Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 50 original podcasts with new episodes released every day.
The Myth of Bitcoin Disintermediation
I’m going to explain why the hype about both Bitcoin and blockchain is overblown, and then, at no extra charge, tell you what the real Next Big Thing is going to be in the world of computing.
But let me start with an admission against interest: I have a spotty track record as a prognosticator. I played with the internet before it was born, when it was something called NSFnet, and didn’t think it was going to be a big deal. I scoffed at the introduction of color displays on early personal computers, and thought moving video on a PC was pointless. (Certainly, I never intended to have use for such frills.)
On the other hand, I remember saying, at the end of the 1980s, that disk storage would soon be so inexpensive that lack of space would never again be an issue, and so we could stop devising needlessly cryptic schemes for compressing business data. And I knew, the moment I saw it, that the Apple Macintosh would forever change the way we talked to our machines, and they to us.
I’m a Luddite who occasionally gets it right.
Bitcoin
You’ve read that Bitcoin is a distributed, secure, immutable public transaction ledger with an integral currency. That’s all true. It is also, for almost everyone, irrelevant.
The salient feature of Bitcoin is that no one is in charge. Bitcoin transactions occur safely and securely yet without the involvement of any central authority nor the need for the buyer and seller to meet, to exchange personal information – even to know each other’s identity. Clearly, for the small percentage of the population for whom transaction anonymity is crucial, Bitcoin offers some advantages that are difficult to achieve by other means. For another few, those who send money to third-world countries with insecure banking systems for example, circumventing possibly-corrupt central authority is useful. For the rest of us, Bitcoin offers few, if any, benefits.
Where, exactly, does Bitcoin keep your money? What exactly is a distributed, decentralized public ledger anyway? If your Bitcoins are safe, yet no one is in charge, where are they and how are they safe?
The answer is that Bitcoin, with its blockchain, keeps your money everywhere and nowhere. There really is no such thing as a Bitcoin, merely a record of the transactions that have credited to you fractional portions of bitcoinage that you have not yet credited to someone else. That’s what the ledger is, a list of transactions. There isn’t even a Bitcoin balance, per se – a number somewhere of the total bitcoinage credited to you. Rather, there is that long list of transactions, some of which increased your Bitcoin worth, some of which decreased it, and most of which have nothing to do with you. Only by walking through the ledger can you construct a sum of your Bitcoin wealth (unless, like me, you already know it to be zero).
So there’s no Bitcoin balance, but there is that enormous and ever-growing ledger, the famous blockchain. And that is the part of Bitcoin that is everywhere, stored in its entirety on millions of computers, no one of which is any more authoritative, secure, special, or otherwise privileged than any of the others. Your Bitcoins are secure because they’re mixed in with everyone else’s, and they are stored in so many places that the odds of losing them all are infinitesimal.
Okay, so having millions of copies means that most of them won’t be lost or damaged, but what prevents people from changing those copies, from doctoring the ledger to take some of your Bitcoins and give them to someone else? After all, if everyone has a copy of the whole ledger, how do we know whose copy is accurate and whose copy has been changed?
That’s where the encryption comes in, the thing that makes Bitcoin a crypto-currency. Each copy of the blockchain, of the ledger, is full of codes – cryptographic hashes – that are calculated from the ledger itself, and that prevent the ledger from being changed, even a small amount, without making all of those calculated codes invalid. Anyone who tried to make a change to the ledger would soon be discovered, as each computer would quickly find that its own ledger codes differed from those in the manipulated ledger.
Without going into the numbingly boring details, suffice it to say that the only practical way to corrupt the ledger is to amass computing power equal to about half of the total computing power engaged globally in “mining” Bitcoins, and to dedicate it all to committing Bitcoin fraud by creating a false ledger more believable than the real one.
There are easier ways to make money.
So it’s secure from fraud and accidental loss, and it allows anonymity for those who want it. What’s not to like about Bitcoin and its admittedly clever blockchain technology?
For starters, it’s ludicrously inefficient. Bitcoin takes a transaction ledger that would fit on a typical, modern laptop’s disk drive and multiplies it millions of times over, distributing it around the planet in countless near-identical copies. It then uses computing horsepower that dwarfs the world’s total supercomputer capacity to add another handful of transactions to that ledger – an operation that, in a traditional, mediated financial system such as Paypal, would be orders of magnitude faster and orders of magnitude less expensive. Given its demands for disk storage, bandwidth consumption, and energy use, Bitcoin might have been invented to sell hardware and electric power.
Okay, so it’s inefficient. It’s still secure and anonymous. Who cares if my Bitcoin pizza purchase consumes as much power as a small developing nation if I don’t have to foot the bill?
That would be a fair point (assuming you’re an Earth-hating nihilist with a poorly developed sense of value) if Bitcoin were really secure and anonymous. But, for most people, it isn’t.
The reality is that, for most people, running Bitcoin software is a risky, inconvenient business. It requires that you download Bitcoin software from a trusted source; that you manage the safe storage of your Bitcoin information – your “Bitcoin wallet” – on your computer, as well as on removable storage media like a thumb drive or external disk; that you have sufficient storage space and bandwidth to download and process the entire blockchain; that your computer is powerful enough to handle the extra workload of all that hashing and transaction verification; and that you keep your anti-virus software up-to-date so that no one sneaks in and gets their hands on your “wallet” and steals your Bitcoins.
It’s work, and it takes a computer enthusiast’s level of interest, and some responsibility, to be a truly disintermediated Bitcoin node, a standalone peer in the Bitcoin blockchain universe.
Of course, instead of all that, you could do what most Bitcoin users do: store your Bitcoins online with a trusted Bitcoin service, one that manages all of those details for you. But, at that point, they have your Bitcoins and your passwords and your identity. They are your intermediary.
And you’re really just back to Paypal.
Oh, the Next Big Thing?
Augmented Reality. Seriously.
Published in Technology
Wow. This is one of the best synopses of Bitcoin I can recall reading. Nice work!
Excellent post, Henry. I agree with Mark: wow! A fine explanation.
I understand most of the words you used and I still don’t get how crypto currencies work.
I’ve heard it said that the currency behind Bitcoin is just electricity.
Nice summary.
The blockchain is getting bigger and bigger all the time (the last time I checked, it was 12 GB, I believe) and it probably already has illegal content in it, like child porn. That sounds like a safe thing to have multiple copies of. Not.
And I think, simply by maintaining a copy of the blockchain and its transactions, the CIA has already been able to identify a few nefarious actors who believed in the “it’s anonymous!” charade of Bitcoin.
Because, of course, since you can only buy a few things directly with Bitcoin, you have to convert it to actual currency for it to have value. Which means, somewhere, somehow, the US Government is going to be aware of it. And if you think they aren’t tracking it, boy, do you have another think coming.
I’ve come not to explain Bitcoin, but to bury it.
Which begs the following question: How useful is bitcoin if you live in an area that has regular prolonged power outages?
Did any one else have to look up disintermediation?
Reveling in my ignorance: Are those not one but two prefixes?
Bitcoin can’t ban you for having the wrong political opinion.
Good question. Fortunately I’ll never have to put it to the test. And not because prolonged power outages aren’t an issue around here.
This is great. You have no idea how many dreams I’ve helped kill because some local Eco Devo guy is convinced that bitcoin mining is the key to future prosperity. All they need is have the local rate payers subsidize the electricity, and some help from the state to set up the infrastructure. They have no idea what they are “investing” in, or how precisely the scheme will result in new jobs or tax revenue (besides the revenue they promised to forego in order to land the project). But it vaguely techy, so it must be pursued.
Nice write-up and I think you have dispelled all those features. Your Bitcoin is only safe from accidental loss as long as you can protect your private key. Lose the key, have a drive crash, lose your laptop,… and your Bitcoin are gone.
As stated previously, anonymity is myth. The ledger has a your transactions and if you make enough transactions, they will be traceable to you.
And for security, a giant hack depends on bad guys never having >50% of all the verifying compute power. Reasonable if there was only 1 crytocurrency, but there are 1000’s of them. All the small ones are vulnerable to a brute force attack. Some bad guy (with a lot of compute power) could hijack the ledger. It is probably detectable later, but can the ledger be unwound? By what mechanism? Would that destroy the “trust” in that coin and thus *all* the value? (think Goldfinger)
Block chain is an interesting idea for exchanging records where there is no centralized clearing house. We don’t need that for money.
ps. I wish disk space was too cheap to measure and augmented reality will happen.
Augmented reality?
Aka fake reality.
Ummm . . . . not for me, thank you.
This is a really helpful post. Why is the “value” of bitcoin and other crypto currencies so volatile?
Fixed quantity, fluctuating demand.
Nice description, Henry.
I’ve always thought that Bitcoin is the fantasy of libertarians who forgot the first maxim of libertarianism: there are no solutions, only trade-offs. And when you push the “solution” side of the equation toward an absolute (such as absolute anonymity), you also push the trade-offs toward the absolute (like the fact that everyone’s entire transaction accounts are public knowledge).
The promise of “anonymity” that Bitcoin proponents loved to tout seems so ridiculous that I have to wonder how such smart people could be so foolish.
The problem with “anonymous” transactions is that typically (i.e. every time), a transaction involves a good or service being exchanged for the currency. And it’s a lot more difficult to keep that part of the deal anonymous. If I order something from Amazon, how I am supposed to actually receive the product I bought without identifying myself? The “delivering the goods/services purchased” part of the equation never seems to get mentioned, but that part is much more difficult to render anonymous than some clever computer code.
And of course, since all transaction details going back to day 0 are public, once I tip my identity to Amazon they instantly also know my financial history. Great.
Sorry, but as soon as I see the word bitcoin or anything like it, my eyes glaze over and I scroll away. I made an exception for this comment, obviously.
Q. What is the solution to the problem of evil?
A. Blockchain!
I might have read that somewhere. Slightly paraphrased.
Yup.
(I agree with everything you state about bitcoin, too.)
Worth noting that there are a lot of alternative cryptocurrencies attempting to improve this in various ways, such as using proof-of-stake algorithms. It’s possible that we will one day look back on Bitcoin the way we recall using dial-up modems to connect to Compuserve, as a primitive version of something that became a game-changer once the underlying technology was refined.
No, that would be VR, virtual reality. Augmented reality is basically a visual overlay on the real world, providing additional information and ways to interact with what you are looking at.
Precisely. PayPal is clearly a more efficient and convenient way to pay online than BitCoin, provided you trust the Federal Reserve and large Silicon Valley corporations to be fair and impartial intermediaries.
If you don’t trust them, well, now you see why cryptocurrencies are so popular among libertarians.
I used to do that!
I had Prodigy for a while, but canceled it b/c the local BBS’s were more fun — and free.
As a counterpoint, consider reading George Gilder’s Life After Google: The Fall of Big Data and the Rise of the Blockchain Economy. For one thing, there’s more to the blockchain that Bitcoin. For another, the cloud, big data, and Google’s model of ‘free’ services is doomed in the long term.
If so, Gilder’s record is considerably better. For example, here’s an excerpt from his 1994 book, Life After Television: The Coming Transformation of Media and American Life.
Given that this was written well over a decade before the introduction of the iPhone, I’d say George did pretty well. Word on the street is that Steve Jobs bought copies of Life After Television and gave them to his execs.
Sort of like the main stream media, then?
Imagine just one application of AR: a HUD (heads-up display) on your automobile’s windshield.
Is a street sign unreadable because visibility is blocked by heavy rain or snow, by stupidly placed foliage, by an 18-wheeler… or simply because there is no sign? No problem. Your HUD can display the street name with perfect clarity, adjusted for light or darkness, at the text size you prefer, for as long as you prefer. Designate a particular road along your journey for early notification.
Speed traps are history. No matter how rarely, suddenly, or strangely speed limits are posted, the current speed limit is right there by your dashboard. Did you miss a reduction? A color-coded outline — from yellow to red — at the edge of the road or lane can signal how quickly you need to slow down. But only if you want that feature enabled.
Are lanes poorly marked or jumbled by construction? The HUD can highlight them for you. It can also mark potholes or debris with red alerts.
Are you driving to a location for the first time? Not only can the HUD help you along the way, but it can outline the lot or building you are looking for when you near it. Whether hidden by trees, packed inside a busy plaza, or set among a dozen other cookie-cutter homes, it’s a cinch to find with glowing corners as seen through your windshield and windows.
Pedestrians, deer, idiot children and their forgotten toys? Easy to spot in time.
Are your reflexes not what they used to be? Sure, that new “smart” car could apply the brake automatically in a pinch. But maybe what you need is better information, not less control. A HUD can display all sorts of information, like exactly how quickly you need to brake around a turn or when another vehicle is speeding closer behind you. A HUD means never needing to take your eyes off the road for information. That information can be relayed in the most discreet ways necessary, or as bold as you like it, or with elegant flair.
Ideally, augmented reality (AR) applied to automobiles would be just as customizable as the interface of a cellphone app or a video game. But reality is seldom as neat as dreams.
DR, I have read Gilder’s After Google. I have enormous respect for Gilder and have always enjoyed his work, but I found this one wanting. I don’t agree with a few key assertions he makes, and I thought his focus on the complexity of password management was facile: yes, blockchain technology dispenses with a central authority, but at an enormous cost.
I initially sat down to write a brief, high-level introduction to what Bitcoin and blockchain actually are, how they’re implemented, where the data reside, things I’d hoped Gilder would address in his book and was disappointed to find absent. I spent some time reading the C++ code of Bitcoin Core, the reference implementation of a Bitcoin node (which is nicely written, by the way), and was struck by the amount of effort that has been invested in technical maintenance of the blockchain, and in the cost — in terms of time, resources, and responsibility — that Bitcoin imposes on its users. It was that observation that prompted this post.
There are interesting uses for smart contracts, and certainly application for the kind of decentralized autonomy offered by blockchain technology — and even more so for the modified blockchains used (eventually, perhaps) internally within organizations, with their limited transparency and their security options.
But generating money using Bitcoin seems a lot like converting corn to ethanol: it’s an expensive process, likely performed at a net loss, and with unpleasant externalities poorly captured and apportioned.
In short, I think it’s a niche technology that is being oversold, and Gilder, whom I often find persuasive, failed to persuade me otherwise.