There’s No Reason to Have Faith in Blockchain Technology

In my opinion, cryptocurrencies are worthless. Frequently, blockchain solutions are significantly inferior to the systems they replace. This is why.

IN HIS 2008 white paper proposing bitcoin for the first time, the anonymous Satoshi Nakamoto concluded, “We have proposed a system for trustless electronic transactions.” He was discussing blockchain, the technology underlying the bitcoin cryptocurrency. The circumvention of trust is an attractive proposition, but it’s not true. Bitcoin does eliminate trusted intermediaries inherent to other payment systems, such as credit cards. But you must still have faith in bitcoin and everything associated with it.

Much has been written about how blockchains displace, transform, or eliminate trust. When analyzing blockchain and trust, however, it becomes evident that there is far more hype than value. Frequently, blockchain solutions are significantly inferior to what they replace.

First, a disclaimer. I am referring to the data structures and protocols that comprise a public blockchain when I say “blockchain.” There are three essential components to this. The first is a distributed but centralized ledger, which is a method for recording when and in what order events occurred. This ledger is public, in the sense that anyone can read it, and immutable, in the sense that no one can alter the past.

The second component is the consensus algorithm, which ensures that all ledger copies are identical. This is generally referred to as mining, and the fact that anyone can participate is a crucial aspect of the system. It is also distributed, so there is no need to trust any particular consensus network node. Additionally, it can be extremely costly in terms of both data storage and the energy required to maintain it. Bitcoin has the most expensive consensus algorithm in the history of the world.

The third and final component is currency. This is a digital token with monetary value that is publicly traded. Currency is a necessary component of a blockchain in order to align the incentives of all parties. On the ledger, transactions involving these tokens are recorded.

Private blockchains lack any interest whatsoever. (This refers to systems that utilize the blockchain data structure but lack the aforementioned three elements.) Who can interact with the blockchain and its features is typically subject to external constraints. These are not novel; they consist of distributed append-only data structures with a list of authorized contributors. In distributed systems, consensus protocols have been studied for more than six decades. Similarly, append-only data structures have been thoroughly covered. In my estimation, the only reason to operate one is to capitalize on the blockchain craze.

All three components of a public blockchain function as a unified network with enhanced security properties. The question is: Does it serve any purpose? All that matters is trust.

Trust is necessary for society. Humans are hardwired to trust one another as a species. Without trust, society cannot function, and the fact that we rarely consider it demonstrates how well it functions.

The term “trust” carries numerous connotations. The personal and intimate trust exists. When we say we trust a friend, we mean that we believe they will act in accordance with their stated intentions. There is also trust that is less intimate and less personal; we may not know someone personally or understand their motivations, but we can trust their future actions. Blockchain enables this type of trust: For instance, we don’t know any Bitcoin miners, but we have faith that they will adhere to the mining protocol and make the entire system function.

The majority of blockchain advocates have an unnaturally narrow conception of trust. They frequently use phrases such as “in code we trust,” “in mathematics we trust,” and “in cryptography we trust.” This is trust as evidence. However, verification is not equivalent to trust.

In 2012, I wrote Liars and Outliers, a book about trust and safety. I listed four very general systems that our species employs to encourage trustworthy behavior. The first two are integrity and standing. The issue is that they only scale to a specific population size. Small communities were adequately served by primitive systems, but larger communities required delegation and greater formality.

The third category is institutions. Institutions have rules and laws that compel individuals to conform to the group norm and punish those who do not. Laws formalize reputation in a sense. The fourth category is security systems. We employ a vast array of security technologies, including door locks and tall fences, alarm systems and guards, forensics and auditing systems, etc.

These four components collaborate to foster trust. Consider banking as an example. The concern of financial institutions, merchants, and individuals with their reputations prevents theft and fraud. The laws and regulations governing every aspect of banking keep everyone in line, including safeguards that reduce fraud-related risks. In addition, numerous security systems are in place, including anti-counterfeiting technologies and internet security technologies.

Kevin Werbach describes four different “trust architectures” in his 2018 book, Blockchain and the New Architecture of Trust. The first is trust between peers. This essentially aligns with my morals and reputational systems: people who develop mutual trust. His second concept is leviathan confidence, which corresponds to institutional confidence. This is evident in our contract system, which permits parties who do not trust each other to enter into an agreement because they both have faith that a government system will assist in resolving disputes. The third is intermediary confidence. A good example is the credit card system, which enables distrustful buyers and sellers to conduct business. His fourth architecture of trust is distributed trust. This is the emergence of confidence in the blockchain security system.

The blockchain shifts some of the trust from individuals and institutions to technology. You must have faith in cryptography, protocols, software, computers, and network. And you must have complete faith in them, as they are frequently single points of failure.

There is no recourse available when this trust proves to be misplaced. If your bitcoin exchange is compromised, you will lose all your funds. If your bitcoin wallet is compromised, you lose all your funds. If you forget your login credentials, you will lose your entire account balance. If your smart contract’s code contains a bug, you lose all of your money. If someone breaches the blockchain’s security, you will lose all of your funds. Trusting technology is more difficult than trusting people in many ways. Would you rather rely on a human legal system or on computer code that you lack the expertise to audit?

Traditional forms of trust, such as bank processing fees, are costly, according to proponents of blockchain technology. However, blockchain trust is also expensive; the cost is simply hidden. This includes the cost of additional bitcoins mined, transaction fees, and the enormous environmental waste associated with bitcoin.

Blockchain technology does not eliminate the need to have faith in human institutions. There will always be a significant void that technology alone cannot fill. People must still be in charge, and there will always be a need for extra-system governance. This is evident in the ongoing discussion surrounding the alteration of the Bitcoin block size and the resolution of the DAO attack against Ethereum. There is always a need to circumvent the rules, and there is always a need to make permanent rule changes. As long as the possibility of hard forks exists — when the people in charge of a blockchain step outside the system to alter it — humans will be required to maintain authority.

Any blockchain-based system must coexist with more traditional systems. For instance, modern banking is designed to be reversible. Bitcoin is not a currency. This makes it difficult to make the two compatible, resulting in frequent insecurity. Steve Wozniak was conned out of $70,000 in bitcoin because he neglected to remember this.

Frequently, blockchain technology is centralized. In theory, Bitcoin may be based on distributed trust, but this is not the case in practice. Practically everyone who uses bitcoin must rely on one of the few available wallets and use one of the few exchanges. People must have faith in the software, operating systems, and computers on which everything is running. In addition, there have been attacks on wallets and exchanges. We have encountered Trojans, phishing, and guessing passwords. Even vulnerabilities in the system used to repair cell phones have been exploited by thieves to steal bitcoin.

In addition, there are backdoor methods for centralization to creep back into any distributed trust system. With Bitcoin, there are only a handful of significant miners. One company supplies the majority of mining hardware. There are a limited number of dominant exchanges. Insofar as most individuals interact with bitcoin, they do so through these centralized systems. This also allows for blockchain-based system attacks.

These issues are not bugs in existing blockchain applications; rather, they are inherent to the blockchain’s design. Any evaluation of the system’s security must take into account the entire sociotechnical system. Too many blockchain enthusiasts are solely focused on the technology, ignoring everything else.

Insofar as people do not use bitcoin, it is because they do not trust it. This has no bearing on cryptography or protocols. A system in which you can lose your life savings if you forget your key or download malware is not particularly reliable. No amount of explanation of how SHA-256 prevents double-spending will resolve this issue.

Similarly, if people use blockchains, it is because they have faith in them. People either possess bitcoin or do not; this is true even for speculators who possess bitcoin because they believe it will make them wealthy quickly. People select a cryptocurrency wallet and an exchange for their transactions based on their reputation. Even the cryptography that underpins blockchains is evaluated and trusted based on the algorithms’ reputation.

Consider the various blockchain-based supply-chain security systems to see how this could fail. A blockchain is not a requirement for any of them. Everyone enters their data into a single software platform, which contributes to their success. Even though blockchain systems are founded on distributed trust, not everyone accepts this. For instance, some businesses lack confidence in the IBM/Maersk system because it is not their blockchain.

Irrational? Perhaps, but that is how trust operates. It cannot be replaced by protocols and algorithms. It is considerably more social than that.

However, the notion that blockchains can eliminate the requirement for trust persists. Recently, I received an email from a company that implemented blockchain-based secure messaging. It stated, in part, “Our use of the blockchain has eliminated the need for Trust.” This sentiment indicates that the author misunderstands what blockchain is and how trust operates.

Do you require an open blockchain? The response is almost certainly negative. Most likely, blockchain technology does not solve the security issues you believe it does. The security issues that it resolves are probably not your own. (Audit data manipulation is probably not your greatest security risk.) False confidence in blockchain can be a security risk in and of itself. Especially in terms of scaling, the inefficiencies are probably not worth it. I’ve examined numerous blockchain applications, and I’ve determined that they could all achieve the same security properties without using a blockchain; however, they wouldn’t have a cool name.

Cryptocurrencies are actually useless. They are only used by speculators seeking quick wealth, people who dislike government-backed currencies, and criminals seeking a way to exchange money on the black market.

To determine whether the blockchain is necessary, ask yourself: Does the blockchain significantly alter the system of trust, or does it merely reorganize it? Does it simply seek to substitute trust with verification? Does it seek to strengthen existing trust relationships or undermine them? How can trust be abused in the new system, and is this better or worse than the old system’s potential for abuse? What would your system look like if you never used blockchain?

If you ask yourself these questions, it is likely that you will select solutions that do not employ public blockchain. And that will be a good thing, particularly when the hype dies down.

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