Blockchain Technology, Decentralization, and Magical Thinking

Sam D'Amico
Feb 26, 2018 · 5 min read

Like most everyone else, I’ve been very curious about the broad applicability of blockchain technologies for a good while. It seems there are clear forces at work that are attempting to ensure that systems such as Bitcoin are here to stay, regardless of the individual value of a Bitcoin. That said — there’s clearly darker elements in our midst, and a ton of the speculation activity and general noise and froth in the community has raised a few red flags that need to be discussed.

First of all, it’s disconcerting to see that there is a clear disconnect between those active in the community and those who understand and implement the underlying technologies. A good example is in the ICO space, where large numbers of retail investors (including Silicon Valley engineers) are buying tokens with minimal documentation to how they will be used in the future. A secondary example is how rival blockchains exist and have significant (billion+ dollar) valuations while having glaring technical flaws (I’ll leave the exercise on which … to the reader). There needs to be more widespread understanding of the technologies being invested in as a large amount of the investments are speculative and underinformed.

To the …. moon? By Tuanna2010 — Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=61844173

A major factor is that magical thinking is masking certain economic realities that are hard to overcome. Distributed and decentralized services aren’t merely a feature in themselves, and censorship resistance of a particular technology says nothing about the censorship resistance of the peripheral technologies needed to support it (for Bitcoin, that would be exchanges, wallet apps, etc). Another issue is that distributed and decentralized services do not necessarily map to existing networks and likewise, do not push network investment in the ways that are best optimized for their adoption. An example here is why Bittorrent-style distribution didn’t win out versus hosting content on cloud storage instances — the performance guarantees and base economics of services such as Amazon S3, plus the poor location of the server nodes in the BitTorrent case, push towards this conclusion.

Serving from home internet isn’t exactly the same as serving from the edge. source: speedtest.net

Market making of crypto exchanges is also interesting — there’s clearly interest in using various cryptocurrencies to move money across borders and around monetary controls. With Bitcoin more traceable nowadays, ICOs (and especially, ICO presales) are especially interesting as it enables jumping a sort of traceability air gap. It’s probably worth discussing how much of the “investment” in new blockchain technologies comes from a desire to move money (and obviously, cash out of the tokens ASAP) rather than long-term strategic investment.

Decentralized, but you probably should buy this specific ASIC

The community continues to stress the value of decentralized, distributed services, but it’s worth showing that the biggest piece of the cryptocurrency pie, Bitcoin, is increasingly centralized. Only a few mining hardware providers exist that are profitable, and make up the bulk of the Bitcoin hashrate. Likewise, its valuation has persisted despite $30+ transaction fees — proof that largely, a ton of Bitcoin traffic occurs on-exchange, rather than off. The debate over whether Bitcoin serves as a final settlement layer or as electronic cash continues as of this article, but it largely appears that Bitcoin itself is increasingly centralized in a way that negates the need for a lot of the cryptocurrency features that constrain its ability to grow. With sufficient centralization, legal agreements between the few major parties that make up the bulk of the ecosystem could negate a ton of the disadvantages of using Bitcoin as a currency (while also negating its advantage vs. say, Visa).

The frontend for a lot of “d”Apps is … centralized. Source: cryptokitties.co

To this point, apart from the actual currencies themselves, most apps and services that run on the blockchain as “decentralized” applications end up being web apps that interact with the blockchain via a browser extension. While there’s no reason why they need to talk to a non-blockchain backend, there’s still an underlying element of centralization that might be dismissed, but actually does matter a lot — the frontend engineering. A large number of startups are attempting to make a decentralized version of many proven consumer technology plays, but it’s unclear if they actually think or expect someone else will make a rival client. Unless the second … or third client enables competitive advantages for participants to use the platform versus the default one (hint: it probably won’t be funded by ICO proceeds, so it won’t have the budget to), this doesn’t make a ton of sense.

Another major issue is the nature of the modern internet — since modern network infrastructure is hub-and-spoke rather than pure mesh, apps served by providers close to the backbone or PoP have advantages versus consumers at ISP leaf nodes. This gives a massive advantages to the existing players in the space — the cloud providers and CDNs, rather than “Web 3.0” dApps, decentralized storage providers, and the like.

Lastly — there’s additional redundancy and replication required. Even with sharding of the networks, or partial trust of nodes, these will be higher than what cloud providers guarantee.

Yeah, that new internet. source: HBO/imgur

Here’s what we would have to do to address these issues — effectively make a new internet! There could be a distributed mesh network where miners do something analogous to Filecoin — proofs of bandwidth (for block mining) and proofs of packet delivery (for data transfer). The problem with this is as follows — future technology roadmaps play in to increased centralization of the network architecture — WiFi and the entire concept of home internet access will become less of a thing once mobile networks routinely hit 1Gbps (e.g., 5G). Density of 5G is going to rival WiFi because of the band choices (e.g., 30GHz doesn’t propagate well). Due to use of licensed spectrum, all sorts of spatial multiplexing & coordination between base stations that needs to happen, and sheer density of the deployment, it would be incredibly difficult to make a competitive decentralized system.

5G: This, but on every building

The fundamental problem is that it takes magical thinking to assume the world is going to flip over to some unproven new architecture with obvious, major performance tradeoffs in order to address some edge cases around privacy and security. The scary part is that this possible change is baked in to the valuations and technology roadmaps of even the most serious participants in the blockchain space. This is something that needs to be discussed more openly as it is by no means guaranteed or even likely.