Human After All (behind the cryptocurrency)

Bitcoin, as a UFO — unidentified financial object — raises a lot of questions for both users and use cases, which reach far beyond its technical protocol.

To describe complex concepts, one sometimes demonstrates the need to summon human emotions, calling upon previous experiences, whether they are positive or negative, in order to make those concepts understandable and set them in our mental landscape.

For bitcoin, and its underlying protocol, the exercise has reached its climax. The notion of trust, the trust machine, is brought forward.

This technology is associated to profoundly human expectations, as the description of the technology is sociological in nature.

Why does this notion of trust work so well?

First, because the protocol itself is based on reaching a consensus in an open system (more on this later), but also because the trust in this system echoes the loss of trust, or at least a certain degree of defiance, towards traditional centralized systems, notably financial systems.

In a time where the digitization of society has enabled new forms of social control, bitcoin offers a system that lives outside of these controls — almost a tool of protest.

From Satoshi Nakamoto’s peer to peer electronic cash system in 2008, to a fully decentralized trust protocol, perception of bitcoin has evolved and has brought to the forefront discussions on :

  1. how to trust people you do not know
  2. how to share trust on untrusted channels

Over the past few years, mainstream media has portrayed bitcoin in a fairly negative way, choosing to focus on fraudulent uses of the bitcoin currency and stories of the dark web, effectively calling into question bitcoin’s capacity to build trust. While there is no denying that fraudulent uses or abuses are possible when using bitcoin, which we have been reminded of recently with the global Wanna Cry ransomware outburst, such a description largely fails to describe bitcoin fairly. Disqualifying some of the users of an emerging technology should not disqualify a concept, a system, a protocol, an even larger population of extremely diverse individuals.

On average, there are approximately 700,000 unique addresses created every day and 350,000 bitcoin transactions that are confirmed on a network where over 16 million bitcoins out of the 21 million that will ever be mined are exchanged. It is hard to believe that the only activity on that network is related to corruption, and organized crime. (Source blockchain info)

A democratic and globalized protocol?

Today, everyone can potentially have access to bitcoin. No matter where you are located, all you need is access to a computer or a smartphone, some money and depending on the exchange platform an ID, to purchase bitcoin, while access to a mining rig will allow users to mine some bitcoin. People from all backgrounds, developers, geeks, simple users, speculators, traders, libertarians have become representative of a bitcoin community that has greatly evolved over the years. This description in mind — a cryptocurrency for the entire physical and geographical world, in an open, decentralized and encrypted protocol — the question of trust becomes fundamental and questions a change of scale of uses and users. During our data sprint, we had originally listed 5 relevant indicators/characteristics for studying users and usage of bitcoin — fungible, traceable, pseudonymous, anonymous and nominative — in order to shed a different light on this notion of trust .

fungible, traceable, pseudonymous, anonymous and nominative

Bitcoin as a financial asset: confidence rides high

Given the number of bitcoin transactions, the price increase, bitcoin works very well as a new financial asset, often complementary to other assets. User trust is tangible and develops as and when regulatory decisions are made. In April, Japan recognized virtual currencies, including bitcoin, as legal payment. This authorization is accompanied by certain obligations, including the strengthening of the identification of users.

As bitcoin demonstrates perennial and sustained growth when looking at financial aspects, countries are starting to legislate in order to recognize bitcoin officially and bring it ever closer to mainstream institutional acceptance.

From traceability to transparency: from the heart to the limits of trust?

The Wikipedia definition of traceability refers to the situation where necessary and sufficient information is available to know (possibly retrospectively) the composition of a product throughout its production and distribution chain.

Excluding fiat currency, all financial assets are traceable and are guaranteed by a trusted third party who validates the “transactions” between a transmitter and receiver. Bitcoin is intrinsically traceable, via its P2P protocol, in a public, decentralized and “archived” ledger.

It is completely transparent as it is potentially seen by all and for all transactions. Imagine, all transactions, amounts, balances visible to all, the equivalent of bank account in the open air.

Who can have such confidence? And what about the fundamental right to privacy?

One of the consequences of this transparency is fragility, and yes — trust — is acquired gradually and is brittle.

An inherent fragility in usages

In a centralized system, the circumvention of traceability by a complex financial arrangement whose sole purpose is to escape the control of an authority — institutions or nations — is an illegal practice commonly used for tax evasion or money laundering purposes. And there are sanctions for this type of use … when you can identify it

In bitcoin-land (cyberspace), the transparency of transactions makes it possible to identify all transactions for all circulating bitcoins. And there is a high level of risk that as a currency it may not maintain its fungibility, that certain coins could be depreciated according to their provenance.

For example, a bitcoin could be worth 1000 or 1600 € depending on whether the previous transactions have stained it for illegal (silk road) or even “unauthorized” use. This sanction on certain bitcoins could be applied to a use which would have taken place previously, and part of the mass of bitcoins would be depreciated.

This is a key issue when looking at bitcoin’s financial future as an asset. The propagation of standard KYC practices by exchange platforms over recent years should nevertheless contribute to building a safer space for bitcoin to grow into.

To the fragility of the usage is added that of the users because it is also possible to know, thanks to the public key, a bitcoin address and to approach an identification (we will return to it in the following paragraph)

Two paradoxical consequences. First, users cannot guarantee the private aspect of their transactions and ultimately their privacy. Second, criminals have difficulty hiding behind the protocol.

Maintaining trust in transactions goes hand in hand with strengthening privacy

Why protect trust in transactions? The reasons for protecting the privacy in transactions are easily understandable: from the activation of citizens’ right to privacy, to the libertarian view that states should not interfere in one’s transactions … to the desire of hiding illegal activities. But to understand what’s at stake from an identity point of view, it is important to clarify three often opposed notions:

  • “Anonymous”: which cannot be associated with a name or fame.
  • “Pseudonymous”: An alias other than its official identity.
  • “Nominative”: that bears the name of someone or is intended for a person.

Anonymous is not synonym of bitcoin.

Often defined as anonymous, it is the principle of pseudonymity that applies to bitcoin address (a kind of alias, which is a sequence of letters and numbers)

For each transaction, a bitcoin address is created with a public key (and a private key) and, from this public key, the calculation of the bitcoin address is possible. Once this bitcoin address has been identified, it is technically possible to end up finding an IP (Internet Protocol) address. Considering that this IP address is the one you use to connect, you can — with some effort in the digital world — identify yourself, almost nominatively as demonstrated in this study “Deanonymization of Clients in Bitcoin P2P Network”. In addition, if the user has recorded personal information about a bitcoin portfolio, the task is even easier.

From a suspicion of anonymity, one quickly moves to the definition of a pseudonym or even to a potential nominative identification. Bitcoin an opaque system? Not really.

But confidence is such that this weakness of privacy does not hinder investment. Even if the bitcoin community is aware of this and advises, for example, to use one address per transaction in order to protect personal privacy as much as possible, it is underestimated.

What are the solutions to maintain protocol trust while guaranteeing privacy?

Two areas are emerging. First, without changing anything to the bitcoin protocol itself, users that are concerned about their privacy can either use a different address for each transaction, or use other technical means that are outside of the bitcoin protocol, like VPNs (Virtual Private Networks) to ensure the highest possible level of anonymity. Second, alternative projects are coming out in order to build cryptocurrencies that are inherently anonymous; a new type of Privacy by Design cryptocurrencies. The best known example is Monero. A cryptocurrency, created in 2014, which relies on the bitcoin structure but modifies certain aspects including the ring signatures system. Monero affirms these 3 notions secure, private, untraceable on the homepage of his site. (Another explanation of Monero here). Zcash, another alternative created by a private fund describes their token as being able to “fully protect the privacy of transactions” and act as a “fungible currency”.

What confidence are we talking about?

Fiat currency is the only anonymous asset and remains an opaque financial tool. All other financial transactions are traceable and identifiable by a trusted third party, unless a very organized approach of concealment is used. Bitcoin, without any central control power, is however in its most transparent mode of organization. If user confidence is present, gaps exist.

Conflict between the principle of anonymity and confidence in bitcoin.

The bitcoin community is looking for solutions to move from the current pseudonymity towards a strengthening of financial anonymity, which seems to be the only guarantee of the absence of state control.

In a society where surveillance of all is possible, well known bitcoin evangelist, Andreas Antonopoulos questions the ability of some states not to use personal financial data to control a population.

Towards a notion of financial privacy?

Another approach is to respond to the shortcomings of bitcoin by creating other cryptocurrency, sometimes private. Mass adoption of one of these monetary solutions is a question on the future of cryptocurrency.

If there is an increase in the financial weight of these cryptocurrencies, some may adapt their principles or characteristics to reflect those of traditional assets more and to better respect international financial constraints.

In which space of differentiation will evolve the bitcoin?

Bolstered by its financial surface, over $46 bn as we speak) bitcoin is increasingly integrated into legislation as payment currency or asset. Yet the stake seems to be maintaining the principles of anonymity to maintain the trust of these users.

Today our identity system is associated with a name, recognized by a trusted third party, the State, which confirms our identity. And it is a protocol organized around a given name, surname, date of birth etc.

In the bitcoin system, identification is not equal to the nominative principle but rather to an encrypted identity.

Perhaps the greatest evolution would be to propose a sort of cyber identity that would exist and be recognized on the web alongside state-issued identities.