By Mikael Fevang.
[See Part I of this article here]
So, even safeguarding consensus among the nodes is no guarantee of integrity on a blockchain. There are, however, several other, and more severe, issues with blockchain technology.
Firstly, you have the fundamental inability of blockchain to scale and accommodate large userbases. People tend to forget that the technology was developed to atomise value transactions and remove the necessity of trust in third parties when making them – not to increase the efficiency or relative ease of engaging in such transactions. As explained in Part I, most blockchains rely on proof of work – sheer computational power – as a safeguard against malicious actors. While it might be effective in an economical sense by making abuse prohibitively expensive, the electricity spent in ensuring this is also staggeringly high. Some estimates, for Bitcoin alone, go as high as 0.27% of the world’s electricity consumption – similar to the usage of Colombia. With that number in mind, consider that Bitcoin and Ethereum are capable of handling, respectively, 7-8 and up to 30 transactions per second (“TPS”). This is in comparison to Visa, which operates with a centralised ledger and can handle more than 24,000 TPS.
Some will argue that a “proof of stake” protocol can increase the TPS by several orders of magnitude. That might be true, but proof of stake has an unpalatable feature in that new blocks are created by the wealthiest nodes on the network. It presumes that those with the highest stakes will act with integrity and protect the interest of the community. Not only does this – somewhat contradictorily – reintroduce the necessity of trust to the system, but it is also unattractive for the same reasons we do not want billionaires to be our judges and legislators.
Overall, removing the third parties from the equation by making a ledger public and distributed unavoidably incurs huge transaction costs and bottlenecks compared to the traditional system where the ledger is held by a central party only. The raison d’être of distributed ledgers is the libertarian ethos of complete freedom of contract and distrust in authority and third parties. It is not, and will never be, efficiency or ease of use. Any belief in the mass-adoption of any blockchain coin or token as a currency is therefore completely unfounded.
If the technology is fundamentally unusable as a currency, what about its prospects as a medium of asset transactions and storage? Some have touted ideas such as putting land registries or “smart” contracts on distributed ledgers. Again, the perceived issue is the necessity of trust in third- and counter-parties.
Putting assets or contracts on distributed ledgers is problematic in relation to law as a distributed ledger is (in theory) permanent and irreversible. In other words, contrary to centralised ledgers, a valid transaction registered on a distributed one is (in theory) impossible to remove or censor. Enforcing transactions without considering their substantive validity risks legalising predatory behaviour and creating counter-productive outcomes.
Agreements entered into in seemingly voluntary circumstances, which later turn out to be forced onto one party by physical threats or exploitation of mental incapacity, will be deemed fully valid under this system. Furthermore, any transaction mistakenly entered into by the parties is similarly treated. A mistyped contract due to a fat finger becomes final on the parties – even when both parties contest it. Consider the serious implications this can have for legal titles and registrations. Contrary to the principle of freedom of contract, the parties are now bound by something neither of them agreed to. One could, of course, attempt to convey and convince a majority of the network that the specific entry should be removed – but that would likely be a fruitless undertaking if the network is large. The clarity of a contractual relationship is rarely binary, and as such avenues for ex post interpretation and provision of remedies are necessary.
By virtue of being (largely) unregulated and autonomous, the crypto-verse has become a hub of international crime. A recent research paper by S. Foley, J. R. Karlsen and T. J. Putniņš argues that as much as 44% of all Bitcoin transactions are done in the pursuit of criminal ends. What was intended to be a technology that rebalanced power disparities and removed the necessity for trust in value transactions has become an arena incentivising the most brazen fraudsters and audacious thieves.
As any real public distributed ledger is immutable and quasi-anonymous, the incentive to engage in theft and fraud is enormous. Couple that with the fact that cryptoassets operate in a regulatory void and are often misunderstood, and you have a con-man’s wet dream. This was a serious concern during the boom of 2017, when so-called exit-scams were frequent. Exit-scams were outright frauds which raised money through an Initial Coin Offering (ICO) only to later, without warning, shut down all communication and run away with the money. In fact, this happened so frequently that it became an accepted risk tied with dealing with ICOs. While the exit-scams have cooled down, other types of crime are still persistent. Hackers and thieves exploiting technological illiteracy is one of them, and they are a source of much scepticism and paranoia among users. Rumours of large international money-laundering operations have also started to appear.
One would expect the exchanges to be beacons of organisation and trust, but unfortunately that is not the case. Ever since the implosion of the Japanese Bitcoin exchange Mt. Gox in 2014, we have seen numerous exchanges go belly-up and seek insolvency protection. Often, the deposits of customers are eviscerated or deemed lost in the process – topically illustrated by the recent and controversial collapse of the Canadian exchange QuadrigaCX. Allegations of false play have since been raised by the company’s insolvency trustee, EY, as they investigate what happened. Another example is Tether, a coin introduced by the exchange behemoth Bitfinex, which is issued with a promise of redemption for US dollars at a 1:1 ratio. In addition to the questionable terms and conditions of redemption, it is also under an ongoing investigation by the US Department of Justice for potential market manipulation. The instances of institutional fraud and incompetence are too numerous to list here. Quite ironically, the quest for a trustless system of value transfer has created a system requiring extraordinary caution and diligence to not get cheated.
The informed reader has probably noticed that I have not dealt with any non-blockchain coins or tokens in my criticism, such as IOTA or Ripple. This has been an active choice as the technologies underpinning those alternatives are either largely unproven and immature (e.g. IOTA) or simply distributed databases that rely on certified validators (e.g. Ripple). Furthermore, both of them exercise indirect authority over their communities as they control the inflow of “new” coins or tokens through human discretion. If they rely on a central authority for proper governance and control, the whole premise of a distributed ledger becomes obsolete.
Perhaps, I am all wrong and will be subject to ridicule years down the line when DLT becomes omnipresent. The technology might mature and change radically to solve the problems I have presented; however, for now, these are all reasonable concerns. In its present state, DLT is simply incapable of delivering anything of non-speculative value. The only thing it has delivered so far is a massive shift in wealth from the gullible to the cunning; the quest for making trust obsolete became an exploitation of it.