On the dangers of cryptocurrencies and the uselessness of the blockchain

At the beginning of June, other crypto experts and I wrote a letter to the US Congress in which we basically say that cryptocurrencies are a complete and utter disaster and ask Congress to regulate this area. The content of this letter is nothing unusual and matches what I was writing about blockchain in 2019. In response, Matthew Green wrote – not really a rebuttal, but a “general response to some of the false objections most common […]that people are raising against public blockchain systems.” He makes several general points:

• Current proof-of-work blockchains like Bitcoin are terrible for the environment. But there are other methods like proof of stake which are not.
• A blockchain is a tamper-proof logbook that makes it impossible to undo certain transactions. But that doesn’t mean there can’t be a governance system on the blockchain that allows reverse transactions.
• Bitcoin is not scalable and the fees are too high. But that’s not something inherent in blockchain technology – Bitcoin just made a bunch of bad design choices.
• Blockchain systems can offer some or a lot of privacy depending on how they are designed and implemented.

There is nothing on this list that I disagree with. However, we can safely say that Proof of Stake is actually an improvement. I’m skeptical of systems that enshrine a system of governance that “he who has the gold makes the rules”. And to the extent that any of these scaling solutions work, they undermine the decentralization claimed by blockchain.

Off topic

But I also think these defenses are largely off topic. For me, the problem is not that blockchain systems can be made a little less terrible than they are today. The problem is that they don’t do what their supporters claim they do. They are unsure of some very important points. They don’t replace trust with code; in fact, in many ways they are far less reliable than non-blockchain systems. Blockchains are not decentralized, and their inevitable centralization is pernicious because it is largely emergent and ill-defined. They still have trusted intermediaries, often with more power and less control than non-blockchain systems. They still need governance. You still need regulation. The problem with blockchain is that it doesn’t make any system better – and often makes things worse.

In our letter to the US Congress, we write: “Blockchain technology is inherently ill-suited for virtually any purpose currently presented as an actual or potential source of public benefit. From the beginning, this technology has been a solution in search of problem and has now clung to concepts such as financial inclusion and data transparency to justify its existence when much better solutions to these problems already exist.Despite over thirteen years of development, it presents many serious limitations and design flaws that rule out almost all applications dealing with public customer data and regulated financial transactions that are no improvement over existing non-blockchain solutions.”

Green responds, “‘Public blockchain’ technology enables a lot of stupid things: Today’s cryptocurrency systems can be for sale, corrupt, and over-promising. But the core technology isn’t useless at all. In fact, I think there are some pretty exciting things in this space, although most of them are further from reality than their followers would like to admit.” I haven’t seen any yet. Specifically, I can’t find a blockchain app whose value has anything to do with the blockchain part that wouldn’t be more secure, more reliable, and just plain better if you removed the blockchain part. I claim no one ever said, “I have a problem. Listen, blockchain is a good solution.” In each case, the brief was, “I have a blockchain. Look, there’s a problem I can use it for.” And in neither case did it actually help.

Just why?

Can anyone show me an application where blockchain is essential? That is, a problem that would have been insoluble without the blockchain and can now be solved with it. “Ransomware could not exist because criminals cannot use traditional financial networks and cash payments are not possible” does not count.

For example, Green complains that “credit card transaction fees have been similar or even increasing in the United States since the 1990s.” While this is true, it has little to do with technological inefficiencies or existing trust relationships in the industry. That’s because almost everyone who can and pays attention gets 1% back on their purchases: in the form of cash, frequent flyer miles or other affinity points. Green is right about how unfair that is. It is a regressive subsidy “because these fees are factored into the cost of most retail goods, hitting the working poor the hardest (who pay them even though they use cash )”. But this has nothing to do with the absence of blockchain, and solving this problem will not be facilitated by the introduction of a blockchain. It’s a regulatory issue. With few exceptions, credit card companies have successfully pressured merchants to charge the same prices whether someone pays with cash or with a credit card. Peer-to-peer payment systems like PayPal, Venmo, MPesa, and AliPay all bypass these high transaction fees, and none of them use blockchain.

This is my main argument: Blockchain does not solve any of the existing problems with financial systems (or any other system). These issues are inherently economic and political in nature and have nothing to do with technology. And, more importantly, technology cannot solve economic and political problems. And that’s a good thing, because adding blockchain introduces a whole new set of problems and makes all of these systems much worse.

Green writes: “I have no problem with the idea that lawmakers (smartly) legislate to regulate cryptocurrencies. , it is abundantly clear that our current regulatory framework is not up to the task.”

But what’s left when you leave out the madness and the scams?

This article first appeared on Bruce Schneier’s blog, Schneier on Security.

(vza)