run their version of semi-direct democracy to reasonably successful ends. They have been able to convert their current systems over to the blockchain to increase security. Each Estonian has an electronic ID card that they use to access government service websites, where they can do everything from voting (in 2015, 30% of votes were cast online), to viewing their own health record, and viewing every piece of legislation that is made public.

Blockchain is also touted to make ‘liquid democracy’ possible, mostly by Podemos in Spain, who use the blockchain-run Agora Voting system in their internal elections, and by the Flux Party in Australia (who gets a miniscule percentage of the vote in national elections). Liquid democracy is the idea that voters can tell their representatives in parliament exactly how to act on each policy issue or bill, OR you can transfer your vote to another person or representative who you think is better suited to take that decisions. The problem with this both of these ideas is that they take ‘representative’ democracy to such an extreme that ‘democracy’ no longer looks like a system where people have ‘equality of speech’ (what the Ancient Athenians called isegoria). Instead, this system relies on the view that people should not have equal say on matters because people have different levels of knowledge in different areas. Of course, it is minimally democratic in the sense that there is still ‘one person, one vote’, but the system encourages a technocratic and meritocratic way of doing politics in which some citizens are given more say due to their supposed ‘specialist knowledge’ or the respect/support they can garner (imagine how many people would hand over their votes to celebrities or people who already have enormous power like Bill Gates or Richard Branson). The major problem with this intermediary voter system is that those who are ‘delegated’ votes do not become representatives, and therefore are not accountable to public scrutiny in the same way as typical representatives are – instead, they hide behind a veil of anonymity, and it is almost impossible for citizens to tell how much influence elites have on the outcome of an election. Another major problem with this system is that our representatives become nothing but puppets – in political theory they are called delegates – they must do exactly as we instruct them. In making a ‘direct’ version of democracy feasible on a large scale, blockchain technologies present the risk that we could lose the advantages of representation; a group of people (politicians) meeting face-to-face in order to discuss and deliberate, to hear the facts and other points of view, rather than simply voting according to their private and individual preferences.

Another related way in which blockchain may improve democracy is in making representatives more accountable. For example, in 2016 George Galloway (yep… and now you see how thin-on-the-ground blockchain advocates are), called for blockchain to be used to hold elected officials accountable for public business. He may be onto something here, because blockchain is an unalterable and peer-to-peer means of storing data, it could be used in some applications when we want to make data freely available to the public in a secure and trustworthy manner. However, as above, we need to think seriously about whether we want to stifle free debate and free action of our representatives by binding them in straight jackets of constant surveillance. On the other hand, a blockchain ledger of how the Government is spending public money could be a very good thing for democracy, as it could make it easier for people to see just how many weapons and foreign aid Britain has sent to Saudi Arabia, for example.

Now onto the more utopian schemes such as decentralized government. Melanie Swan says we could have a ‘personalised’ model of government whereby you can ‘choose your government and your services’. Here we have the ‘Franchulates’ (as envisioned in Snow Crash) – a portmanteau of franchise and consulate, it’s a ‘business that provides fee-based quasigovernmental services consumed by individuals as any other product or service, a concept that blockchain governance could make possible’. Making politics into business, Swan asks us to ‘imagine a world of governance services as individualized as Starbucks coffee orders’, which is supposed to sound nice, like a pumpkin latte. In ‘The Crisis of Culture’, Hannah Arendt argues that ‘taste belongs among the political faculties’, but I don’t think that is what she had in mind. An example of personalized governance services might be that one resident pays more for a higher-tier waste removal service that includes composting, whereas a neighbor pays for a better school or health package. It is like selecting the SkyTV package that suits you. However, with the rich having no incentive to pay for social services (using private schools and healthcare instead), the poor would suffer from massive declines in government funding for health and education services. This proposal is as ridiculous as a ‘personalised legal system’ – which has also been proposed by Melanie Swan – the idea that a person or firm could choose the legal system with the features they like. The danger is that, to take an earlier example, Apple would be able to choose the British Cayman Islands legal system of paying no tax, whilst situating their data centre in Ireland – which, incidentally, is what they are de facto doing everywhere else already.

These proposals are (hopefully) mostly going to stay within the pages of science fiction or books published by the Institute for Blockchain Studies, but there are people with real power and wide audiences in the second camp, the Anarcho-Libertarians, including Julian Assange and Edward Snowden.

For context, in a 2013 survey, 44% of bitcoin users professed to be libertarian or anarcho-capitalists, favouring elimination of the state. One nerve centre of this movement is the cryptoanarchist organisation, Parallel Polis (Assange was reportedly one of the first members of their mailing list), ironically named considering that on paper they should despise everything about the centralised and highly administrative, anti-pluralistic, even authoritarian, Greek Polis.

The main targets of the crypto-anarchists are big banks and states themselves, especially ones opposed to free trade. Advocates of Bitcoin claim that it poses an ‘existential threat to the nation-state’, because their central banks and the fiat money they control will be replaced or ruined (or something – they are usually unclear) by Bitcoin. Major advocate Jon Matonis, claims that ‘Bitcoin prevents monetary tyranny’. This rhetoric has been undermined by economists and journalists, who usually point out two things: 1) Bitcoin isn’t money, it’s essentially a currency. Money is what names the instrument in which official transactions in that nation-state are conducted – it is anything that will settle a legal contractural obligation. In short, the state decides what money is. The UK and the USA (except for the IRS) treats Bitcoin as a currency. 2) There are, and have been, many alternatives to national currencies – one was the super-national euro, which became money in some countries, others are high-value goods like fine art or precious metals, and others we use every day, such as supermarket loyalty points. None of these have posed any threat to national sovereignty or control over monetary policy.

In addition, states do have an enormous impact on the value of cryptocurrency – as seen when South Korea announced a potential clampdown on cryptocurrency trading in January 2018 (and continues to do so) leading to a huge crash in cryptocurrency prices across the board. Moreover, states control the power grids upon which cryptocurrencies function. Besides these counter-arguments, however, there is also the fact that anarcho-libertarian’s cryptocurrency hopes are likely to have the opposite effects – far from distributing money and power, simply handing it over to a new elite or, more likely still, benefitting existing elites.

For example, cryptocurrencies such as Ripple use one particular aspect of blockchain to woo large financial services sector clients; ‘smart contracts’ (i.e. contracts written into the blockchain) mean that payments can be sent around the world far faster than before. This is because the ‘double-spend’ problem can be prevented without needing a ‘third party’ like PayPal or a bank to verify that x has the money to pay y. However, rather than merely bypassing banks, financial firms are able reduce to their costs on cross-border transfers and thus benefit from a slicker and less regulated international financial system. Moreover, cryptocurrencies are often used simply due to fear of government seizures, as seen by the great deal of Bitcoin demand following the Cyprus banking crises in March 2013.

All the while, a new elite of Bitcoin miners and hoarders are emerging. As of December 2013, reportedly 50% of all Bitcoin were owned by around 920 people – including the Winkelvoss twins of Facebook infamy. This partly reveals a deeper flaw with blockchain and cryptocurrencies – that although the blockchain may be secure, more or less everything else is not. For example, in order to buy cryptocurrency, most people will use an exchange website (rather than downloading it onto their own hard-drive in a ‘wallet), and these are often being hacked, resulting in bankruptcy as with Mt. Gox in 2014 (which handled over 70% of all Bitcoin transactions worldwide at the time), or even run intentionally as scams. David Golumbia of the Univeristy of Virginia interestingly points out that the only people willing to properly commit to such high-risk ventures are the wealthy.

The anarcho-libertarians’ vision was brilliantly summarised by Jim Edwards as ‘Bitcoinistan’, which he calls a country ‘with as little government interference as possible, in a market free of burdensome laws and taxes’. Edwards and I both agree such a state would be a nightmare, ‘characterized by radical instability, chaos, […] and a mass handover of wealth to a minority even smaller than the one percent that currently lauds it in the United States’.

The People’s Republic of Bitcoinistan has recently been established in central Asia. A land with no laws, but rich in coin deposits.

The People’s Republic of Bitcoinistan has recently been established in central Asia. A land with no laws, but rich in coin deposits.

 

Even more worryingly is the extremist right-wing ideology behind many crypto-anarcho ideas. David Golumbia’s The Politics of Bitcoin describes how much of this ideology is associated with Ron Paul’s racist and conspiracy-theory filled brand of neo-liberalism, with its roots in the Liberty Lobby – a US lobbying organization infamous for its anti-Semitic conspiracy theories and racist hate-speech – and the John Birch Society – who desire the abolition of the Federal Reserve. Ron Paul himself advocated using Bitcoin to pay for campaign donations in 2016. The Paulite argument is essentially that fiat money does not allow for ‘store of value’, and thus can simply be controlled and even destroyed by government and bankers at their whim. However, unlike gold, Bitcoin is certainly not a store of value – as shown by its dramatic price fluctuations more akin to the Dutch Tulip bubble of 1637 than the consistently high-price of gold. 

The Dutch Tulip Bubble

The Dutch Tulip Bubble

 

Another famous crypto-anarchist is Cody Wilson, who became famous in 2016 by publishing the blueprints to a pistol that can be manufactured by a 3D printer. This ultimately anti-central-state political act hints at arming the population as a militia, with Wilson believing he is simply realizing the Second Amendment, however, with implements of violence being sold anonymously on the blockchain, the future could extend far beyond citizen militias, most obviously to aiding and abetting terrorism. Do we really want anonymity to the extent that anyone can purchase BAE weaponry using Bitcoin?

Other blockchain advocates argue that it will cut out the middleman and reduce bureaucracy (this is again because of smart contracts, but also the reduced need for auditing and accountants). However, this will not spell the end for accountancy firms such as PWC, instead they are likely to put more resources into their consultancy departments, advising firms and private individuals on what on earth the blockchain is and how they can use it to the basically the same job that PWC used to do for them.

Following on from this point, the peer-to-peer exchange and the ‘sharing economy’ sound wonderfully egalitarian, but in reality, they are run on a techno-rhetoric that people must have the skills, education and equipment for in order to use. It seems obvious, but of course, when the price of Bitcoin increases, everyone who possesses Bitcoin (those who are tech savvy enough, or can employ wealth managers to do it for them) gets proportionally richer.

Bitcoin, due to mining, is far more energy intensive than other transaction systems such as VISA (Digiconomist estimates it to be well over 2.5 times more intensive). Moreover, Bitcoin mining is estimated to consume about 46.16TWh annually, which is more than is used by the whole of Singapore or Portugal, and almost as much as Hong Kong. This suggests Bitcoin is perhaps not a sustainable transaction method for the future.

Source: Jerry Cummins

Source: Jerry Cummins

 

There are also wider, more philosophical points that may be worth considering. To what extent do we want the economic and computational realm to interfere with politics? These are the fears of the Frankfurt School such as Herbert Marcuse, as well as Hannah Arendt, who see political action and freedom being replaced by a pre-ordered and pre-coded world governed by instrumental rationality that favours elite control. Or what about the case for ‘stopping and thinking’? Another point made by Arendt and also Heidegger, is that we should think about how this new technology alters our perceptions of the world. To be more precise, blockchain technology touts the end of paper-based systems, checks and balances, and multiple streams of approval (such as third parties). The problem with making processes automatic and ultra-fast may be that we do things without thinking, much like e-voting – a piece of proposed legislation appears on our iPhone screens and we simply click ‘Yes’ or ‘No’. This is not what Arendt, nor I, think a healthy politics or freedom looks like.

I scan-read or simply scrolled to the bottom of the article, so can you just tell me whether I should buy crypto now?

CONS: It’s a Ponzi scheme. If your coin exchange doesn’t go bust, get hacked or simply steal/lose your money, then the inevitable (perhaps already occurring) crash of the cryptocurrency market will ensure you lose large amounts of money eventually.

PROS: It’s fun and most, if not all, of the cool kids are doing it. Take Cambridge BitPop band, Chablis, for example. These three-piece cryptominers claim to have been hashing coin since day, and to know the sparkly recesses of England’s bitpits like the back of their hand.

P.S. The writer’s mate reckons RaiBlocks are ‘going to take off’, so if you’ve got a spare guinea, that’s where to put it according to a bloke who knows next to nothing about computing, economics or financial markets.

P.P.S. Since writing this article, the price of RaiBlocks has dropped 30%. But my mate reckons to buy loads now because ‘it’s cheap’.