Blockchain is the ultimate April Fool’s joke

How a joke taken seriously shows the myths behind BitCoin, blockchain and cryptocurrencies

For April Fool’s, I posted a message on Facebook and Twitter on how I would focus on blockchain from now on. Unfortunately, some of my friends got confused and took it seriously.

After two months as a fellow at Newspeak, I’ve realized that, while AI and ML are very interesting, they are not real game changers. The real game changers are cryptocurrencies and blockchain! AI and automation are still far away from transforming our society and will only further concentrate wealth in the hands of the few, whereas blockchain is happening *now*.

Blockchain can bring about decentralization and real fairness: everybody can mine bitcoin, everybody can transfer money easily, and decentralization will make disasters like Cambridge Analytica and related privacy leaks impossible.

No one will be able keep all your information in one location for everyone to look at and analyze, and the blockchain ledger provides the transparency necessary to guarantee fairness and to spread the wealth.

Decentralization will make it impossible for one player to control much of your data and all videos like Facebook and YouTube, and the spread of misinformation will become a thing of the past.

From today on, I will focus my energy on pursuing crypto algorithms and blockchains for the benefit of the many!

A few friends asked me for an explanation. These statements are quite common in the discussion of BitCoin, cryptocurrencies or decentralization, so what is wrong with them?

Decentralization does not stop misinformation

Decentralization will make it impossible for one player to control much of your data and all videos like Facebook and YouTube, and the spread of misinformation will become a thing of the past.

Decentralization will not prevent the spread of misinformation. Often, when Google/YouTube or Facebook make headlines because something undesired has happened on these platforms, people call for decentralization and want to break up these companies, but would that actually fix anything? They say it is too difficult to keep checks on the Big Tech companies. Now, there is a valid point in asking for more diversity in consumer choice, but would it actually be easier to keep tabs on what is going on if there were many different YouTubes or Facebooks? Who would be able to keep tabs on that? Governments and NGOs already have a hard time keeping up with the status quo. Would anyone have been able to detect filter bubbles and the spread of fake news if social media streams were more devolved?

It would actually become much, much harder. Hardcore fans of decentralization ask for full decentralization. This means that everybody would essentially run their own social network and video sharing service with no central authority to control anything and without being able to track the most basic metrics easily. This is great for defying authoritarian governments (if it works), but would also make it much harder for concerned parties to understand what is going on and to prevent manipulation.

Blockchain does not protect your privacy

No one will be able keep all your information in one location for everyone to look at and analyze, and the blockchain ledger provides the transparency necessary to guarantee fairness and to spread the wealth.

The blockchain ledger actually stores all transactions in one location. It is duplicated many, many times, and cannot be changed retroactively. What happens on the blockchain, stays on the blockchain.

Anyone can verify the ledger to make sure that all transactions on it are valid. In centralized financial systems, such as the banking system, banks and oversight agencies ensure that the transactions are valid, and we as consumers know they are valid because we trust these institutions. However, on the blockchain, there is no central authority that can enforce such trust as there are no authorized entities, so trust in the system has to be created by other means.

Specifically, trust on the blockchain is created by miners. They download and replicate the ledger. To ensure that a bad actor could not change past transactions, miners expense a lot of work to mine so-called “proofs-of-work”. These are cryptographic seals that would have to be recreated if any of the transactions was changed.

The longer in the past you would want to change a transaction, the more blocks on the blockchain would have to be re-mined (and re-sealed to use that analogy), which quickly becomes prohibitive as it would require too much work.

The amount of electricity required to create the original proofs-of-work that build trust in the ledger is a real concern by now, though. A lot of energy is wasted on this. By now, mining of various cryptocurrencies consumes more power than all of Switzerland together.

Source: https://digiconomist.net/bitcoin-energy-consumption

Since information is stored on the blockchain forever and cannot be changed, an unexpected problem has appeared for miners: some users have stored data on the ledger that is actually illegal (like links to child porn). Law enforcement has to decide now how to handle this since everybody who is mining the ledgers will inevitably have downloaded illegal material as part of their copy of the ledger.

Similarly, personal data of people has leaked onto the blockchain and can now not be removed anymore. And finally, transactions can often be traced back to users because trading does not happen in isolation, and auxiliary data might give you away.

So, again, blockchain is not the solution itself, and it comes with its own risks.

BitCoin is actually quite centralized

Blockchain can bring about decentralization and real fairness: everybody can mine bitcoin, everybody can transfer money easily, and decentralization will make disasters like Cambridge Analytica and related privacy leaks impossible.

The blockchain decentralizing power is a bit like communism delivering workers from hardship. In theory, you have free elections in communism, but in practice, you can only vote for the one leader and live in a totalitarian regime. It is the same with BitCoin.

In theory, its structure is quite decentralized, but, in practice, control over mining is very centralized and very few own most of the coins. The distribution of miners follows a power law: the three biggest miners control a majority of the mining pool.

bitcoin mining pools by size. Source: https://blockchain.info/pools?timespan=4days

Likewise, the distribution of bitcoins is also very unbalanced: the top 100 BitCoin addresses own 20% of all bitcoins. One person can have multiple addresses, so it could be even more centralized.

The top 100 addresses control 20% of all bitcoins. The majority of bitcoins is held by about 5000 addresses. Based on data from https://bitinfocharts.com/top-100-richest-bitcoin-addresses.html on 4/23/2018.

This analysis is specific to BitCoin. You can check https://arewedecentralizedyet.com/ to see the stats for other cryptocurrencies, but it doesn’t look any better for any of them.

All major cryptocurrencies are majority controlled by a few mining pools, and most of the tokens are held by a couple of addresses.

No game changer

While AI and ML are very interesting, they are not real game changers. The real game changers are cryptocurrencies and blockchain! AI and automation are still far away from transforming our society and will only further concentrate wealth in the hands of the few, whereas blockchain is happening *now*.

While mining bitcoins and other cryptocurrencies wastes a lot of energy for proof-of-work for transactions that could also be handled by a centralized system, it is not a game changer in the way you would consider the industrial revolution, for example. And while the effects of machine learning on automation are measurable and worth discussing, we cannot say the same for blockchain applications.

Blockchain and cryptocurrencies are only game changers for people who made money off of them, and for people who lost their savings because they believed in the bubble. There hasn’t been a good or useful application of blockchain (yet) beyond creating speculative financial assets like BitCoin and co.

Another look at blockchain applications

Blockchain does not change the fact that money is the main driver in our economies. Facebook and Google are trying hard to do the right thing, but they still are for-profit companies that need to make money which means advertising, mostly. The algorithms underlying blockchains only allow us to create marketplaces where trust between actors in markets is not necessary anymore. So, while blockchain can help us to get rid of centralized clearing houses, this is a very niche benefit in general. It does not change our economies in any way.

That said, for hackers and people who want to get around blocked services in authoritarian regimes, decentralization can be a boon. However, these goals conflict with the wish to make loads of money, and money is the driver for mostly all of the blockchain startups and ICOs. You just cannot make a lot of money for your shareholders while defying governments that host your company.

A blockchain-based version of Google or Facebook would end up being no different than what we currently have. Only that a lot of the blockchain companies sound like get-rich-quick schemes. We should not blame the current players but blame the game and figure out how to fix it with regulations where necessary. There is no need to switch to blockchain to achieve that.

This brings us to an important insight from system design: we really suck at it. The bigger and more complex a system, the less we will be able to predict it, and the worse and more unexpected the failures will be.

Point in case is Facebook, which, with 2 billion users that can interact with each other, is probably one of the biggest systems ever created. Or YouTube, which is the second biggest search engine after Google and has 300 hours of video uploaded to it every minute by its billion users. While these systems work in many ways, we are only slowly discovering how Facebook’s and YouTube’s algorithms affect society, and what kind of impact they can have.

Since there is not a lot of previous experience with such systems, the software engineers and product designers behind these platforms have to learn along the way and tune the systems to prevent past mistakes from happening again.

We also know from system design that system knowledge is not easily transferable from one system to another, and that, when we set up a new, different or bigger system, we are prone to then run into many old and new issues because we won’t know how to anticipate the emerging behavior of the new system. The adage “Never change a running system” sums this up quite succinctly.

Now consider decentralized systems in this mix. Decentralization does not make things easier. Rather, it makes things harder to understand and to predict because you have many more moving pieces.

It is quite reasonable to assume that, for example, a decentralized social network would have many problems of its own, and given the added complexity, they would not be easier to spot and to fix than what we experience with Facebook at the moment.

Let’s reflect on the realities of our current competitive markets: decentralized systems are less common at the moment because more centralized systems just work better and faster in the current technological environment. They have less overhead and and their maintenance costs less for big tech companies.

Blockchain is good for starting a transaction ledger in a decentralized way with participants that do not trust each other, but it does not scale well. While many startups at the moment are all about “doing XYZ but with blockchain and decentralization to tackle world peace”, the big tech companies currently “doing XYZ” are doing it the way they do it because it just works better at the moment. If that changes, they have the resources and technical know-how to change that. This is a simplified view, but Facebook, Google and so on are still sufficiently agile that this will remain true for a little while longer.

Altogether, decentralization and blockchain are not the one solution that we need, and a lot of the hype is totally unnecessary. Many of the statements you hear from people contradict themselves when you look behind all the promises.

Don’t blindly trust what you hear from people who are invested in BitCoin, blockchain or cryptocurrencies. There is no gold-laying goose. Except for a lucky few.