Bitcoin was the first successful attempt at creating an economic model that could function independently from any existing governments. Using Blockchain technology, Bitcoin aligns incentives of the different participants on the network with its own cryptographically verified system of checks and balances. Although Bitcoin had the first-mover advantage, and still running for over a decade since its creation, many other Blockchain governance designs have been popping up lately as either public Blockchains, widely used by cryptocurrencies, or private Blockchains, for more business use cases, such as JP Morgan Coin and Facebook Coin (Popper). Ehrsam foreshadows that “there will be a Cambrian explosion of economic and governance designs” due to the advent of this foundational technology. As opposed to traditional systems, where it is rare that a new government is formed or a new central bank is created, Blockchains allow for rapid iterations of different governance systems at the speed of software. With this level of experimentation, governance systems will evolve and adapt to better suit their organization’s needs. Through the current banking system, the U.S. National debt continues to balloon out of control, and it doesn’t seem to be getting better anytime soon, making this sort of experimentation necessary if we want to shift away from this debt-based economy and achieve sustainable development goals (Swaminathan). Governance is one of the most vital problems that innovations and continued research into Blockchain technology will disrupt.
The amount of data available online today is massive, and continues to expand at an exponential rate; “By 2020, it’s estimated that for every person on earth, 1.7 MB of data will be created every second” (DOMO). These quickly growing volumes of data have been posing major security and privacy problems for the big companies and governments trying to control it. Even the five major tech companies — Facebook, Apple, Microsoft, Google, and Amazon (FAMGA) — struggle to keep their systems secure from the misuse and abuse of the data they manage. Not to mention the recent Cambridge Analytica scandal that severely damaged many users’ trust in Facebook. The company has since been prioritizing and allocating much of their resources into security, but there is only so much they can do without fundamentally restructuring the way our internet works. When the grand design of the internet we have today was in its early phases, security of its users was not the number one priority, as tougher challenges such as scalability and usability overshadowed that aspect. Fields like Cybersecurity and Bug Bounty Hunting have become lucrative from the increase of demand in patching up these foundational security flaws the World Wide Web has suffered throughout its growth. This year, the World Economic Forum listed cyberattacks and data fraud in its top ten biggest global risks, alongside extreme weather, natural disasters and the failure to tackle climate change (Myers). As we grow more accustomed to our devices and many of our core operations move online and to the cloud, it has reached the point where big companies and world governments desperately need to find better ways of governing all of the information constantly flowing through the internet to ensure that it scales in a secure and decentralized manner.
Even through corruption and unsustainable debt growth, individual users are more secure with the existing banking system than moving their data and operations onto Blockchain systems. There are way more security risks and ways to lose money on current Blockchains than with centralized banks, as observed from live, public Blockchains running over the past decade such as Ethereum and Bitcoin. “For the average man, their money is far more vulnerable in cryptocurrency than it is [in a] bank account” because the unfamiliarity and complexity of Blockchain brings new ways to lose funds, such as losing your private keys, cryptocurrency exchange hacks, bugs in the code, capital gains taxes, double spend attacks, and several others (Larimer).
These threats have actually played out within both the Ethereum and the Bitcoin network, as well as in other cryptocurrencies. The “highest-profile hack of all time” happened on the cryptocurrency exchange Mt. Gox where hackers siphoned over “850,000 bitcoin, worth $460 million at the time, and about $27.4 million in cash held by the cryptocurrency exchange” for a grand total of $487 million dollars, over the course of a few years (Williams). At the time of writing, those bitcoins would be worth over $4.5 billion. The issue was able to happen over such a long period of time and go largely unnoticed mainly because of vulnerabilities in the source code of Mt. Gox’s platform and the poor code security practiced by the organization. A hack this large could have potentially affected hundreds of thousands of people, with no way of them being able to reclaim their bitcoins due to the lack of dispute resolution or insurance mechanisms within the Bitcoin system, which was largely unregulated at the time. Another Blockchain network known as Ethereum suffered a similar issue where a large amount of funds were lost, except in this case there wasn’t anyone trying to steal them.
On November 7th , a user of Ethereum wallet Parity stumbled upon a bug that allowed him to convert a contract that was governing [multi-signature] wallets into a regular wallet address. This so-called smart contract was critical to make transactions to and from a set of wallets possible.
After converting the contract the user was able to make himself the owner. Stunned by what happened, he then inadvertently killed the contract, immediately rendering all associated wallets unusable. The user later reported the bug as a ticket on Parity’s GitHub. However, without any way to access the Ether inside, [over $170 million dollars] were already locked inside hundreds of frozen wallets. (Buis)
In other words, many people ended up having their funds locked away in a piece of smart contract code, unintentionally, by a user who even reported the bug to the company. Over $170 million was locked up in a sort of glass safe that everyone could see was there but no one could access and retrieve the funds back to their original owners. This whole mishap caused the entire Ethereum network to hard-fork over to a new blockchain that reverted the state of the network to before the occurrence of this incident, rebranding the old blockchain to Ethereum Classic, which is still running today at a much lower valuation than Ethereum. This issue affected over 500 people, much less than the Mt. Gox hack, but enough to demonstrate the failures in governance of these high-volume Blockchain networks.
These mistakes of the past will provide valuable lessons for the successful blockchains of the future. However, initial blockchains like Bitcoin and Ethereum still highlighted many of the powerful features of this technology, even in its infancy. At its core, Weber describes Blockchain in An Advisor’s Introduction to Blockchain as:
Blockchain architecture gives participants the ability to share a ledger that is updated, through peer-to-peer replication, every time a transaction occurs. Peer-to-peer replication means that each participant (node) in the network acts as both a publisher and a subscriber. Each node can receive or send transactions to other nodes, and the data is synchronized across the network as it is transferred. (p. 50)
This peer-to-peer structure is why blockchains are considered to be decentralized, as long as the participants, or nodes, of the network are reasonably not of the same party. Decentralization is a major superpower in terms of security because it means that there is no single point of failure that an attacker can use to take down the entire system. Governmental organizations and big companies, like FAMGA, realize these benefits of decentralization, which is demonstrated by the growing distribution of data centers around the globe and the major shift to cloud-based technologies. What Blockchain brings to the table is that it is able to keep the entire network in sync through, what are known as, consensus algorithms. The Bitcoin network uses a consensus algorithm known as Proof of Work (PoW), in which several nodes act as miners, or machines actively running the software, that solve computationally-expensive cryptographic puzzles, such that if an attacker wanted bring down the entire system they would need more than 50% of the computing power of all miners on the network (IEEE). This means a hacker would require a significant amount of resources to attack Bitcoin, especially as the network grows larger. Many blockchain implementations can also take advantage of the fact that the technology provides a shared ledger of all the transactions on the network. It basically acts as a giant record book that you can trust because it has been cryptographically secured and verified by all participants in a peer-to-peer manner, as long as the majority of participants are not bad actors. These aspects of Blockchain are what make the technology so promising for securing the future of our data.
Whether there will be one blockchain to rule them all or millions of blockchains communicating between each other, those that will succeed are the ones that will best fit the needs of the people they serve. Different businesses and organizations will have different requirements for ensuring their survival, making certain blockchains more appealing to them than other implementations. The growth of Blockchain technology will ultimately benefit the diversity, efficiency, and programmability of governance structures in place today as we see existing and new organizations shift their data and operations onto future Blockchain systems. Vote Blockchain for governance.
Buis, Juan. “How the $170 Million Ethereum Bug Could Have Been Prevented.” Hacker Noon, Hacker Noon, 8 Jan. 2018, hackernoon.com/how-the-170-million-ethereum-bug-could-have-been-prevented-819053c3b2cb.
DOMO. “Data Never Sleeps 6 | Domo.” Connecting Your Data, Systems & People, DOMO, 2018, www.domo.com/learn/data-never-sleeps-6.
Ehrsam, Fred, and Fred Ehrsam. “Blockchain Governance: Programming Our Future.” Medium, Medium, 27 Nov. 2017, medium.com/@FEhrsam/blockchain-governance-programming-our-future-c3bfe30f2d74.
Larimer, Daniel. “Decentralized Blockchain Governance.” Medium, Medium, 20 June 2018, medium.com/@bytemaster/decentralized-blockchain-governance-743f0273bf5a.
Myers, Joe, and Kate Whiting. “These Are the Biggest Risks Facing Our World in 2019.” World Economic Forum, 2019, www.weforum.org/agenda/2019/01/these-are-the-biggest-risks-facing-our-world-in-2019/.
Popper, Nathaniel, and Mike Isaac. “Facebook and Telegram Are Hoping to Succeed Where Bitcoin Failed.” The New York Times, The New York Times, 28 Feb. 2019, www.nytimes.com/2019/02/28/technology/cryptocurrency-facebook-telegram.html.
Swaminathan, Aarthi. “Fed Chair Powell: ‘The U.S. Federal Government Is on an Unsustainable Fiscal Path’.” Yahoo! Finance, Yahoo!, 26 Feb. 2019, finance.yahoo.com/news/us-debt-unsustainable-path-192804468.html.
Williams, Sean. “The Biggest Cryptocurrency Hacks in History.” The Motley Fool, The Motley Fool, 9 May 2018, www.fool.com/investing/2018/05/09/the-biggest-cryptocurrency-hacks-in-history.aspx.