Bitcoin Is for Drugs
The cryptocurrency market capitalization is $107,420,953,608 USD today. That’s right, blockchains are worth one hundred billion dollars… and no one knows what the fuck they’re for!
In this article, I will explore a theory that is not often discussed:
The blockchain is for censorship resistance. That’s it. Use cases such as buying drugs, gambling, tax evasion, sharing secrets, capital flight and scamming people eclipse all other use cases.
Investing in Bitcoin is investing in vice.
It is not discussed because it is an ugly truth and most people I have met in the community are idealists. I do think more people are figuring it out, as is evident by posts such as the cogent “Don’t use a blockchain unless you need to”, which states:
In 2017 there are only two ways bitcoin is being used at any real scale:
1. to help people hide their money from governments (mainly in China, where the government at all levels is more corrupt and capricious than anything we’re used to in the West), and
2. to buy drugs over the internet.
To demonstrate that the blockchain is for censorship resistance, we may only look at the mountain of evidence of how value has been attributed to the blockchain in the last 8 years:
- Silk Road: buying drugs
- Satoshi Dice: gambling
- Mt. Gox: scamming people
- Wikileaks: sharing secrets
- Tumblers: tax evasion
- Token/AppCoin ICOs: scamming people
- Ransomware (WannaCry, CryptoLocker): scamming people
- Mining in China: capital flight
These are all examples of substantial economic activity powered by the blockchain. And these are just examples that people in the space will easily recognize. It is easy to think of other use cases for a censorship resistant digital currency (starting a revolution, political donations, money laundering, etc.). You may not like these things, but the value of such an instrument is enormous if you think about all the vices of the world. It without a doubt eclipses any other value proposition of the blockchain.
Let’s take a look at what others are suggesting the blockchain is for.
Turing Complete Smart Contract Platform
I remember someone non-technical asking me the difference between Bitcoin and Ethereum. I said something to the effect of “Bitcoin is primarily for sending money. With Ethereum, you can do more complicated things like you can make it so that your money is only sent if a bunch of conditions are met. For example say if it’s Tuesday and the temperature is below 60 degrees, then send the money.” At the time, I realized that my example was useless, but that wasn’t the point. The point was that you could program money, and that’s just inherently cool. Right? The person I was talking to was probably thinking “Why the hell would I want this?”. Well you don’t want this, actually, I’m just thinking like a geek. I like the idea that a bunch of logic decides where the money goes, and this logic is “on a public blockchain” and “auditable”.
I am reminded of myself in that moment every time I hear “let’s put property titles on the blockchain”, “let’s decentralize data storage”, “let’s put passports on the blockchain”, “let’s build a world computer on the blockchain”. This is exactly why Ethereum is so god damn appealing to us techies. We love the idea that everything is connected to the world computer and the world computer automates everything and people can’t scam eachother anymore and people don’t need to work anymore and there is no more global warming and there is peace on Earth.
But seriously though, what can you do with “turing complete smart contracts”?
According to Ethereum God Vitalik Buterin himself, “turing complete” is a red herring.
“Turing complete” was what was told to be the value proposition, and now it is “rich statefulness”? He is right, it is widely accepted that the permissiveness of Ethereum scripting is what grants it a wide and difficult to assess attack surface. This is why you have practical attacks on contracts like the DAO and theoretical attacks like the “Parasite Contract” described by Paul Sztorc.
I have recently wondered why Rootstock is not getting more hype than it is. Could it be because many in the Bitcoin community know that “copying Ethereum” is not really useful? What’s a smart contract for, anyway? According to Vlad Zamfir, the lead researcher of the Ethereum project, the only useful example of smart contracts on Ethereum today are ERC20 tokens, so we’ll talk about those in the next section.
One should note that simple and supposedly useful contracts like multisig escrow or time lock contracts are possible on the Bitcoin blockchain and do not require “Turing complete smart contracts”. Do people use these scripts? See for yourself: https://webbtc.com/api/stats. Multisig outputs represent less than 0.1% of outputs on Bitcoin today.
And if you’re thinking of Steem, Filecoin, StorJ and the likes, please refer back to Alistair Roche’s article referenced above:
Centralisation has huge advantages
As another example, let’s look at IPFS and Filecoin. I think they’re super fun and cool. But the only things I’d build on top of them would either be for activists or criminals. Those are the only people who need a way to store data like that, whatever the third season of Silicon Valley is telling us.
For the vast majority of businesses, it’s more important that your files are stored safely and cheaply, and can reach your users quickly. There is currently no better way to do this than to use Google, Amazon et al’s futuristic datacenters and CDN tech, and by the time Filecoin is ready, those corporations will be even further ahead in whatever robot- and AI-driven stuff they’re doing in those big rectangular prisms.
So it is not “Turing complete smart contracts” that give value to the blockchain, at least not today, but let’s address the ERC20 tokens.
Token Sales, ICOs, ERC20
There is 1 useful smart contract that we talked about that currently has no real equivalent on Bitcoin. People are crowdfunding sales of API keys (magic dividend-paying ones, sssshhhhh) so you can use the Decentralized Application (DAPP) that will have an MVP by the end of the year — we promise.
This is called a token sale or “inital coin offering” (ICO).
Are tokens what’s giving value to the blockchain?
Yes, but not for the reason you may think. The notion of tokens or “appcoins” being valuable has been discredited by many, including by one of my favorite authors on the subject, Daniel Krawisz, who says:
The value of the app is a matter entirely of the service it provides, whereas the value of the appcoin partly due to the value of the app and partly to its competition with other currencies. If there are two currencies to choose, there is a relative disutility of holding the one which has the smaller market cap. The disutility becomes stronger as the difference between their market caps becomes greater.
A user will not want to expose themselves to the risk involved with exchanging their currency every time they want to use a new app. Decentralized applications that use the same token will not only be cheaper to use because they have no exchange fees to pay and no risk to take on, but they will also be more secure because of concentrated hashpower.
I’ll refer to Alistair Roche again, who has other good arguments against having to use a second coin:
What they fail to mention is that at the same time, their coin is like bitcoin but without:
- network effects
- brand recognition
- years of being unsuccessfully attacked by the world’s most sophisticated hackers
- relative price stability (emphasis on relative) and liquidity
But these DAPP developers aren’t selling tokens because they are useful, they are selling tokens because they get free money without having to talk to financial regulators. If you read Chris DeRose’s account of the current situation, it is very hard to say that this is not just a way to circumvent regulation. Even those vocal about the “Token Model” write about how the primary functions are raising money (regulated activity) and network effects (ponzi schemes, the very thing the regulation is meant to protect against).
The point is this: the token smart contract is value add to the blockchain because it is an easy way to have an uncensored and unlicensed security sale. The evidence for this value is that the market cap of ETH has skyrocketed from $1B to $36B in 3 months because of the money pouring into these ICOs without any evidence of useful products to date.
If these teams building “blockchain infrastructure” were not scamming people, they would raise money the same way companies such as Blockstream, Open Bazaar, Blockstack, and so on have done it: the legal way. Or even, use Patreon or Kickstarter or something.
ICOs and “token sales” are used to leverage the censorship resistance of the blockchain and the fact that the market cap of Ethereum has risen to extraordinary heights demonstrates the value of this censorship resistance.
Store of Value, Digital Gold, Investment
Let’s delve into more old-school value propositions. Some say Bitcoin has value because it is “digital gold” or a “store of value”.
The key word in “store of value” is “value”. Some say that because Bitcoin is scarce, it’s a good store of value. However, the scarcity property is not sufficient to give something value. I have a plant on my desk and if I tried selling its leaves saying “buy James’ Leaves, the only leaves in the world that come from the plant on James’ desk”, no one would care.
Bitcoin needs something else to give it value. Once it has that value then sure, the scarcity is what allows it to store the value. Rick Falkvinge has explained it succintly in a few tweets. The whole thread is worth reading but here is his point:
The reason hedge funds are getting into Bitcoin is not because it is scarce, it is because it is scarce and has value as a censorship resistant payment network.
With only scarcity and nothing else, Bitcoin would not be worth investing into. If scarcity was valuable in itself, then I’d be selling the leaves of the plant on my desk or the chair in my kitchen that wobbles at exactly 0.43Hz.
This one is probably the most divisive one in the Bitcoin community. Many contributors have thought that the value of Bitcoin is in its fast and cheap payments. The truth is that Bitcoin payments are not cheap. When I send my friend $50 on Facebook Messenger, the transaction fee is $0. Facebook then batches all their payments and gets a big volume discount and pays pennies to process thousands of payments (this is how ACH files work). Bitcoin payments are not fast. When I go to the grocery store to buy bread, my credit card transaction completes within seconds on the VISA network. A typical Bitcoin transaction fee is around 5–10 cents (let’s ignore the fees caused by full blocks for now, that’s another story) and takes between 10 to 60 minutes to be confirmed, depending on how much money you sent.
<BLOCK SIZE LIMIT DEBATE> This value proposition is exactly why I was for a bigger block size limit all this time, I thought higher fees and longer confirmation times meant the destruction of the biggest value proposition Bitcoin had: cheap and fast payments. And I fully understood Mike Hearn, Jeff Garzik and Gavin Andresen’s early pleas to the Bitcoin Core team to increase the limit before the network backlog gets insane. However, I never understood why the other side of the debate was so obsessed with the block size limit: it is because they believe, like I do now, that the main value proposition of Bitcoin is censorship resistance. Adam Back is a cypherpunk, after all. The difference is that I don’t believe this limit is what censorship resistance hinges on, but that’s another story.</BLOCK SIZE LIMIT DEBATE>
Today, “fast and cheap” applies as value propositions for Bitcoin only for international payments and only temporarily. It is often cheaper than Western Union or international wires and the 60 minute rule mentioned above applies regardless of where the recipient is. However, this is not due to a quality found only in the blockchain technology. Banks and credit card networks have become increasingly global and more efficient. I believe we will soon have global payments that are fast and cheap and also not powered by the blockchain. If anything, the rate of adoption of Bitcoin forces the financial institutions to compete. Once they wake up, though, there is no technical reason why they can’t have faster and cheaper payments than Bitcoin.
Having said that, the banks and credit card networks of the world cannot compete with the censorship resistance property.
If you’ve bought a token that “optimizes supply chain processing through decentralized smart turing complete contracts”, I’m sorry but you’ve been scammed. This scam was made possible by the blockchain because there is no better instrument to scam people and not be fined or go to jail. If you believe in instant cheap payments, you’re better off investing in Apple. If you’re wondering where to store your wealth, know why Bitcoin can appreciate, because if all you want are scarce things, I have a T-Shirt with a snowflake-shaped armpit hole for sale, 0.1 BTC.
If you’ve bought drugs using Bitcoin: congratulations, you understand the blockchain.