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Michael Culhane's Blog: Authentic
Blockchains and Bogus Blockchains
Posted by Michael Culhane Jan 3, 2018
Introduction
Sandeep Sood posted, “Fake it ‘til they break us: the dangerous distraction of permissioned
blockchains” a few months ago. Reflecting on his insights and doing some further reading
on his subject, prompted me to write this post. I want to reinforce and elaborate on the
important distinction Sandeep drew between blockchains and “permissioned blockchains.”
The Relevance of the Past to the Present
The Social Democrats’ Second Party Congress in Russia in 1903 occurred fourteen years
before the revolution that overthrew tsarism. Two factions were vying for control of the
revolutionary movement. Lenin headed one of them, but his group constituted a minority
at the Congress. Taking advantage of disarray within his opponents’ camp, however, he
shrewdly labeled his own minority group the “Bolsheviks” (literally the “Majoritarians,”)
and dubbed his opponents, who outnumbered his side, the “Mensheviks” (literally the
“Minoritarians,”).
Lenin’s bold stroke worked because both labels stuck and played a major role in altering the
course of history, to the detriment of the Russian people and many of their neighbors. His
brilliant public relations maneuver anticipated the creation, a few decades later, of the PR
industry. The main issue at the Second Party Congress that provoked such a fierce fight was
centralization versus democratization. Sound familiar?
The Current State of Affairs
Permission-less blockchains can be genuine. “Permissioned blockchains” cannot. The
difference between them is that simple. Some of the proponents of “permissioned
blockchains” have appropriated the term “blockchain” in order to co-opt Satoshi Nakamoto’s
ideas, with the aim of using diluted versions of them to prop up and maintain the existing
order of monetary systems that authentic blockchains threaten not merely to reform, but to
disrupt on a massive scale.
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The crucially important issue of who originates the critical terms pertaining to the rapidly
heating up monetary debate must be addressed. Whoever controls language controls the
dialogue. To define a “blockchain” as a shared ledger or a transparent database is to use
that term promiscuously. Shared ledgers and transparent databases that fail to incorporate
a blockchain’s most essential attribute (which I will delineate below), are nothing but bogus
blockchains. The same type of obfuscation occurs when the word “cryptocurrency” is used
interchangeably with the terms “digital currency” and “virtual currency.” Even if no one
is practicing deception, these misnomers can only sow confusion in the marketplace of
contending ideas relevant not only to currencies, but also to full-fledged monetary systems.
In this important discussion, we must relentlessly challenge intellectual laziness, which has
already begun to degenerate into Orwellian doublethink. (See Sandeep’s post in which he
exposes the Bank of America CEO’s inaccurate statements. The internet is teeming with
other examples.)
Fortunately, the leading members of the existing monetary order do not constitute a
monolithic bloc. Some are forward-looking, while others are desperately clinging to
obsolescent financial functions and controls. The former will continue to enable consumers
to benefit from forthcoming innovations. The backward-looking thinkers’ responses to the
challenges revolutionary cryptocurrencies have posed to the existing order have generated
systematic semantic confusion.
Certain troglodytes within the financial establishment, such as JP Morgan Chase’s CEO Jamie
Dimon, are willing to mislead the public in order to preserve what they have: centralized
control over their niches within monetary systems that are ultimately controlled by sovereign
states. But it is time to hold him and his ilk accountable for perverting language with the
goal of preserving their positions of power within systems whose salient characteristic is
centralized control.
Strong, unequivocally stated views about cryptocurrencies’ virtues or flaws foster fruitful
discussions. But imprecise language hinders lucidity, a prerequisite to understanding various
currencies’ advantages and disadvantages (including those of fiat currencies).

Whenever I use the term “blockchain” in this post, I am referring only to authentic
blockchains, which I will describe below. I believe I have solid etymological grounds for doing
so. The first use of the word “blockchain” I am aware of occurred in 1976 when four computer
scientists, Ehrsam, Meyer, Smith and Tuchman, introduced a process known as “Cipher Block
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Chaining” (CBC). CBC is a process used in encryption algorithms, but it is not relevant to
Proof of Work (PoW) or shared ledgers. Starting in 1997, the term “block chain” was used in
discussions about “HashCash,” which is a PoW function. In his seminal white paper published
in 2008, Satoshi repeatedly used the words “block” and “chain,” but he never linked them
together. Shortly thereafter, Hal Finney, in an exchange with Satoshi, first used the term
“block chain” to denote Bitcoin’s ledger. (The preceding four sentences are based on this
post.)
Satoshi designed Bitcoin’s ledger specifically to embody PoW, using HashCash. Finney’s was
the first use of the term “block chain” to denote a shared ledger, and most uses of the term
“blockchain” today (correct or incorrect) stem from Satoshi and Finney’s attaching to it a new
meaning. Since then, writers have consolidated the term into a single word, “blockchain,” and
have used either an upper-case “B” or a lower-case “b,” when employing that term, depending
on the context and the writers’ preferences. (This and the preceding paragraph are based on
a perusal of the etymological record. I welcome corrections, clarifications, or elaborations.)
Authentic Blockchains
Satoshi did not first conceive of a blockchain and then try to figure out what could be built on
it. Instead, he sought to create a true peer-to-peer electronic cash system and decided that
he needed a blockchain to provide its foundation. A blockchain enables the participants in
a distributed network to reach a consensus on their own, rather than to trust a centralized
authority to impose one on them.
Blockchains as record-keeping structures are computationally redundant and, therefore,
cumbersome as well as relatively expensive. Bitcoin is a justifiable application of blockchain,
even though blockchain is undesirable for many reasons. If Bitcoin can rid itself of its
burdensome blockchain, while preserving its integrity, it still will be Bitcoin.
Blockchain’s single revolutionary attribute is: finality of information secured by proof of work.
What I refer to as “bogus blockchains” fail to incorporate PoW.
Proof of Work
A particular PoW is a string of symbols that, by being displayed, demonstrates the
computational effort that was performed in order to discover it. Cryptocurrency mining adds
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more PoW to a blockchain as more blocks are added to the chain. PoW is the only measure
by which participants in a distributed network reach a consensus without trusting any human
authorities.
PoW transforms a database into a digital monument, which reflects the work required to
construct it. Andreas Antonopoulos has eloquently observed that the Bitcoin blockchain’s
PoW resembles Egypt’s majestic pyramids and Europe’s exquisite cathedrals. In stark
contrast, bogus blockchains, which do not embody proof of any significant work, resemble
Barbie-doll houses and the “cookie-cutter” tract housing developments found in America’s
suburbs.
The energy required to generate PoW is an ineluctable cost a blockchain incurs in order to
bring trustless-ness, individual autonomy, and savings in human labor (also known as “social
scalability,” a term coined by Nick Szabo) to a network’s participants.
Bitcoin’s adversaries frequently cite inaccurate and irrelevant statistics such as: “Bitcoin
requires X amount of energy to process Y transactions,” or “Bitcoin requires X amount of
energy to issue Y new coins.” These statistics are subsequently used to discredit Bitcoin for
being woefully inefficient and inferior to centralized systems or other cryptocurrencies. This
line of thinking fails to recognize that Bitcoin mining does not exist to validate transactions or
to mint new coins.
Bitcoin mining exists for the sole purpose of consuming expensive resources. Any
“blockchain” that does not incur the cost of a significant amount of energy to produce it is
either an unsecured blockchain or a bogus blockchain. Mining continues to make tampering
with a blockchain’s information more prohibitively expensive over time, although it is never
possible to attain the Holy Grail of perfect immutability. The more energy that is consumed
to generate PoW, the more secure a blockchain’s information will be (i.e., the better a
blockchain will be serving its sole purpose).
Proof of Work Protocol
PoW protocol is a set of rules a blockchain-based network’s participants mutually and willingly
obey. A network’s participants make a blockchain useful by adhering to PoW protocol. Under
PoW protocol, participants always consider to be authoritative that version of a blockchain
which demonstrates proof of the most work performed on it. This is also known as the act of
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forming a “Nakamoto Consensus.” Apart from PoW, there is no determinate measure by which
the genuine version of a blockchain can be identified. Without such a measure, one must rely
on human trust.
PoW protocol mandates that a network’s participants place their trust in computing power
rather than in a human authority, in order to authenticate the historical record of its
information. This protocol successfully secures a blockchain, even though some centralized
miners control significantly more computing power than a typical participant does.
Computing power relies on energy, which is a finite resource. When the participants
in a network conform to PoW protocol, they ensure that a malicious actor must spend
considerable energy to frustrate honest actors’ expectations. This deterrent virtually
guarantees that the reward attained by acting honestly is greater than any ill-gotten gains
that can be acquired by using the system unethically. In order to launch an attack that
is statistically likely to mutate the blockchain fraudulently, a malicious actor or team of
malicious actors must spend more resources than all of the resources spent by half the
entire network (including those expended by all other malicious actors).
Even if such an attack should prove successful, only the following damage could be inflicted
on the network:
1. Malicious alterations to its blockchain that erase historical transactions (alterations
which increasingly become more difficult to effect as time passes); and
2. Prevention of the processing of specific transactions for as long as the attack
continues.
A malicious actor can benefit financially from such an assault only by fraudulently reversing
her recent transactions. This is known as the “double-spending” attack. No attacker can
initiate invalid transactions using money that other participants own. No attacker can
counterfeit new money. PoW protocol ensures that, for an attacker to be able to “counterfeit”
new money, she would need to prove that she has performed work to create it, which means
that she actually would have earned it.
By submitting to PoW protocol, participants interact with an immutable blockchain, gain
rewards for its upkeep, and freely compete with one another to reap those rewards.
Participants benefit from these opportunities only by adhering to the protocol. Markets and
physical laws, not positive law or social influence, govern PoW protocol.
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Alternatives to PoW

PoW converts computational power into voting rights that are used to form a consensus,
which validates transactions. Computational power, rather than a true democracy in which
each individual is represented by an IP address in a network, must cast the decisive number
of votes needed to reach a consensus because of a threat known as a “Sybil Attack.”
Such an attack is one in which an individual actor controls multiple computers and forges
identities, by pretending each of her computers is controlled by a separate individual. This
threat deters a network’s participants from attempting to reach a consensus based on a
majority vote by network nodes.
Any attempt to replace the PoW consensus algorithm is unobjectionable, as long as those
who make such an effort still intend to preserve a blockchain’s true goal: to approach as
closely as possible the immutability of information without relying on trust in a human
authority. Bogus blockchains provide no such benefit to consumers.
Some proponents of blockchains are exploring alternatives to PoW, mainly out of
environmental concerns. A proposed alternative blockchain protocol called Proof of Stake
(PoS) is gaining popularity, although it is unproven and seems likely to be flawed.
The overarching issue concerning the PoS protocol is that under it the cost of forging a new
copy of the blockchain is derisory. This is known as “costless simulation,” which essentially
means that the cost of “rewriting history” is inconsequential.
To paraphrase Greg Maxwell, the focus on a stake being recorded on a blockchain under
PoS distracts us from understanding that there is no determinate measure which proves
that the information being recorded is a real stake. Under PoS there is no trustless means
of identifying which version of a blockchain is the real one. The only way for a participant to
ascertain that a blockchain is authentic, if he has not monitored it since its inception, is to
trust a human authority. If presented with competing versions of a blockchain, participants
who have not constantly observed the blockchain ab initio, would need either to honor the
result of a vote held by network nodes (which reintroduces the danger of Sybil Attacks), or
to rely on a trusted authority. This is sometimes referred to as “ask a friend” security, and it
defeats the purpose of a blockchain.
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Under Proof of Stake there is not necessarily anything at stake. Proof of Work, on the other
hand, is a real Proof of Stake in which the stake (electricity) has value that is extrinsic to the
blockchain.
Applications of Blockchain
A blockchain is a platform on which a network’s participants share information and trade
with one another. It is a virtual marketplace. For a blockchain to be useful for an application,
the application must require an immutable record. Information that flows from a continuous
stream is used to compile that record. A network’s participants stream that information
to the network’s miners, who relay it in batches to the blockchain. For a blockchain to be
feasible for an application, such an application must motivate workers to secure it with PoW.
Trustless finance happens to be a perfect application of blockchains. It is hard to imagine a
practical application that does not involve trustless finance in which a blockchain would be
both useful and feasible.
Three of blockchain’s applications have already proved to be successful. Blockchain has
eliminated the need to place trust in businesses or political authorities:
1. To store digital financial assets;
2. To intermediate digital financial transactions; and,
3. To administer the issuance of digital money.
If a business or political authority is using what it refers to as a “blockchain” to help it
maintain its position as a trusted source of information, then it is relying on a traditional
database purporting to be a “blockchain” (i.e., it’s nothing but a bogus blockchain). Whatever
useful purpose is achieved in this context can be accomplished by a traditional trust-based
system.
Centralized trust, it should be acknowledged, will always attract clients. Unless there is a
significant cultural and psychological shift (which is certainly a possibility), most individuals
will not want autonomy in every aspect of their finances, and perhaps most businesses will
want complete autonomy in almost no aspect of their finances. But to have real autonomy in
even a single aspect of one’s finances (e.g., managing a portion of one’s savings or making a
political donation while living under a dictatorial regime) requires a system in which no actor
can control any other actor’s money.
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Antonopoulos uses the terms “soft promise” and “hard promise.” Applying his terms to
the concept of “software layers,” a soft layer is one in which information and transactions
are malleable, controllable, and reversible. A hard layer is one in which information and
transactions are final and tamper-proof. All traditional computer records are soft, but a
blockchain is hard because of its PoW. The physical element of PoW empowers a blockchain
to transcend the traditional hardware/software divide. A blockchain is essentially hardware
embedded within software.
Financial operations can never truly be finalized within systems in which the base layer is
“soft.” Soft systems that support reversible financial transactions, however, can be built
on top of a hard layer. Although gold provides a hard layer to consumers who trade with
one another using that metal as a medium of exchange, cryptocurrencies have attributes
that make them useable in many transactions in which gold either cannot be used or is
inconvenient to use.
A network can remain neutral and trustless only if the finality of its information is secured
by a blockchain, and that blockchain can exist only if a cryptocurrency is associated with
it. Securing a blockchain requires physical work, and in a neutral system people naturally
are unwilling to work for free. If there is no financial incentive to secure a blockchain, then
it will not be properly secured. If securing a blockchain becomes unprofitable, it is highly
unlikely that enough work will be performed to secure it until workers (i.e., miners) receive a
sufficient reward for doing so.
A cryptocurrency must exist on, and originate directly from, a blockchain. It is impossible
for a blockchain cryptographically to secure a guarantee of any physical asset. If the unit of
account recorded on a blockchain is not itself valued, then that blockchain cannot be useful
qua blockchain.
Any database designed to serve only as the balance sheet for external assets (i.e., any
database that records only derivatives) is not a blockchain. Such an application trustingly
presumes that any attempt to redeem the underlying asset should be honored. For this type
of application, a centralized system is sufficient.
Cryptographic mechanisms that permit the secure and trustless opening of peer-to-peer
payment channels do, however, exist--to create networks for routing transactions outside
blockchains. Such mechanisms will likely dramatically scale the performance of, and
increase the privacy of, cryptocurrency-based transactions.
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Antonopoulos has recently introduced a concept he calls “Immutability as a Service.” This
would entail the Bitcoin blockchain’s PoW being used as a tamper-proof source of truth for
non-blockchain applications, so that they can benefit from Bitcoin’s PoW. Bitcoin miners
could offer their PoW to secure information which, for example, legal systems based on
English common law could reference in order to enforce ownership of assets. Such an
application of the Bitcoin blockchain’s PoW would still require trust in a human authority. This
kind of application would be indirectly enforced by a blockchain but would not itself be directly
interwoven with a blockchain.
Net Neutrality
A salutary refusal to accept trust is most significant in the context of neutrality. Neutral
networks are freely distributed and open to everyone. Because blockchains are nothing
more than secured records of information, they are inherently neutral. If a network does
not enable free participation, then eventually some parties almost certainly will be excluded
and oppressed by it. Furthermore, if a network is not open to everyone, then some actor or
group of actors will be able to, and motivated to, dictate whom to exclude. Such a network
inevitably will be susceptible to corruption.
Net neutrality in a financial system governed by a blockchain is the only proven defense
against inexpensive corruption. From the consumer’s perspective, neutral networks of
participants who honor blockchain governance are the only means of maintaining trustlessness
in the three financial functions I identified above.
If a network is neutral, no extenuating circumstances can render it non-neutral. A neutral
network cannot make allowances for extenuating circumstances, because it cannot tolerate
the existence of an authoritarian controller who decides what constitutes an extenuating
circumstance. “Partial neutrality” is an oxymoron.
A monetary system is either neutral and free or it is centrally controlled. These two
alternatives are not only mutually exclusive but constitute a dichotomous and exhaustive
classification of all monetary systems. Notwithstanding many voices to the contrary, control
of an entire system is decidedly different from any concentration of power within that system.
Blockchain governance of neutral networks is also the only proven way to guarantee
autonomy for participants, as well as for networks themselves. Participants can be financially
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autonomous with respect to their ownership and use of digital assets because they no longer
need to rely on trusted third parties, which are--by definition--security vulnerabilities. The
networks are autonomous because they do not require a central administrator to supervise or
maintain them. No person or group plays a necessary role in their maintenance. The networks
will persist even if any given participant or group of participants leave them. A single system’s
financial functions can be performed globally and seamlessly, without any intermediaries
blocking or decelerating them.
Bogus Cryptocurrencies
According to news reports, Russia will issue a new digital currency and refer to it as the
“CryptoRuble” The first two syllables of the word “cryptocurrency” are not “crypto” because
they denote cryptographic hash functions deployed to sign transactions. These are called
digital signatures and they are not unique to cryptocurrencies or even to financial computer
applications. Instead, we say “crypto” because we maintain a blockchain that tracks the
transactions in a currency, and we place trust in the version of that blockchain on which the
most cryptographic hash functions have been computed. In other words, we call a currency
“cryptocurrency” because its blockchain is secured by PoW and the holders of the currency
follow PoW protocol.
If Russia’s proposed CryptoRuble uses a freely distributed blockchain and participants
in its network honor PoW, then it will be a cryptocurrency. This means that the Russian
government will have no power to control it. A currency controlled by a government cannot be
a cryptocurrency. The reason for this is simple: If it is a cryptocurrency, it is not controlled by
a government.
We have already seen that Russian propaganda can be effective and insidious. Do not be
bamboozled by any governmental propaganda, no matter which nation state originates it.
The Importance of Clear Terminology
Consider the following three scenarios in which one might refer to the databases described in
them as “blockchains:”
1. Referring to each batch written to a database as a “block;”
2. Multiple parties being given access to the same database; and,
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3. A consortium of parties operating within a silo, with each party maintaining its own
version of a ledger and auditing and error-checking the others’ versions.
None of these scenarios justifies calling the database in it a “blockchain.” Simply saying
“database” or “shared ledger” suffices. The act of sharing certain information with users that
was previously kept private from them does not in itself obviate the need for trust. Therefore,
any application that merely focuses on transparency does not require a blockchain and is not
relevant to this discussion. A blockchain is not used because it is transparent. Many users
actually consider transparency to be dangerous and undesirable. A blockchain is used to
avoid trusting any human authority.
Definitions might seem to be a trivial matter, but the deleterious consequences of imprecise
language cannot be overstated and must not be overlooked. No honest salesperson would
stand outside a helmet store and sell hats to customers, branding the hats “helmets.” Not
even a hat designed to include a helmet’s adventitious characteristics is a helmet. A hat with
a chin strap is still a hat, not a helmet. This is because helmets are designed specifically to
offer that which hats cannot provide: protection.
Presented with hats and helmets, any consumer would immediately see the differences
between them. But because blockchains and cryptocurrencies are such technical subjects,
consumers can easily be misled by their esoteric intricacies. With the hat-helmet example
in mind I hope that, in most instances, the use of the word “blockchain” to describe what is
really a bogus blockchain is merely the result of ignorance rather than of dissimulation.
Conclusion
Bitcoin presents us with free money. In this context, the word “free” can have two meanings:
free of control and free of cost. Bitcoin is free of control because it is a distributed network,
and it is not free of cost because its participants value only PoW. Fiat currency, however, is
not free of control and--for those who control it--it is totally free of cost.
Both the power and value of a neutral network governed by a blockchain are directly
proportional to the number of participants in the network who honor that blockchain’s
governance. A cryptocurrency becomes more established, and therefore more stable and
treasured, as the number of people willing to adhere to its protocol increases. In this respect,
cryptocurrencies are no different than fiat currencies.
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To put into perspective how extraordinary Bitcoin is, consider that Satoshi wrote the code for
Bitcoin before he started to write his white paper. He said that when he conceived Bitcoin
he had to write the code first and then physically see it running, before he could convince
himself that his conception was realizable.
Bitcoin’s adversaries frequently utter a pathetic platitude along the following lines: “Bitcoin is
impractical, but the underlying blockchain technology that it runs on is the real innovation.”
When people say that they support blockchain but not Bitcoin, they should pointedly be asked
whether they actually mean that they prefer a bogus blockchain because it allows them to
continue to exert authoritarian control over a service that cryptocurrencies are now providing.
As I submit this post, Bitcoin still has unfortunate limitations regarding its user experience,
security, and feasibility–all of which make using it relatively difficult, risky, and expensive. It
is also currently impossible to use on a global scale. For now, these shortcomings induce
Bitcoin enthusiasts to continue to depend on centralized financial systems. Backward-looking
pundits in the monetary debate use these drawbacks as a pretext for arguing that Bitcoin will
never work. Forward-looking innovators will discover ways to help consumers overcome these
real but not insurmountable obstacles.
164 Views Tags: bitcoin, blockchain, cryptocurrency
Michael Culhane in response to Elijah Alper on page 12
Jan 4, 2018 4:13 AM
Thanks for the feedback, Elijah Alper.
Regarding your second point, I think that if you take another look, you will see that we are actually in
agreement. I never state that trust-based shared ledgers are worthless, nor do I wish to imply that idea. My
intention is to convey that they are nothing new and that they are not blockchains. Blockchains serve a specific
purpose that centrally-validated systems do not.
I expect that we will use centralized records of information for as long as we communicate with one another,
including for financial applications. But emerging technology and cultural changes can, and probably will,
continue to drive consumers increasingly towards blockchains. One way to impede this, which I point out, is
through semantic dissimulation. Another way, which you point out, is through coercion.
Elijah Alper
Jan 3, 2018 9:14 PM
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Thank you for the great read. I think you make a compelling point that non-immutable distributed ledgers that
by design require trust in some parties are not "blockchains," as you define blockchain.
I also think these "distributed ledgers" may well have value in certain cases. To the extent you are saying that
they are worthless (e.g., some of the adjectives you use), more is needed to prove that point.
Finally, I would not underestimate the ability for governments control even pure public blockchains. Ask people
in China if the Internet is really free and open to all. Seems like some targeted threats or hostage-taking of
core developers or owners of mining consortiums might do a lot of damage.