Is Bitcoin a Failure?
by Ethan Glover, Sun, Sep 10, 2017 - (Edited) Wed, Jan 10, 2018
The following is a summary and analysis of a graduate thesis paper written by Michael Russo. It's titled, "Satoshi's Broken Promise: Conflicting Rhetorics In The bitcoin Ecosystem." Russo calls bitcoin, "...yet another digital artifact promising revolution while at the same time instituting its own brand of control." He claims bitcoin fails in its principles of decentralization, bitcoin as property, and anonymity. That being said, the following is highly critical of bitcoin, but not a dismissal of the technology. I only request that you keep an open mind in considering the points below, as I believe they are worth the attention.
Bitcoin was, and is, the response to a financial disaster, as indicated by Satoshi's referencing the following headline from the Financial Times: "Chancellor on brink of second bailout for banks" ("Genesis Block"). -Russo
I once argued that bitcoin is not and should not be held to libertarian principles. If we are to accept it as an open technology, as a true alternative to the current banking system, we need to accept creative uses of the blockchain that are both apolitical, and pro-establishment. Limiting the currency to a specific ideal and infighting about its adoption and use can only stagnate its rise. However, Russo makes a compelling argument for the fact that as bitcoin gains popularity, it becomes more vulnerable.
Can You Keep It?
In the 1990's during the rise of the internet, people thought the web would finally be a place of unregulated freedom. It was a place away from government control, a place for liberty. But regulation started to appear in the late 90's, branching from independent institutions like the W3C. The dream of a free web started to fade. Although the internet was and still is a great tool, it does not live up to its promise of a liberty paradise.
While the internet had great potential for unregulated interaction, its major flaw is that it's built by people. In his book 'Code,' Lawrence Lessig argues, "Code will be a central tool in this analysis. It will present the greatest threat to both liberal and libertarian ideals, as well as their greatest promise. We can build, or architect, or code cyberspace to protect values that we believe are fundamental. Or we can build, or architect, or code cyberspace to allow those values to disappear." If the internet is the bastion of freedom, that freedom can easily be taken away so long as the code can be changed.
Lessig's point echoes that of Benjamin Franklin regarding the newly created "more free" United States. Franklin was asked when he was leaving the constitutional convention of 1787, "Well, Doctor, what have we got - a Republic or a Monarchy?" Franklin replied, "A Republic, if you can keep it." The people were tasked to maintain the ideals of the constitution, and they failed. Just as I believe bitcoin will fail, and as Russo believes bitcoin has already failed.
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What Can The Government Do?
Through the US Department of Defense and the Domain Name System protocol, the government is able to completely shut down websites that contain information or content disagreeable to them. If they are unable to shut down a website, they can suspend it at the registrar level and prevent all user access. That's what happened to the Liberty Reserve dollar in 2013, which promptly led to its destruction. Bitcoin, of course, has stronger defenses than the Liberty Reserve, but we'll get back to that.
According to Coindesk author Joon Jan Wong, the United States accounts for over 50% of all the invested capital in bitcoin. Blockchain.info shows that more than a third of all bitcoin nodes exist in the United States. (Archived link.) If the United States government made a serious effort to destroy bitcoin, they would have a significant impact on the health of bitcoin all over the world.
If a user stores their bitcoin on a US based server, such as with Coinbase, they are vulnerable to US law. The US may currently consider bitcoin legal, but that could change at any time. As an example of the impact governments can have on bitcoin, we can consider Russia. The Russian government took down multiple bitcoin related websites, those takedowns significantly harmed the health of information and availability of the technology in Russia.
Obviously, the blockchain does not require DNS. It only requires that the blockchain file can be transferred in some manner. It's stored on a peer to peer level and can not be blocked or deleted on a whim. The government could make it illegal to download and store the blockchain. Maybe on the grounds that people have put links to child pornography on it. Illegalizing bitcoin in that manner would only help drive the bitcoin economy further underground. It would indeed become a tool mostly for criminals. Bitcoin itself would most likely never go away, but its popularity could be significantly damaged by such legal action.
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While the government is the largest external enemy to bitcoin, it is not its largest enemy. It's biggest weaknesses are internal, and related to the people who use it. A few elite coders control bitcoin and its direction as a board. That existence of a few people trying to maintain the original ideals of Satoshi Nakamoto is bitcoins Achilles heel. Just as the constitutions greatest weakness was the people's ability to maintain the ideals.
Bitcoin at its core requires a communal consensus. All users must agree to the ledger through a verification process. Over time, it becomes more expensive to participate in this process. Casual users are becoming more limited in their usage of bitcoin because of that "democratic" process of verification. The blockchain is currently over 65GB. Computing blocks for monetary rewards has become completely out of the question for individual users, doing so requires massive server farms. As bitcoin grows, the groups of organizations that have the power to find new blocks become smaller. With that, there is a greater risk that they can refuse to validate transactions, raise fees, and slow the bitcoin economy. Former bitcoin developer Mike Hearn explains all of this far better than I can. [Must read.] To summarize Hearns points, the network is already controlled by a few elites who have out-competed the users bitcoin was built for.
The size of a block is currently, and arbitrarily set at 1MB in size. But with a large amount of transactions, that small size has caused data congestion. Downloading larger single files rather than many smaller files could get rid of that congestion. Despite the fact that the majority of bitcoin users seem to want to increase the size of a block, a small minority of miners in China have refused to do so. (See Hearn's article linked above.) When representatives from Coinbase expressed a preference to increase the block size on the official bitcoin forums, the message was very literally deleted because Coinbase "picked the wrong side." They were even banned from the online community for making the suggestion. In fact, it is commonplace for people to be banned from the BitcoinTalk forums for suggesting changes that the developers find "wrong," or for talking about forking the code to make something new. Bitcoin's open-source structure, which still requires lead developer approval for all changes, has not, in any way, succeeded at removing authority from the currency.
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When Cornell University released their theory of "selfish mining" as a weakness to bitcoins infrastructure, it was dismissed as a practical impossibility. [Must read.] But as casual users keep moving to lite software, without downloading the whole blockchain, that theory becomes more practical over time. Users who don't want to, or can not download and support the entire blockchain system, are handing over their power to a network of elites who can. It is they who represent their transactions by publishing them to the blockchain.
While it once seemed impossible, there is a conceivable time in the future that a single miner could hold 51% control of the network and use the power to double-spend, reverse transactions, and devalue the currency. Bitcoin fans defend the 51% problem by saying no one would attack the network in this way because they would be attacking their own currency and its value.
Kevin Dowd of Durham University replied to that by saying,
Arguments to the effect that no one would engage in behavior that threatened the system, because everyone has a stake in it, are based on simplistic assumptions about the self-interests of the parties concerned ... This statement will ... ultimately prove to be bitcoin's death knell. Bitcoin, the ultimate system designed to avoid the need for trust, is now reduced to relying on the trust in the dominant mining pool not to attack it.
Mt. Gox represents the problem with casual users moving towards a centralized agency to store and manage bitcoin when they can't, or are unwilling to do so. When users lost money on the Mt. Gox crash, they had no choice but to appeal to government authorities in order to try and get it back. That third party system of protection does not currently exist for bitcoin. Which makes even fiat a safer option in the long run.
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The Question of Regulation
In a Financial Cryptography & Data Security study, it was found that 45% of bitcoin exchanges like Mt. Gox go bankrupt and disappear. Of eleven exchanges that researchers looked at, five of them did not reimburse customers, six claim to have done so, but provide no evidence.
This record is why companies like Coinbase and Bitpay sought government regulation. So they could offer transaction insurance and penetrate a more mainstream user base. However, that also puts their users under the view of government regulation, strictly controlled by the law and the DNS structure mentioned earlier.
The idea that bitcoin is going to replace the banking institutions and bring down the government is naive. At best, it's an early, still growing version of the very institutions it claims it will destroy. At worst, it's another addition to the current system. Users could keep creating "alt-coins," but the foundational technology of the blockchain still remains. And unfortunately, that technology is flawed. In order to make sure instant transactions remain possible, despite the block size problem and other problems, companies like Coinbase avoid using the blockchain altogether. They keep transactions local and trade directly, or in chunks. Coinbase has already had to fix a problem with one of bitcoin's major features.
Michael Russo notes,
It would seem that anarcho-libertarian bitcoin users are at an impasse. On the one hand, they might run a node on a home computer, doing little to protect their property from the manipulations of elite mining farms. On the other hand, they can relinquish their property rights to hierarchically structured, corporate clearing houses like Coinbase, who promise both protection and convenience at the cost of economic autonomy. In either case, in the current ecosystem, the claim that bitcoin is property is a misleading ideal. Casual bitcoin users are at risk of being subjected to the same unfair monetary practices of the coercive social institutions they seek to circumvent.
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Bitcoin also fails by way of privacy. Not just because the casual user who is driven towards Coinbase is required to give up their identity, but because 40% of bitcoin users can be identified with very basic investigative techniques. Even if those users create a new address for every transaction. Yes, bitcoin offers encryption, and if people user other privacy methods in just the right way, all the time, they can remain anonymous.
The practicality of people being able to do that, especially the average person and casual user who merely wishes to use the currency to make trades, is basically nil. With all the anonymizing software, VPN tunnels, and public WiFi usage, you eventually have to connect to the network and make your entire transaction history and its patterns visible. Ross Ulbricht fell to this major security flaw. The idea of a public ledger on an anonymous currency is contradictory. You can not have an open economy and an anonymous one too. Saying that bitcoin is anonymous, if you use encryption correctly all the time, is as impractical as communists saying financial incentive isn't an issue if everyone just stopped caring about financial incentive.
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Tools Don't Have Principles, Users Do
At the end of the day, bitcoin claims to be anti-establishment but houses bureaucracy and control from elites. It promises P2P cash with no third party trust agents, but users face a choice between trusting a minority of users who hold power over the network, or placing trust in regulated companies like Coinbase and Bitpay. Bitcoin claims anonymity but transactions are easily traceable through social engineering unless users use a great deal of effort and resources through multiple third-party apps that claim to make them anonymous. A public transaction is always public, and still traceable.
Russo's glaring point remains, Bitcoin has created a class hierarchy divided by computational power. The cryptocurrency as is can not deliver on the promises of decentralization, anonymity, or full control over property. And I agree with him.
No tool in the world can usher in a new set of principles and destroy the structures and traditions that others have used for centuries. Bitcoin offers a new idea of competition in money. With competition in third-party financial insurance and protection, bitcoin could be better. But with all facts considered, I see bitcoin only as a fascinating first step towards monetary liberty. Neither I or Russo aim to insult or degrade its ideals and current position and uses as a tool. By recognizing that bitcoin itself has made no difference at all, but instead gave people the confidence and means to interact outside of government control, we can recognize that bitcoins biggest flaw, people, is also its greatest strength. Whatever means you use to avoid or fight against the state is a personal choice. The tools you use aren't doing the work or making the difference, you are. Just remember that nothing you do makes you immune to government interference, fraud, theft, or monetary instability.
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