Crypto — a mirror of society
This is my first Medium article. It includes an introduction to why I got interested in cryptocurrencies and blockchains, and particularly a description of some of the intriguing layers of the space that I think many that are new to the space may be unaware of. I hope this post can help therefore others that are new to the space become aware of it’s depth, as well as perhaps stir up some discussion underneath this article or on Twitter.
I’ve always been intrigued by technology. Growing up in the eighties and nineties, one of my earliest technology memories is playing Boulder Dash on the Commodore 64 at a friend’s place. The simple fact fact that pressing buttons on a keyboard could make a guy on the screen dig caves, looking for gems and digital gold (earliest bitcoin reference?) was magical to me.
Another introduction to technology that highly impressed me was the internet. In the early nineties, I remember my father showing me the website of a man that had the same name as me, but lived on the other side of the globe. That man was also one of the first people I e-mailed with.
Anno 2018, interacting with pixels on a screen by pressing buttons on a keyboard or communicating with someone else over the internet is far from impressive. For my child, swiping through photo’s on our tablet or video-calling with her grandparents (or kissing the screen for that matter) are very normal activities. This example may seem trivial, it’s illustrating for the technological advances that were made over the past generation, as well as how the degree of impact technology has on our lives.
Philosophizing about how the next upcoming technology can impact our lives is something I’ve always been attracted to. It’s even what characterizes me as a health scientist. Over the past few years, I felt an urge to dive into Bitcoin and cryptocurrencies but simply had other priorities in life that kept me from really looking into it. Late 2017, I decided that my holiday break I would finally have time to read up on it and buy a little bit of Bitcoin. I was somewhat skeptical, but it just seemed like it could be a good investment and I wanted to understand what all the fuzz was about.
So, when my holiday break started, right after Bitcoin had retraced slightly after hitting an evaluation of $20.000, I bought some. Quite naïve and unfamiliar with market cycles, market dynamics and determining a good entry point. After reading up on how blockchains work and why Bitcoin had ~$30 fees and a transaction backlog of multiple hours, I started checking out other coins, as those appeared to have much more momentum.
While I heard blockchain technology had promise aside from Bitcoin, the number of different use cases I found were mind blowing. Using blockchains to track goods across a supply chain and validate the authenticity of products, intellectual property, land, personal identity, create a censor-free, decentralized internet, keep a ledger on how green energy can be exchanged between neighbors or disrupt the global online advertisement market; everything seemed possible. I realized this isn’t just about creating a form of digital money, these are protocols for storing an immutable state of any kind, what is now mostly known as “the internet of value”.
There was no way back; I had been sucked into the rabbit hole indefinitely.
When I started studying Bitcoin and cryptocurrencies, I expected the key topics to be purely technical. Once again, I was very wrong. Underlying technology is obviously an important pre-requisite for the functioning of the system. However, I’m starting to realize that social elements of society like economics and politics are arguably the most important aspects of the system’s long-term sustainability, making crypto a true mirror of society.
Bitcoin as the catalyst for a new economy
During the 2007–2008 financial crisis, the economy cringed as a result of years of questionable financial policy and behavior by banks. Worldwide, banks bankrupted and governments printed extra money to bail them out. Life savings were lost due to the bankruptcies, but the inflation and loss of jobs due to the shrinking economy impacted many more.
In november 2008, Satoshi Nakamoto introduced Bitcoin as ‘A Peer-to-Peer Electronic Cash System’. Bitcoin was born, offering a new way to send money from one person to another without needing a trusted third party like banks. While incredibly volatile over the past few years, Bitcoin’s design potentially allows it to become a good Store of Value (SoV) because the number of new coins that will be minted will decrease as time passes (decreasing inflation).
Some people believe Bitcoin can completely overtake the current financial system. Others feel that is too much to ask, but expect Bitcoin to eventually enforce global governments to limit inflation of fiat currencies by providing the population an alternative, facilitating ‘ideal money’ as introduced by Nobel Prize winner John Nash.
Replacing trust by incentives
‘Trusted third parties’ like banks can only be surpassed if the system replacing it does not have a single point of failure. Therefore, the system needs to be decentralized, ideally on a logical, architectural, and political level.
To achieve decentralization, Satoshi Nakamoto designed Bitcoin in such a way that the code is fully open source and the nodes that keep the network running are incentivized to do so. Nodes are rewarded by receiving the transaction fees paid by users of the network to make transactions, as well as newly minted Bitcoin. To limit ‘over-incentivizing’ nodes and basically handing out free money, as well as reduce the chances of a (pool of) nodes being able to overtake and manipulate the network, Nakamoto intentionally made the process difficult. Nodes are required to solve cryptographic puzzles before processing transactions (known as ‘mining’), which means both hardware and energy costs are made during the process.
Since a malicious party would need to own at least 51% of the networks total mining power to successfully overtake the network and decide which transactions are confirmed and which aren’t, attacking the network becomes expensive. At the time of writing, such a ‘51% attack’ on Bitcoin would cost just over $0.5 billion per hour in energy costs, as well as a few billion dollars worth of hardware. This makes it almost impossible for a single malicious party to successfully overtake the network. Aside from ‘cutting your own flesh’ by degrading the value of the asset you’re trying to gain while spending lots of money doing so, if resources are combined a successful 51% attack could be possible. For instance, the three largest Bitcoin mining pools (that combine their hardware resources to solve the cryptographic puzzles and split the rewards) currently control 52.3% of the networks mining power.
Other criticisms include high network energy costs, high fees and slow transactions, but scaling solutions aiming to solve these issues are being worked on. Regardless, Bitcoin has had a near-perfect uptime (>99.99%) since it’s inception and the cryptographic code remains un-cracked despite the multi-billion dollar bounty, showing great resilience and potential.
The ‘blockchain, not Bitcoin’ debate
One of the most-heard criticisms on Bitcoin and cryptocurrencies in general is that blockchain technology could be applied without using Bitcoin as a native currency, which is also one of the biggest irritations of the Bitcoin community. While this is correct from a technological perspective, the lack of incentives for nodes significantly limit the network’s chances of becoming naturally decentralized.
For some specific use-cases, in fully-controlled environments, for instance where the node distribution is pre-arranged (e.g. amongst strategic partners or branches within a franchise), the parties submitting transactions are known and public verifiability is not necessarily required, such a system could increase efficiency compared to traditional logistics or bookkeeping systems. These systems are called ‘Distributed Ledger Technology’ (DLT) and are being used to build enterprise solutions, for instance by Hyperledger.
Therefore, distributed and decentralized systems are not the same. The major difference lies in trust. Perhaps a decent rule-of-thumb for this: whenever trusting a certain party is required, the system itself is not fully decentralized and is possibly better described as distributed.
In 2017, Swiss computer scientists Karl Wüst and Arthur Gervais wrote a paper called ‘Do you need a Blockchain?’ in which they present a framework to determine if using a blockchain is appropriate, and if so whether that blockchain should be permissionless (available to everyone), public permissioned (everyone can verify but only permissioned parties can write) or private permissioned (only permissioned parties can write and verify).
Therefore, incorporating economic incentives within the design of a cryptocurrency is the only proven way (under the assumption that Bitcoin has already proven it, at the least as a proof-of-concept) to create a naturally decentralized network. This mechanism has been labelled ‘cryptoeconomics’ and is based on a multidisciplinary research field called ‘Game Theory’.
To summarize, in the case of Bitcoin, nodes are incentivized to secure the network by earning tokens. On the other side, users are incentivized to use the network by not needing to trust a third party to store their value while knowing beforehand what inflation to expect. For most inhabitants of western countries needing to trust third parties like banks and governments currently doesn’t seem like a very big deal as the economy is actually flourishing, but the value of such a system becomes painfully obvious when those trusted third parties start to fail, for example in Venezuela right now, where inflation has greatly depreciated the national currency’s value.
For anyone buying cryptocurrencies to hold them as an investment, realizing these principles is of key importance to understanding the fundamental value of a coin or token. Determining the actual appropriate dollar price for a coin or token is at this point in time virtually impossible, despite admirable attempts at doing so by investors like Chris Burniske. However, determining whether or not the coin or token has an indispensable function within the system and thus whether it should actually exist can be another way to determine if it could be expected to have monetary value in the first place.
In October 2017, Ethereum co-founder Vitalik Buterin published an interesting view on this. In his post, Vitalik describes that the sole reason for existence of many of the currently circulating tokens is that they are considered the mandatory currency (‘Medium of Exchange’) for buying or selling a certain product or service. This introduces two vulnerabilities that could be detrimental to the token’s value; (i) the buyer/seller of the product or service starts to accept other currencies as well, and (ii) super-efficient exchanges allow tokens to be instantly swapped at very low cost, removing the necessity to hold the token for it’s utility. Both scenario’s have proven to be realistic, as (i) Quantstamp has recently accepted ETH and USD as a payment for their manual audits and (ii) protocols for super-efficient exchanges are being built as we speak.
Ironically, this again relates to decentralization; whoever decides which rules are programmed into the software that is used to run the network has a lot of power. This brings us to the next layer of the crypto space that is in my opinion the most important of all; politics.
Governance; deciding on the future of a blockchain
Using Bitcoin as a reference point again, one of Satoshi Nakamoto’s solutions to democratize the system’s governance was making it fully open source. If developers can not find consensus on a certain issue, they can decide to ‘hard fork’ the network, meaning the system is split in two, where both sides subsequently continue on their own path. For example, this happened in mid-2017, when Bitcoin was forked and Bitcoin Cash was formed after developers could not agree on a design issue. Similarly, miners can decide for themselves which version of the software to run, and users of the network can ‘vote with their feet’ by choosing which blockchain they continue to use.
While this is certainly an open and democratic system, splitting the network into multiple versions can both create confusion amongst users and dilutes the value of the main blockchain, introducing pragmatic thresholds for real-life adoption of the currencies.
Another concern the underlying motives of the blockchain’s core developers. Besides possibly acting within their own best interest, they could potentially be unobtrusively influenced (e.g. blackmailing or other forms of threats). While I believe that most of the developers that are currently working on large blockchain projects have a clean conscience and are truly doing so ‘for the greater good’, the fact that there’s a theoretical vulnerability that is also difficult to verify should be taken into account.
While different potential solutions are being researched or even experimented with, ‘on-chain governance’ is one of the most discussed structures, for instance in this medium article by Fred Ehrsam. Ehrsam uses Tezos as an example to describe how on-chain governance could work:
“In Tezos, anyone can submit a change to the governance structure in the form of a code update. An on-chain vote occurs, and if passed, the update makes its way on to a test network. After a period of time on the test network, a confirmation vote occurs, at which point the change goes live on the main network. They call this concept a “self-amending ledger”.”
The DFINITY project even goes a step further, allowing on-chain voting to make retroactive changes to the ledger itself. Although this increases the blockchain’s flexibility, it is controversial as a similar decision caused a massive conflict within the Ethereum community in 2016, even causing the network to be forked into Ethereum and Ethereum Classic. Vlad Zamfir, one of the lead developers for Ethereum, is therefore very explicitly against on-chain governance and warns that such decisions should be handled with caution:
“Please be careful. The effectiveness and legitimacy of our blockchain governance processes are critically important. Don’t needlessly put them at risk! Treat your articulation of governance problems and proposals as a loaded weapon and don’t shoot in the dark.”
Like Zamfir suggested, I think that finding a solution for governance of blockchains very important. Therefore, I am very excited that Input Output HongKong (IOHK) is currently hiring scientists and PhD students in law to study the legal context of cryptocurrencies and blockchain. IOHK is the research and development team that is creating the Cardano blockchain, but also participates in the development of Ethereum Classic. It will likely take a while before we see the results of their research, but I think it could potentially be very important for the blockchain space in general by providing guidance on (a)potential governance solution(s) based on thorough research.
Conclusions
When my ‘crypto journey’ started late 2017, I particularly saw Bitcoin and other cryptocurrencies as a potential new ‘medium of exchange’, a way to transfer money from one person to another. And, because of the volatile price movements, as an investment opportunity. I just wanted to spend my holiday to figure out how things work, buy some coins I found interesting and wait and see what happens.
It’s six months later now. I spent much, much more time researching the crypto space than I anticipated, and lost most of the money I invested due to the bear market conditions. I also definitely ‘overtraded’, which is a common pitfall for people that are new to the space. Most of my friends that ‘got in’ before me have removed the app they used to keep track of their portfolio or just went into crypto-hibernation, just ‘HODLing’ their coins until the market is structurally turning green again.
Despite the losses and associated frustrations, I have not regretted getting into crypto for a moment. On the contrary; I absolutely love it. Looking back, I definitely made some ill-advised investment decisions, but while doing so, I learned so much. During this whole market downfall, I’ve been reading articles, listening podcasts, watching YouTube video’s and following discussions on ‘Crypto Twitter’ and the more I read, the more I want to read.
Before getting into crypto, politics, governance, economics, cyber-security and privacy were topics I didn’t really care about. Ever since, my whole perspective of the world around me has evolved. Even if cryptocurrencies never live up to their current promise and I lose all the money I initially invested, this journey has opened my eyes and helped me widen my view on economics, politics, and society in general.
So far, getting into crypto has had virtually zero utility for me — but it is already changing my life.
