The Tor of Money

Bitcoin is not currency; it’s the internet of money!
— Andreas Antonopoulos

In my article “Bitcoin Is for Drugs”, I highlight how the blockchain is for censorship resistance (CR). If you strip CR away from the blockchain, you are left with a lame financial instrument that can easily be out-done by existing financial instruments and thus a poor store of value.

I have devised a test you can use on your pet projects called “Does it need a blockchain?”. Check it out:

Does It Need a Blockchain?

The “Does It Need a Blockchain?” test is simple and can be conducted by any engineer thinking about building something on top of the blockchain or thinking about integrating a new feature in the blockchain protocol.

1- Your problem, does it need censorship resistance? If yes, you probably need the blockchain. If not, continue.

2- Assess cost, performance, reliability and user experience of your system with the blockchain.

3- Remove the blockchain and centralize (censorship resistance often requires decentralization) the system.

4- Assess cost, performance, reliability and user experience once more. Did it dramatically improve? If yes, then you do not need the blockchain.

Applying “Does it need a blockchain?”

I claim that over time, you will come to realize that every time your answer to #1 is “no”, the answer to #4 is “yes”.

I will do what any self-respecting engineer would do and provide data for my claim:

1- Bitcoin does not make remittances cheaper

2- The blockchain does not make micropayments work (in before lightning network: LN requires a security deposit which you would not need if you just used USD. For example, see how quick and cheap it is to buy a $0.69 song on iTunes without needing to lock up funds in a payment channel and subjecting yourself to volatility risk)

3- Decentralized blockchain-based file storage, if designed right, will follow economies of scale like ASICs. If 1 hard drive is profitable, you will buy 1000 and stuff them in a data center. Then, the government will find out you are storing a huge amount of data they do not want you to be storing and threaten to shut you down. You will comply so that you do not interrupt the service and add data policies. This removes censorship resistance and congrats, you have replaced AWS… with AWS. If hosting 1 hard drive is not profitable on the blockchain thingamabob, then you will simply not use it. Also, about the S3 outage you keep referencing, the solution to that is not to move to a decentralized model with lower reliability, slower transfers, and higher costs. The solution is simply to have a backup plan that is turned off most of the time except for fire drills. Then when S3 goes down, you turn your backup on and fail over. This is what Fortune 500 companies are supposed to do.

4- Selling US stocks globally. If buying US stocks in nation X is currently legal, there is an opportunity to build a non-blockchain-based product that facilitates this market by matching buyers to sellers. This product out-competes a blockchain-based alternative by undercutting on costs because there is no need to buy a third currency (the crypto-token) to buy the stock. If buying US stocks in nation Y is currently illegal, then even if a blockchain-based product is — from a technical perspective — possible, the regulators will simply heavily fine or imprison anyone facilitating trades with this product. If you want to do this illegally or anonymously, then you have to use the blockchain as long as it has censorship resistance.

5- Prediction markets need the blockchain because they need censorship resistance

6- Activism needs the blockchain because it needs censorship resistance

7- A consortium of more than 70 of the world’s biggest financial institutions agree: “we do not need a blockchain”

Other examples have been left as an exercise for the reader.

Censorship Resistance

I say “censorship resistance” a lot but do not explain what it means. This coupled with the way “Bitcoin Is for Drugs” is written makes it sound like I think censorship resistance is only for bad things and so Bitcoin is only for bad things. Tom Boice, a former colleague of mine, highlighted this flaw with my article:

However, capital flight, free speech, and immutable property in the context of oppressive regimes shouldn’t be viewed as a vice. It’s easy to write that off as something investors tell themselves so they can sleep well at night, but we also have to recognize that no government is immune to becoming authoritarian.
Say bitcoin was around in the 1940s. If the Japanese interned in the US had hid their money in bitcoin — would that be a vice?

Here is another great reply left on Hacker News by Catherine Darrow:

This argument is exactly analogous to the argument that privacy is for people with something to hide.
There’s a very good response to that argument, and it applies here as well. It runs thus: sometimes society is wrong. Every advancement in our thinking starts out as a rebellion — such as the civil rights movement in the 60’s. Many of the participants did have something to hide from significant chunks of society, yet what they were doing was ultimately judged to be right.
Usually the things society judges to be wrong are wrong — but sometimes they aren’t. I want society to be able to oppose movements when they become large and vocal, and I want society to be able to ban dangerous ideas from public spaces — but at the same time, I want individuals to be able to study and nurture any ideas they like in privacy, no matter how harmful or radical, because I want the good-but-countercultural ones to grow until they are ready to face society’s judgement.
Privacy is often used to pursue vice . . . but that is an acceptable price to me, to guarantee individual freedom of inquiry.
So it is with cryptocurrencies. And for that matter, cash.
Sometimes our laws are wrong, and it is the black market which provides the demonstration and motivation to change them. Prohibition is an obvious example. Uber and Airbnb are controversial, but modern examples. Sex toys are an easily overlooked example. Marijuana legalization comes to mind, too; the laws are changing for that particular drug (and not for, say, Psilocybin) precisely because the scale of the black market has resulted in a lot of people having experience with it and giving us both personal experience and scientific data. If anonymous cash transactions were not possible, that probably wouldn’t have happened.
The individual ability to buy anything, much like the individual ability to read anything, is both an important personal freedom and an engine for social progress specifically in the areas where society’s mores are wrong. Sure, people almost always use this freedom to do things society doesn’t approve of (either in the sense of the whole country or in the more restricted sense of their local community). Sure, those are usually things that are actually wrong. But squashing them isn’t worth losing the powerful corrective force for society as a whole that arises from those few cases in which the miscreants are right.
I do want governments to be able to make laws, to be able to regulate commerce, to declare that certain things can’t be bought and sold. But I don’t want them to have such an efficient method of enforcement that small scale rebellion isn’t possible. A certain persistent, low-level, ongoing engagement in vice is the price of moral experimentation, and I think it’s worth it.

Once you understand the importance of what Bitcoin offers, it raises the question: is the freedom offered by a censorship resistant digital currency and payment network not enough for you guys?

And before you hook onto Catherine’s mentioning of how black markets push society forward when the law is wrong and you say “ah so you do see why we’re building tokens on the blockchain!”. Yes, I see and that is why I said it was value-add to the blockchain because it uses censorship resistance to circumvent the law like nothing else in the blockchain space right now. However, your tokens are better served by a web server and a database (seriously, whiteboard it!). You are selling snake oil and you do not even realize it. Not everything that is in the black market is pushing the limits of the law in a good way.

Bitcoin May Fork Even After Segwit2x

There is this idea that has prevailed since the dawn of Bitcoin that it will become The World Currency. The problem with this idea is that the essential quality of any money is general acceptability. You will only accept a currency if you know you can send it to someone else who will also accept it. For as long as Bitcoin maintains censorship resistance, which is its only value-add, I do not see Bitcoin becoming The World Currency because governments will always want to regulate. This is what they do, whether you like it or not. For as long as the blockchain has censorship resistance, it will remain second class to the official legal tender that they issue, monitor and sometimes censor to enforce the law.

I think the bitcoin-the-world-currency delusion is just getting started. I do not think Roger Ver or the miners were ever malicious. Andreas told everyone we were dealing with the “internet of money” and no one stopped the press to wonder how exactly the tech was better than what we have. We need to stop with this “it is better money” and “it will replace financial institutions” bullshit. Credit cards are faster, ACH is cheaper, TransferWise is easier than any blockchain scheme you can come up with.

My wager on the future is this: Miners will continue to listen to the users, but the users will increasingly be bitcoin-the-world-currency folks who think that the tech is about displacing the whole world’s financial infrastructure. These people are seeing $$$ and opportunity, understandably, and doing just a bit less than the required research to realize that the blockchain cannot fulfill their dreams (I know this because this was me for years until 1 week ago). The centralizing forces will at some point force a fork upon Bitcoin, where the changes they are suggesting break censorship resistance and the people who “get it” will have to change the PoW algo and go on a “minority” censorship-resistant-fork.

For as long as the charade lasts, the world-currency-fork will have more hashpower and will probably be worth more. If it is not a fork in Bitcoin, it will be Ethereum or Dash or whatever. The minority fork will be the CR-fork that will continue doing its thing and working on the decentralized vision. Its price may tumble in comparison because arguably less people understand the blockchain than those that do. Eventually, more and more people in the world-currency camp will find replacements for their use cases that are not blockchain-based and exit in droves. Look at what R3 did with Corda. I would love to be a fly on the wall in the architecture meeting where they are all scratching their heads, trying to figure out why none of their designs compete with the existing systems. Then, one of the junior engineers goes “why do we need to have every node validate the same ledger again?”.

These realizations will come at an accelerated pace and The World Currency World Computer delusion will crumble.

CR-fork will continue chugging along and being useful to a global niche. Everyone will think “Why are they even still working on this? Blockchain is dead.”

Conclusion

Society needs a financial instrument with CR (see catherine’s post), which is what the blockchain is. But if you take CR out of the blockchain, you are left with a waste of electricity.

The “about” page on the Tor Project website reads:

Tor is an effective censorship circumvention tool, allowing its users to reach otherwise blocked destinations or content.

That sounds about right. Bitcoin is not the internet of money, it is the Tor of money. It is a tool for activists and the oppressed.