Attack of the 50 Foot Blockchain

by David Gerard

  They are so keen on their sci-fi TV show idea that they named their blockchain startup after it. It appears that they are in fact Singularitarians — fans of Ray Kurzweil’s non-musical-instrument ideas, like an artificial intelligence taking over the world this century — who came up with a way to propagandise their beliefs in Ethereum and the Singularity (and crank pseudoeconomics) through the medium of science fiction television, and decided a crypto asset offering was clearly the way to collect money to make the TV show to evangelise their cult.432

  Summary

  Blockchains won’t solve your bad recording or publishing deal. They can’t scale to collecting your money from the main channels, let alone other countries or obscure sources. They won’t extract money from Spotify or YouTube they don’t have – Spotify’s haemorrhaging red ink as it is.433 Just assume the major labels will hand the whole industry over to Apple a second time.

  If you want to clean up industry metadata, blockchains aren’t going to do that for you. What will is some way to clean it up that doesn’t involve creating a new organisation you can’t trust. Something along the lines of MTFLabs’ incremental approach is probably the only one with a chance.

  Conclusion

  I started this book in October 2016 and finished the first draft in December. Had I tried to say then what was coming next in cryptos, there is no way I would have foreseen the six months since.

  I would have predicted that Bitcoin would continue to be clogged and barely usable for real purchases, licit or illicit. I’d have thought Ethereum would keep stumbling along, with no real application being found for smart contracts. I’d have forecast “Blockchain” slowly falling out of favour as a business buzzword as the returns failed to manifest.

  I would not have predicted a second bubble in Bitcoin, with tabloid newspaper finance sections enthusing about the fabulous potential of cryptocurrencies to normal people who have no business going within a mile of such horrifyingly risky investments. I would not have anticipated a matching bubble in Ethereum, and especially not in utterly substanceless ICO tokens, with no basis in anything whatsoever, being traded like hotcakes because they’re the exciting new item and for no other reason. At least tulips are pretty.

  Bitcoin itself, as an ideology fundamentally at odds with reality based on a technology that reached its limits in 2015, will keep lurching from crisis to crisis. Internecine conflicts will remain the order of the day, with partisans wielding DDOS attacks, death threats and the deployment of Craig Wright as some sort of expert. The price will rise and fall dizzyingly, though realising it as actual money will still be strangely problematic; exchanges will continue to be hacked on a monthly basis. People will continue to lament “if only I’d bought in 2011, I’d be rich!” – though if they had bought in 2011, they’d have lost it in Mt. Gox. Cooler heads will wonder just how much longer this can be kept going.

  The one constant is: new ideas in finance bring new starry-eyed naïfs, and new predators. New technologies will keep being used as an excuse to put an extra layer of flim-flam over old scams, in an ongoing historical reenactment of the reasons for each and every financial regulation.

  There will be more promises of free riches in the future, and more asset bubbles. All of this will happen again. The hook may be different, but wishful thinking and scammers to prey on it are eternal.

  Everything to do with cryptocurrencies and blockchains is the domain of fast-talking conmen. If anyone tries to sell you on either, kick them in the nuts and run.

  Further reading

  Memoirs of Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay was first published in 1841 and remains the best book available on economic bubble thinking.434

  Nathaniel Popper’s book Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money is an excellent history of Bitcoin and the players to 2014.

  David Golumbia’s The Politics of Bitcoin: Software as Right-Wing Extremism is a short but very useful academic survey that traces just where the Bitcoin cluster of crank political and economic ideas sprang from.

  Izabella Kaminska regularly discusses Bitcoin and blockchains (and “Blockchain”) in the Financial Times, both in the main paper and her blog at FT Alphaville. I’ve found her work a powerful and effective antidote to business bafflegab Blockchain hype in real-world usage. Matt Levine does similarly good work at Bloomberg.

  The RationalWiki article on Bitcoin has come along nicely since 2011. Unlike Wikipedia, we’re not constrained from calling a spade a bloody shovel. In the US, we’re tax deductible as a 501(c)3 educational charity! Though not accepting Bitcoin at this time.

  Glossary

  Address: a long number which you can send Bitcoins to and from. Can only have coins sent from it using the matching key. Together they make a key pair in public key cryptography.

  Anarcho-capitalism: the ideology that a complete absence of government is essential, and property rights, which are paramount, will still function without it. Bitcoin ideology shares a lot of its ideas and jargon.

  ASIC: Application-Specific Integrated Circuit – a silicon chip to do a single specific job. In mining, the only power-efficient way to mine bitcoins.

  Bitcoin: The greatest invention in the history of humanity.

  Blockchain: The other greatest invention in the history of humanity.

  BTC: the usual abbreviation for Bitcoin as a currency unit. Less common abbreviation: XBT.

  Bubble: in economics, when an asset is hugely popular for no discernible reason. The key factor is investors buying in the hope of selling to later investors. Bubbles always pop. Bitcoin has had two major bubbles, in 2013 and 2017.

  Cold wallet: Bitcoin private keys kept offline. Could be wallet software on a computer that’s not online, could be keys on a USB stick, could be printed out on paper.

  Consensus model: How you choose who gets to write the next block. Bitcoin uses Proof of Work, which is hugely wasteful.

  Craig Wright: Not Satoshi Nakamoto.

  Crypto: in this context, an abbreviation for cryptocurrency or crypto asset. In non-cryptocurrency use, the term is short for “cryptography.”

  Crypto asset: the general class of cryptographic things that aren’t necessarily cryptocurrency, but can be traded like it, e.g. tokens in a smart contract running on Ethereum.

  Cryptocurrency: Bitcoin and its various copies.

  Cypherpunks: a mailing list for cryptography enthusiasts against the forces of oppression, i.e. any government anywhere. Heavy on the anarcho-capitalism. Most of the ideas that became Bitcoin started here.

  DAO: see The DAO.

  Dapp: a “distributed application,” a fancy name for a smart contract in Ethereum.

  Darknet: sites only available via Tor, where you can buy illegal goods and services using a cryptocurrency.

  Distributed ledger technology: a euphemism for blockchain.

  DRM: Digital Rights Management, an entertainment industry term for “that song I just bought and downloaded won’t play.” Music industry blockchain applications frequently involve a version of it, whether by name or not.

  Ethereum: a cryptocurrency whose value proposition is smart contracts. Arguably the first popular smart contract platform.

  Exchange: A site to buy or sell cryptos for actual money. Many offer fancy gambling trading facilities. May not get hacked this month.

  Fiat: Actual proper money that normal people buy things with. Only Bitcoiners ever use this term to when talking about actual money in casual conversation.

  FPGA: Field-Programmable Gate Array – a silicon chip you can program to perform your function. In mining, the step between graphics cards and ASICs.

  Front-running: in stock markets, for a broker or exchange to act on insider information. The crypto version is to take a particularly good trade and execute it yourself, before executing the customer’s order. This is illegal on conventional regulated security
exchanges.

  Gold standard: an economy with a known and limited money supply. Bitcoin aims to implement this digitally and hark back to the days countries backed their currency with actual piles of gold.

  GPU: Graphics Processing Unit, the bit of a computer graphics card that computes video game pixels very fast and can also compute hashes very fast. Used to be the favoured mining method for Bitcoin before being superseded by FPGAs and ASICs; remains the favoured mining method for Ethereum.

  Hal Finney: Cypherpunks mailing list participant and Bitcoin’s first beta tester. Died 2014. Some people think he was Satoshi Nakamoto.

  Hash: a quickly-computed check value on a chunk of data. If two chunks of data have the same hash, it’s usual to assume they are identical. A hash is strong if it’s all but impossible to guess the data from its hash, or to construct a chunk of data that has the same hash as another chunk of data. Bitcoin mining relies on this.

  Hashpower: How much computing power you can apply to mining to guess a hash that gets you the bitcoin reward for adding a block to the blockchain.

  Hot wallet: software that keeps copies of the private keys for your bitcoins, and sends transactions to and receives them from the Bitcoin network (and eventually, when they go into a block, the blockchain).

  ICO: Stands for “Initial Coin Offering” or “Initial Crowdfunding Offering”, but in practice means a token that is speculated upon just because speculators can. Hugely popular in the second bubble.

  Immutable: something that cannot be changed. The blockchain is considered immutable, as any change would change the hashes and be immediately evident.

  Key: a number which works like the PIN of a Bitcoin address. This is the one secret thing you must control if you “have” a bitcoin.

  KYC/AML: Know Your Customer/Anti-Money Laundering rules, which any crypto exchange wanting to deal in hard currencies, particularly US dollars, needs to follow.

  Margin call: when you need to pay back your margin trading loan.

  Margin trading: taking a loan from your brokerage to buy a security; lets you buy more than the value of the assets you have to hand. Could be hoping for the security to go up or down. Can pay off hugely, but is risky (especially with cryptos). Short selling is a form of margin trading.

  Mark Karpelès: Owner of Mt. Gox when it collapsed. Did nothing wrong.

  Mempool: the “memory pool,” in the memory of a computer running a Bitcoin node, where unconfirmed transactions pile up.

  Merchant: actual shopkeeper selling legal goods or services, who probably doesn’t accept Bitcoin.

  Merkle tree: an ordered collection of transactions, each hashed against the hash of previous transactions; this makes it very quick to verify the tree of transactions is the one you think it is. Bitcoin and blockchains rely on a Merkle tree to verify everything is in order and hasn’t been tampered with. Invented by Ralph Merkle in 1979.

  Mining: literally wasting electricity as a competitive sport to make new bitcoins.

  Mixer: somewhere to send your bitcoins in order to obscure their history.

  Mt. Gox: The largest bitcoin exchange in the run-up to the 2013 bubble; collapsed soon after, sending $400 million in bitcoins up in smoke.

  Nick Szabo: Cypherpunks list participant. Came up with the idea of smart contracts. Proposed Bitgold, one of the precursor ideas to Bitcoin.

  Oracle problem: how to tell a smart contract when a real-world event it depends on has happened, without requiring human judgement.

  Painting the tape: where traders collude to make it look like there’s activity in a security, or to push the price up. The Willy and Markus bots, running on Mt. Gox in the days before the 2013 crash, were a notorious Bitcoin example.

  Permissioned blockchain: a private blockchain allowing only known participants. Allows the use of a simpler consensus model.

  PGP: “Pretty Good Privacy,” a program to sign or encrypt messages using public key cryptography.

  PHP: A programming language for websites. Very easy to make a site in, and very easy to make an insecure site in if you don’t know what you’re doing. Quite a lot of Bitcoin exchanges started with someone thinking “I know PHP, how hard could running a Bitcoin exchange be?”

  Ponzi: an “investment programme” in which earlier investors are paid with the contributions of later investors. Named after Charles Ponzi, who was famous for such schemes in the 1920s. A more general category of fraud than “pyramid scheme.”

  Private blockchain: another term for permissioned blockchain.

  Proof of Stake: A consensus model that is far less wasteful than Proof of Work, by just declaring that thems what has, gets.

  Proof of Work: A consensus model in which you compete to write the next block in the blockchain by just wasting more electricity than everyone else. This is as terrible as it sounds.

  Public key cryptography: a way to sign or encrypt messages using two keys, one to encode and one to decode. Either can decode messages encoded with the other. Bitcoin uses this to authenticate transactions as having been sent by you: you sign them with the address’s private key, and this is verified with the address (which is the public key).

  Ransomware: Computer malware that locks up your Windows PC and demands bitcoins to unlock it.

  Roger Ver: early Bitcoin advocate and anarcho-capitalist.

  Satoshi Nakamoto: the pseudonym used by the creator of Bitcoin. Disappeared in 2011; nobody knows who he was.

  SEC: The U.S. Securities and Exchange Commission, the government agency that enforces securities law and regulates the industry. Its mission statement is: “protect investors; maintain fair, orderly, and efficient markets; facilitate capital formation.”

  Short selling, shorting: selling a security you don’t own in the hope it will go down and you can buy to cover what you sold. A form of margin trading.

  Smart contract: a contract implemented as a computer program that triggers given particular conditions.

  The DAO: a smart contract for a Distributed Autonomous Organization, intended to operate as an automated venture capital firm. The most famous smart contract ever, as the world’s largest crowdfunding at the time, gathering $150 million. Hacked shortly after launch, losing $50 million and splitting Ethereum into two currencies.

  Tor: The Onion Router, a method to browse the web anonymously. Development is substantially sponsored by the US government, both for their own use and to help dissidents in oppressive countries. (Even as the NSA doesn’t like it at all.) Also favoured by Internet trolls and darknet users.

  Tulip: a pretty flower, and the subject of the 1637 bubble known as “tulip mania,” one of the first well-documented bubbles.

  Turing complete: when a computer or computer language is sophisticated enough that it can theoretically solve any problem that any other computer can … given enough memory and time. You often don’t want this, because it makes it harder to prove mathematical correctness when you really need to be certain, e.g. in a smart contract.

  Wallet: anywhere you keep the private keys to your bitcoins. Can be a hot wallet or cold wallet.

  XBT: An abbreviation for Bitcoin as a currency unit. More proper (currency units that aren’t for a specific country are supposed to start with X) but less common than BTC.

  Acknowledgements

  Phil Sandifer suggested in October 2016 that I write a book about “Why Bitcoin Is Stupid or something,” thus lodging a sort of parasitical book-writing worm in my brain. (This was supposed to be a quick 15,000-word rant before lunch.) Always ready with a motivational quip, like “if you’re expecting a sense of accomplishment when you finish, you’ll want to stop that.”

  Arkady Rose put up with me talking nothing but cryptos for months and beta-read the early drafts. I knew I was onto something when I watched Arkady laugh out loud all through the second half of The DAO section. Intermittently cursing Phil for causing them to be subjected to this.

  My beta readers, fact-chec
kers and nit-pickers, particularly on Facebook, for essential ideas, research leads critiques and saving my backside repeatedly, including (amongst many others): Fiona Apps, Julian Ardente, Matthew Ardill, Lee Baldwin, Sean Barrett, Asaf Bartov, Jacinta Blackbourne, Karen Boyd, Abigail Brady, Ricky Buchanan, Roger Burton-West, David Cake, Katie Chan, Alex Clarke, Doug Clow, D Coetzee, Peter H. Coffin, Lindsay Duff, Stephen Early, Daniel Ericsson, “DOS,” “Facehammer,” Caroline Ford, Jeff Franzmann, Sabitha Furiosa, Andrew Garrett, David Goh, Steve Gustafson, John Hawkes-Reed, Nigel Heffernan, Deana Holmes, Axel Johnston, Sam Kelly, Andrew Ketrow, Alli Kirkham, Jola Kupferer, Lev Lafayette, Stuart Lamble, Charles Lieberman, Joe Lynn, Pauline Martindale, Chris McKenna, Brian McNeil, MegaZone, Tristan Miller, Edward Morbius, Tom Morris, Wayne Nix, Corwyn O’Domhnaill, Caoimhín Ó Gormáin, Hartley Patterson, Phy Phor, Larry Pieniazek, Drew Robertson, Madjai Sabine, Gunther Schmidl, Stefanie Schulte, C. J. Scott, Rebecca Scott, Dan Sheppard, James Skinner, Helen Smith, Andrew Stallings, Tim Starling, Jorge Stolfi, Joe Thompson, Sarah Thompson, Hester Tidcombe, Nicholas Turnbull, Django Upton, Alison Wheeler and the acerbic cryptocurrency skeptics of Reddit /r/buttcoin and Something Awful YOSPOS.

  Alli Kirkham for her applied excellence not only in art (I love Scared Business Guy) but graphic design. Go commission her.

  All my friends who fervently encouraged me through my progress reports.

  Thank you, I couldn’t have done it without all of you. It’s amazing how much work even a short book is.

  About the author

  David Gerard is a Unix system administrator by day. His job includes keeping track of exciting new technologies and advising against the bad ones. He was previously an award-winning music journalist, and has blogged about music at Rocknerd since 2001. He is a volunteer spokesman for Wikipedia, and is on the board of the RationalMedia Foundation, host of skeptical wiki RationalWiki. His website is davidgerard.co.uk. He lives in east London with his spouse Arkady and their daughter. Until he reinstalled the laptop they were on, he was the proud owner of six Dogecoins.