Is a Great Blockchain Swindle Afoot?


Blockchain has been called “The Foundation of the Fourth Industrial Revolution.” Umpteen conferences are now being devoted to explaining it. Hundreds of cottage firms have emerged claiming blockchain expertise. Enterprises, hearing that Bitcoin will compete with their payment or other systems have been spending millions looking into how they may have to pivot operations to survive.

Thousands of tech firms have raised impressive money doing ICOs (Initial Coin Offerings) proposing projects that claim they will scale or speed up blockchains, enable direct peer-to-peer services, or “incentivize” or motivate participants by getting them involved with loyalty tokens similar to Airmiles, tokens that might one day appreciate wildly on exchanges.

If blockchains are going everywhere, we are told, we will need these tokens to participate in the new world.

I was one of the people hoping blockchains would penetrate and streamline every bureaucracy in society. I drank the coolaid. Parroting many things I’d read and heard at countless meet ups and conferences, I even told a skeptical official from the Canadian Government at a meeting last March that blockchain would pervade many, many systems.

I believe I was wrong.

Automation will streamline many operations, but it now seems very likely to me that it will not necessarily be blockchain because blockchain is not the right system with which to automate a business or institution that relies, perhaps permanently, on a top-down command structure.

The problem lies in how Bitcoin, a revolutionary payment system that can operate without central oversight, is not really understood.

That the Bitcoin-style blockchain is not well understood is entirely natural because Bitcoin was not only technologically, but was also socially, transformative.

First let’s review how Bitcoin, the invention that brought this discussion, works.

Bitcoin: “A Peer-to-Peer Electronic Cash System”*

When Bitcoin first appeared, it was technologically revolutionary because it solved a decades old problem in distributed computing called “The Byzantine General’s Problem,” also known as the problem of trust in a distributed system.

Let’s say a group of Generals and their troops have surrounded a walled city and are about to attack. With no higher authority presiding over each General’s conduct, how can the General’s trust that the others are not traitors about to sabotage the siege?

Normally, a distributed database needs a central administrator to moderate affairs in the system. For example, if I want to send you a thousand dollars, the normal banking database between us will check my balance before sending you the money. The centralized database (presided over by an administrator) makes sure I don’t cheat and send money I don’t have.

Bitcoin replaced this central database by distributing it to thousands of participants connected by the public Internet and using mathematics or cryptography to secure the data being transmitted.

All you had to do to join the Bitcoin network was download some free software onto a fairly strong computer and away you go,.

Rather than ONE database in a single data centre, a big pool of data at Equinox, say, with “a single point of failure” (the fallible administrator, who can be bribed, tricked or coerced into giving up passwords to access the data, or who may directly rip off the system), all the data in the Bitcoin system is processed and is INDIVIDUALLY ENCRYPTED by thousands of machines across the world.

If one machine or the Internet in an entire country goes down, the rest of the system keeps on chugging, and NONE of the data is compromised.

If someone shakes a Bitcoiner down for their private keys or passwords that allow them to access their bitcoins, the keys will only allow access to that individual’s Bitcoin data. None of the other data in the network can be unlocked.

It is the distribution of the network and the intense encryption of all the data that makes an insane hack like the one at Equifax on over a hundred million people impossible on Bitcoin.

How data is secured on the Bitcoin network

If I send a Bitcoin to you, my Bitcoin address, your Bitcoin address and the amount of bitcoins sent are scrambled or hashed (by a cryptographic algorithm) into a long string of inscrutable characters called “a hash.”

Our neighbor Bill then sends a Bitcoin to Francis, and their two addresses and the transaction details are also scrambled into a long string of characters called a hash, and that string of characters (hash) is scrambled again with the hash from transaction you and I made.

Another transaction flows in. Jeanine sent Pierre 12 Bitcoins. The transaction information is hashed or scrambled again with the combined hash of all the preceding hashed transactions. All this transaction data flows into the block of data being built by all the computers in the Bitcoin network.

Because of how densely all the transactions are encrypted, I conceive of a “block” of data (in the case of Bitcoin, the blocks in the “blockchain” are one megabyte in size) is almost like a cryptographically hard ‘onion.’

Reverse engineering all that “hashing” or dense, layered encryption is prohibitively expensive. It is much more lucrative to process or “mine” blocks in the Bitcoin network for a chance of winning bitcoins than it would be to try to mathematically reverse all the layered transaction cryptography.

Once the blocks have been filled with encrypted data (more or less) the computers in the Bitcoin network now compete to guess a unique number set by the network (a process that might be likened to trying guess all the gum balls in a jar).

The unique number they seek is called a ‘nonce.’

The computer that guesses the nonce first is awarded 12.5 bitcoins and the entire network moves on to filling the next block. That’s thousands of computers working in sync to process data.

Because of the dense encrypting and gaming to discover the nonce and get the reward, the Bitcoin network is notoriously slow compared with Visa and MasterCard (although it can outrun Swift).

The process of the entire network encrypting all the data and competing to guess the nonce consumes a lot time and of electrical energy. This is partly why a Bitcoin-style blockchain is not the best solution for enterprises looking to secure their data and speed processes.

Bitcoin maximalists generally believe almost that it is precisely the expense of processing the network that also makes it too expensive to attack. A less expensively-secured system, they say, is a less secure system period.

The energy consumption in Bitcoin also aids in the perception, perhaps valid, that the processes of the network imbue Bitcoins themselves with real value. The dense encrypting and energy crunching used to make Bitcoin may are sometimes likened to geological processes that produce gold.

Bitcoin maximalists also say that a unique, global and censorship-resistant payment system for globalized humans that cannot be controlled by any single jurisdiction or authority is a valuable system that will motivate creation of cheaper and greener electricity systems.

Bitcoin, by competing with them, will also force banking and other institutions to give better service.

OK, so what what does this have to do with enterprise blockchain?

It has everything to do with it. Properly understanding blockchains could save you and your firm thousands of money by helping you better direct your inquiries.

The Bitcoin system is governed by network consensus. A majority of the whole network (users, miners, developers, retailers) must agree on changes to the network.

No boss can command an upgrade or shut down the system.

The extraordinary Bitcoin writer and speaker Andreas Antonopoulos gave a helpful speech on Bitcoin governance as it relates to “forks” or splits in blockchains in the video below.

He uses the analogy of a “community kitchen” or “decentralized restaurant…with no chef and no managers” (at about 11:30).

A lot of “experts” are going around touting the enterprise panacea of blockchain.

The problem is that a lot of these people are salespeople and consultants. I don’t believe that they are lying, but many seem to have missed the meaning of the important social reorganization that Bitcoin permitted: decentralization and disintermediation. Axing the boss or middleman is not necessarily needed or suitable in every organization.

We can go around shouting “Off with their heads and on with the blockchain,” but we all saw how the French aristocracratic governance was really only reformed by parliamentary entity.

I support Bitcoin because it is an alternative that competes with banks and causes them to have to function better because of its presence. I do not believe or wish that Bitcoin will destroy those institutions. It simply gives humanity a choice that they needed and banks a competitor that they needed.

Very few businesses today operate according to collective governance: I can think of a few food co-ops and farms in the most liberal parts of North America doing this. For the most part, businesses, especially large corporations, operate using a clearly defined hierarchical top-down command structure.

Corruption can and does enter these institutions and many are in need of reform.

But the acute issue that Bitcoin maximalists keep sounding the alarm on regarding institutional blockchain is that institutions may be wasting money trying to fit a square peg blockchain into a round institutional hole, an encrypted, decentralized blockchain into an organization with a top down structure.

Wherever you have a boss with absolute authority, that boss can ignore, override or overwrite information in the blockchain if they want. According to Bitcoin maximalists, The presence of boss negates the usefulness of blockchain 

You do need better data security and more efficiency. You might need some kind of encrypted database, but you may not need a blockchain. Be careful how much R&D you devote to it.

Bitcoin is so far a very basic and simple system of send and receive because complex systems cry out for bosses. Imagine an orchestra with no conductor. That is why, say the Bitcoin maximalists, Ethereum and Ripple and all the other coins with a central team presiding are not really blockchains and are not really decentralized. They “printed money” for private and not really public systems.

Bitcoin Maximalist and former Wall Street risk analyst Tone Vays spoke about the uselessnesses of a peer-to-peer rideshare blockchain business attempting to disrupt Uber’s market in a Trading Bitcoin lecture he gave on Youtube.

“If centralized ridesharing is legal, decentralizing ridesharing is plain old stupid. However, where ridesharing is illegal decentralizing ridesharing becomes necessary…Just think about it for a second. Decentralization is a tool that prevents censorship. If you don’t have censorship, you don’t need it. No on is going to use it. It’s going to be too expensive.”

“Also, you are not going to be able to create a decentralized rideshare. It’s impossible. And here’s are you gonna fix bugs? It’s a computer program. There is always bugs. When you have a decentralized ridesharing, who’s gonna fix a problem? And I know you all think that the community is gonna fix the problem, but the community is not gonna fix the problem. Somebody has to be financially motivated to fix the problem. Either you need a centralized company responsible for a decentralized application- which again is dumb- or you’re printing your own money.”

“NowBitcoin actually prints its own money, but it prints it in a decentralized way. You cannot replicate that…becaus you need to profit from your own money making…and then people like me and Jimmy Song will argue that your program is not actually decentralized.”

(At about 58 mins)

Top-down command structures can lead to abuses of power and inefficiencies related to those, but anyone who has been part of a collective that uses consensus-based decision-making like a food co-op knows how slow (time-consuming and expensive) those human systems can be.

Decentralized blockchains systems are the same. The innovation that was Bitcoin cannot easily be adapted in the private sector.

Indeed, not understanding blockchains might threaten your business, but not necessarily because you need one.

*Special thanks to Elena Sinelnikova of the Toronto Group CryptoChicks, who helped me understand the workings of Bitcoin with her Powerpoint show, “Blockchain 101.”

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