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No, your cryptocurrency cannot work

No, your cryptocurrency cannot work

Whenever the topic of Bitcoin's energy usage comes up, there's always a flood of hastily-constructed comments by people claiming that their favourite cryptocurrency isn't like Bitcoin, that their favourite cryptocurrency is energy-efficient and scalable and whatnot.

They're wrong, and are quite possibly trying to scam you. Let's look at why.

What is a cryptocurrency anyway?

There are plenty of intricate and complex articles trying to convince you that cryptocurrencies are the future. They usually heavily use jargon and vague terms, make vague promises, and generally give you a sense that there must be something there, but you always come away from them more confused than you were before.

That's not because you're not smart enough; that's because such articles are intentionally written to be confusing and complex, to create the impression of cryptocurrency being some revolutionary technology that you must invest in, while trying to obscure that it's all just smoke and mirrors and there's really not much to it.

So we're not going to do any of that. Let's look at what cryptocurrency really is, the fundamental concept, in simple terms.

A cryptocurrency, put simply, is a currency that is not controlled by an appointed organization like a central bank. Instead, it's a system that's built out of technical rules, code that can independently decide whether someone holds a certain amount of currency and whether a given transaction is valid. The rules are defined upfront and difficult for anybody to change afterwards, because some amount of 'consensus' (agreement) between the systems of different users is needed for that. You can think of it kind of like an automated voting process.

Basically, a cryptocurrency is a currency that is built as software, and that software runs on many people's computers. On paper, this means that "nobody controls it", because everybody has to play by the predefined rules of the system. In practice, it's unfortunately not that simple, and cryptocurrencies end up being heavily centralized, as we'll get to later.

So why does Bitcoin need so much energy?

The idea of a currency that can be entirely controlled by independent software sounds really cool, but there are some problems. For example, how do you prevent one person from convincing the software that they are actually a million different people, and misusing that to influence that consensus process? If you have a majority vote system, then you want to make really sure that everybody can only cast one vote, otherwise it would be really easy to tamper with the outcome.

Cryptocurrencies try to solve this using a 'proof scheme', and Bitcoin specifically uses what's called "proof of work". The idea is that there is a finite amount of computing power in the world, computing power is expensive, and so you can prevent someone from tampering with the 'vote' by requiring them to do some difficult computations. After all, computations can be automatically and independently checked, and so nobody can pretend to have more computing power than they really do. So that's the problem solved, right?

The underlying trick here is to make a 'vote' require the usage of something scarce, something relatively expensive, something that you can't just infinitely wish into existence, like you could do with digital identities. It makes it costly in the real world to participate in the network. That's the core concept behind a proof scheme, and it is crucial for the functioning of a cryptocurrency - without a proof scheme requiring a scarce resource of some sort, the network cannot protect itself and would be easy to tamper with, making it useless as a currency.

To incentivize people to actually do this kind of computation - keep in mind, it's expensive! - cryptocurrencies are set up to reward those who do it, by essentially giving them first dibs on any newly minted currency. This is all fully automated based on that predefined set of rules, there are no manual decisions from some organization involved here.

Unfortunately, we're talking about currencies, and where there are currencies, there is money to be made. And many greedy people have jumped at the chance of doing so with Bitcoin. That's why there are entire datacenters filled with "Bitcoin miners" - computers that are built for just a single purpose, doing those computations, to get a claim on that newly minted currency.

And that is why Bitcoin uses so much energy. As long as the newly minted coins are worth slightly more than the cost of the computations, it's economically viable for these large mining organizations to keep building more and more 'miners' and consuming more and more energy to stake their claim. This is also why energy usage will always go up alongside the exchange rate; the more a Bitcoin is 'worth', the more energy miners are willing to put into obtaining one.

And that's a fundamental problem, one that simply cannot be solved, because it is so crucial to how Bitcoin works. Bitcoin will forever continue consuming more energy as the exchange rate rises, which is currently happening due to speculative bubbles, but which would happen if it gained serious real-world adoption as well. If everybody started using Bitcoin, it would essentially eat the world. There's no way around this.

Even renewable energy can't solve this; renewable energy still requires polluting manufacturing processes, it is often difficult to scale, and it is often more expensive than fossil fuels. So in practice, "mining Bitcoins on renewable energy" - insofar that happens at all - means that all the renewable energy you are now using could not be distributed to factories or households, and they have to continue running on non-renewable energy instead, so you're just shuffling chairs! And because of the endless growth of Bitcoin's energy consumption, it is pretty much guaranteed that those renewable energy resources won't even be enough in the end.

So there's this proof-of-stake thing, right?

You'll often see 'proof of stake' mentioned as an alternative proof scheme in response to this. So what is that, anyway?

The exact implementations vary and can get very complex, but every proof-of-stake scheme is basically some variation of "instead of the scarce resource being energy, it's the currency itself". In other words: the more of the currency that you own, the more votes you have, the more control you have over how the network (and therefore the currency) works as a whole.

You can probably begin to see the problem here already: if the currency is controlled by those who have most of it, how is this any different from government-issued currency, if it's the wealthy controlling the financial system either way? And you'd be completely right. There isn't really a difference.

But what you might not realize, is that this applies for proof-of-work cryptocurrencies too. The frequent claim is that Bitcoin is decentralized and controlled by nobody, but that isn't really true. Because who can afford to invest the most in specialized mining hardware? Exactly, the wealthy. And in practice, almost the entire network is controlled by a small handful of large mining companies and 'mining pools'. Not very decentralized at all.

The same is true for basically every other proof scheme, such as Chia's "proof of space and time", where the scarce resource is just "free storage space". Wealthy people can afford to buy more empty harddrives and SSDs and gain an edge. Look at any cryptocurrency with any proof scheme and you will find the same problem, because it is a fundamental one - if power in your system is handed out based on ownership of a scarce resource of some sort, the wealthy will always have an edge, because they can afford to buy whatever it is.

In other words: it doesn't actually matter what the specific scarce resource is, and it doesn't matter what the proof scheme is! Power will always centralize in the hands of the wealthy, either those who already were wealthy, or those who have recently gotten wealthy with cryptocurrency through dubious means.

The only redeeming feature of proof-of-stake (and many other proof schemes) over proof-of-work is that it does indeed address the energy consumption problem - but that's little comfort when none of these options actually work in a practical sense anyway. This is ultimately a socioeconomic problem, not a technical one, and so you can't solve it with technology.

And that brings us to the next point...

Yes, cryptocurrencies are effectively pyramid schemes

While Bitcoin was not originally designed to be a pyramid scheme, it is very much one now. Nearly every other cryptocurrency was designed to be one from the start.

The trick lies in encouraging people to buy a cryptocurrency. Whoever is telling you that their favourite cryptocurrency is the real deal, the solution to all problems, probably is holding quite a bit of that currency, and is waiting for it to appreciate in value so that they can 'cash out' and turn a profit. The way to make that value appreciation happen, is by trying to convince people like you to 'invest' or 'get in' on it. If you buy the cryptocurrency, that will drive up the price. If a lot of people buy the cryptocurrency, that will drive up the price a lot.

The more hype you can create for a cryptocurrency, the more profit potential there is in it, because more people will 'buy in' and drive up the price before you cash out. This is why there are flashy websites for cryptocurrencies promising the world and revolutionary technology, this is why people on Twitter follow you around incessantly spamming your replies with their favourite cryptocurrency, this is why people take out billboards to advertise the currency. It's a pump-and-dump stock.

This is also the reason why proponents of cryptocurrencies are always so mysterious about how it works, invoking jargon and telling you how much complicated work 'the team' has done on it. The goal is to make you believe that 'there must be something to it' for long enough that you will buy in and they can sell off. By the time you figure out it was all just smoke and mirrors, they're long gone with their profits.

And then the only choice to recoup your investment is for you to hype it up and try to replicate the rise in value. Like a pyramid scheme.

The bottom line

Cryptocurrency as we know it today, simply cannot work. It promises to decentralize power, but proof schemes necessarily give an edge to the wealthy. Meanwhile there's every incentive for people to hype up worthless cryptocurrencies to make a quick buck, all the while disrupting supply chains (GPUs, CPUs, hard drives, ...), and boiling the earth through energy usage that far exceeds that of all of Google.

Maybe some day, a legitimate cryptocurrency without Bitcoin's flaws will come to exist. If it does, it will be some boring research paper out of an academic lab in three decades, not a flashy startup promising easy money or revolutionary new tech today. There are no useful cryptocurrencies today, and there will not be any at any time in the near future. The tech just doesn't work.


Moderation note: Because of the hype and manipulation issues explained above, I will be very strictly moderating these comments. Anything that vaguely looks like shilling or bad-faith arguing will be deleted unceremoniously, and the poster reported. That includes complaints about the moderation policy. It's up to you to make it obvious that you are discussing in good faith.

@ealtamir

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@ealtamir ealtamir commented Sep 6, 2021

if the currency is controlled by those who have most of it, how is this any different from government-issued currency, if it's the wealthy controlling the financial system either way? And you'd be completely right. There isn't really a difference.

I'd say there's one big difference: control of the supply is out of the hands of any specific individual. I believe this would go a long way in having a form of sound money that wouldn't be terribly devalued by emission of new currency.

How I see things, whenever new currency is issued, those who benefit from it the most are the ones closest to power. As you move further away from the center, you are more and more in the role of payer for the privilege of those that receive the money first.

In general, I think you're equating a working cryptocurrency with one which is not controlled by "wealthy" individuals. Having the largest stake in the cryptocurrency is not necessarily equal to having "control" over it. It just means that you have the largest stake. Thus, in theory, you'd have the largest incentive to keep the currency valuable, assuming it's worth something to begin with. This setup could benefit substantially many individuals who are not considered "wealthy".

@ploum

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@ploum ploum commented Sep 6, 2021

"This is also why energy usage will always go up alongside the exchange rate; the more a Bitcoin is 'worth', the more energy miners are willing to put into obtaining one."

Nope. Bitcoin has "halving". The reward is diminishing over time to the point of becoming very small.

"If everybody started using Bitcoin, it would essentially eat the world. There's no way around this."

Nope. Bitcoin use and mining power are completely uncorrelated. By mining bitcoins, your earn as much as the computational fraction you are representing. So, indeed, there was a race to more and more mining power in the recent years but it can completely be reversed. For example if electricity prices rises.

Bitcoin could be used by the whole world with mining only happening on a laptop. That would not change anything for Bitcoin users.

"all the renewable energy you are now using could not be distributed to factories or households"

Nope. Electricity is something really really hard to transfer over long distances. What happens is that miners are looking for hedges : very cheap power produced in region where nobody want it and where it actually help so consumer the electricity (you cannot shutdown a dam or a central nuclear, even if there’s less demand). That’s basically why you have different night/day prices for electricity in most countries.

" in practice, almost the entire network is controlled by a small handful of large mining companies and 'mining pools'"

Nope. Miners can only do one thing : mining. They don’t have any other power. Running the network itself is done by "nodes" (anybody can run a Bitcoin node). The code itself is opensource. The most influential people are probably the developers but everything is done in the open and anybody can become one.

As always, things are a lot more complex as soon as you understand how they work. If you don’t understand anything about electricity production and the Bitcoin network, it’s really easy to have an intuition you are right. Which is usually the proof you are completely missing the mark.

I don’t say that Bitcoin is perfect or a white knight. I only say that what you wrote will only convince fools and ignorant. Reality is a lot more subtle than that (as always)

@kent214backup

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@kent214backup kent214backup commented Sep 6, 2021

There's an additional consideration that is often glossed over:

A currency that's worth $5 on Monday and $381 on Tuesday will likely not be used on Wednesday to buy a dozen eggs.

Currencies that boast such wild swings in valuation almost preclude their use as a day to day medium of exchange; people tend to hold onto these currencies for the purposes of speculative investment...which sort of defeats their use in addressing the problem of diminishing fiscal liquidity "down on main street."

And yet there ARE needs for greater liquidity "down in the gutter and out in the streets;" it's just not likely going to look like today's cryptocurrency, which is almost exclusively the domain of people who are nowhere near the gutter, nor the streets.

As such: why do we end up investing so much time into discussions about "magic internet money?"

I believe it's because people are not aware that there are plenty of alternatives that can be implemented much more effectively, inexpensively, and less burdensome upon environmental resources.

Additionally, the so-called thought leaders have figured out how to monetize a perpetuation of the hype train regarding cryptocurrency...by leveraging their hype to make money on...crypto.

In short: crypto is not often used to address ACTUAL human problems; it's often used to steal mindshare from more practical solutions so people can be persuaded into buying crypto.

By all rights, the COVID-19 experience should have brought forth a crypto renaissance, and yet: nothing. Have you noticed?

What if it's all BS?

@jlykins

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@jlykins jlykins commented Sep 6, 2021

I don't know how this got written without including the words "double spending."

Preventing double spending is the reason for all of this hullaballoo, no more, no less. It's easy to create a distributed ledger, but hard to create one where you cannot double spend, hence mining and staking. Read the bitcoin paper: https://bitcoin.org/bitcoin.pdf

You can't double spend physical cash because you can't give someone else a physical object and have it too.

You can't double spend your fiat because your bank says to your counterparty "trust us bro, he didn't double spend" and your bank is pretty trustworthy.

You can't double spend your bitcoin because to do so you'd have to have more than half of the computing power in the world, which is pretty tough to do, and even if you did actually succeed at double spending it would render your investment worthless, because all transactions are public and someone might notice the double spend and the value of bitcoin would plummet.

Soon, you won't be able to double spend your Ethereum because if you did, everyone would notice, point it out to everyone in the network that you double spent, and then everyone would automatically slash your Ethereum stake to zero going forward and carry on without you.

That's all. It has nothing fundamentally to do with voting or economic distribution or proving ownership of scare resources or anything like that. It's about preventing double spending on a distributed ledger of transactions.

@fafrd

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@fafrd fafrd commented Sep 6, 2021

The crypto-as-pyramid-scheme is why I'm very much looking forward to the rise of stablecoins.

Being able to trade a tokenized dollar allows users to access the benefits of a blockchain (censorship resistance, programmable money) without the downside of being exposed to a fluctuating/ponzi-like cryptocurrency.

This is already starting- tools like Compound and AAVE allow lending and borrowing of stablecoins.

@dm17

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@dm17 dm17 commented Sep 6, 2021

Friendly reminder that Satoshi Nakamoto literally means "central intelligence" in Japanese!

Yes, the fork to BTC gold was pretty well taken but that doesn't mean the few with commit access in the future can't be compromised in one way or another.

Also, crypto fans love to talk about how "crypto can't just be printed like fiat!" However, I find it strange that they overlook how one can just print fiat and use it to buy/sell cryptos.

I could go on but I've never seen satisfying answers to any of the above yet.

@3nprob

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@3nprob 3nprob commented Sep 6, 2021

@ploum

"This is also why energy usage will always go up alongside the exchange rate; the more a Bitcoin is 'worth', the more energy miners are willing to put into obtaining one."

Nope. Bitcoin has "halving". The reward is diminishing over time to the point of becoming very small.

That's actually a reinforcing factor to their argument. Given everything else is equal, halving reduces the supply, meaning that to acquire one unit, twice the power needs to be expended, on average. So your point is reinforcing their argument, not contradicting it.

Bitcoin could be used by the whole world with mining only happening on a laptop. That would not change anything for Bitcoin users.

Not true. Reordering attacks would be cheap to the point of Bitcoin becoming unusable as a currency. The number of confirmations you'd have to wait to be confident that your incoming transactions aren't reversed would make week-long settlements seem instant in comparison.

" in practice, almost the entire network is controlled by a small handful of large mining companies and 'mining pools'"

Nope. Miners can only do one thing : mining. They don’t have any other power.

Not true. Successful miners can do ordering and censoring of transaction. If the monetary value of expended energy becomes low enough compared to the market price of bitcoin, bitcoin becomes vulnerable to opportunistic manipulation. Look at historic 51% attacks on ETC for real-world examples of what happens when your hash rate is too low to secure the network.

As always, things are a lot more complex as soon as you understand how they work. If you don’t understand anything about electricity production and the Bitcoin network, it’s really easy to have an intuition you are right. Which is usually the proof you are completely missing the mark.

Well, yeah... I think you and OP are both making the same mistakes of overconfidence and oversimplification.

My main issue with the OP:

Cryptocurrency as we know it today, simply cannot work. [...] There are no useful cryptocurrencies today, and there will not be any at any time in the near future. The tech just doesn't work.

This depends on your definition of "work". Bitcoin works perfectly at fulfilling its stated goals and it and some others (e.g. Ethereum) are absolutely useful already. Just because widespread adoption of it doesn't promote OP's vision of how socioeconomic dynamics should change doesn't mean it's broken. Yes, there's an inherent "the rich get richer" issue but a more fair global wealth distribution has never been the promise of Bitcoin.

@lookfirst

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@lookfirst lookfirst commented Sep 6, 2021

And in practice, almost the entire network is controlled by a small handful of large mining companies and 'mining pools'. Not very decentralized at all.

This is a common misconception. Miners are not tied to a single mining pool and can switch on a whim.

@3nprob

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@3nprob 3nprob commented Sep 6, 2021

Friendly reminder that Satashi Nakamoto literally means "central intelligence" in Japanese!

@dm17 ...Nani? I assume you meant to write "Satoshi" but 'm not aware of any reading that comes even close to that.

@joepie91

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@joepie91 joepie91 commented Sep 6, 2021

@ealtamir:

In general, I think you're equating a working cryptocurrency with one which is not controlled by "wealthy" individuals. Having the largest stake in the cryptocurrency is not necessarily equal to having "control" over it. It just means that you have the largest stake. Thus, in theory, you'd have the largest incentive to keep the currency valuable, assuming it's worth something to begin with. This setup could benefit substantially many individuals who are not considered "wealthy".

I don't find this to be a plausible argument. The same could be argued for conventional finance; the wealthy actors should have every incentive to be good stewards of the currency and financial system, because breaching the trust invested in them will wreck the economy. And yet, they weren't, and it did. Because as it turns out, humans are not perfectly rational actors, and by and large things go wrong and rational decisions go out the window when there is a large amount of wealth accumulation.

And since the premise of Bitcoin was to prevent centralized control, and it is not doing that in practice, I feel comfortable in concluding that it is "not working". Other cryptocurrencies have not always explicitly stated that this is their goal, but they have implicitly built upon it by using the consequences of such a hypothetical system ("nobody can take your money!" etc.) as marketing points, and so as far as I am concerned, they can likewise be concluded to "not work".

If cryptocurrencies cannot meet the goal of "preventing centralized power over the financial system", then it becomes hard to argue what value they truly add over conventional financial systems. Which is why that usually ends up with people either a) comparing it specifically to one of the worst systems (the US banking system) rather than the more well-functioning ones like SEPA or b) going off on a conspiracy-theorist tangent as the justification. Neither are a very good argument.

@jlykins:

I don't know how this got written without including the words "double spending."

That's because that term has basically zero meaning to anybody outside of the cryptocurrency scene. It's cryptocurrency jargon. This article was not written for people who are part of the scene.

Consensus (here presented as 'voting', can be treated the same for the purpose of illustration) comes into the picture because that is how double spending (and similar undesirable tampering) is prevented. It's the fundamental mechanism by which cryptocurrencies work, or at least are supposed to.

Read the bitcoin paper: https://bitcoin.org/bitcoin.pdf

I was an early adopter. I know how Bitcoin works.

@lookfirst

This is a common misconception. Miners are not tied to a single mining pool and can switch on a whim.

That assumes that miners are aware of the tampering, which is very unlikely with a remotely skilled attacker, and that they actually care, which is similarly unlikely because they are more likely driven by (short-term) profit considerations than by ensuring network honesty. This is one of those things that only works in theory if the stars align, but almost certainly not in practice. Not to mention the major mining companies which definitely control their own hardware and mining operations.

@95440b97d

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@95440b97d 95440b97d commented Sep 6, 2021

What should be added to the article is what all the energy is used for in the mining process. Crypto protagonists claim it is used for complex calculations but it really is finding a number (nounce) for a block (to be mined) that makes the block hash with a certain number of zeros. So in other words proof of work is equivalent to rolling a dice -- the faster you can roll it the more likely it is to find the lucky number (nounce).

@nfd9001

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@nfd9001 nfd9001 commented Sep 6, 2021

And in practice, almost the entire network is controlled by a small handful of large mining companies and 'mining pools'. Not very decentralized at all.

This is a common misconception. Miners are not tied to a single mining pool and can switch on a whim.

Yes, but unless they control monumental amounts of computation, they basically do need to be tied to a pool, and being in a larger pool implies getting steadier payouts (probably for limited extra cost), so there's significant pressure for miners to pseudo-centralize themselves into a few large conglomerates.

@jehochman

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@jehochman jehochman commented Sep 6, 2021

Thank you. Good post based on the conclusion. Cryptocurrency is heavily shilled by people with severe conflicts of interest to the poor reader who might buy late and be left holding the bag.

@jlykins

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@jlykins jlykins commented Sep 6, 2021

@joepie91 (looks like my response got eaten by the series of tubes so here's the gist)

Consensus (here presented as 'voting', can be treated the same for the purpose of illustration) comes into the picture because that is how double spending (and similar undesirable tampering) is prevented. It's the fundamental mechanism by which cryptocurrencies work, or at least are supposed to.

Insofar as no coins have been double spent (or other undesirable tampering been discovered), would it not be fair to describe the system as being in the state a reasonable person might describe as "working"?

@ShadowJonathan

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@ShadowJonathan ShadowJonathan commented Sep 6, 2021

It is quite the stretch to call "double spending" jargon.

@jlykins FTR, i had no idea what that term meant, until i thought about it a little longer, and i've poked at cryptocurrency pretty closely in the last few years, learned some stuff, heard some things, and i haven't heard this exact jargon, or i cant remember it, which means i didn't know it's meaning at the time (as it wasnt explained), which is what @joepie91 is illustrating here.

@lookfirst

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@lookfirst lookfirst commented Sep 6, 2021

@joepie91 That assumes that miners are aware of the tampering, which is very unlikely with a remotely skilled attacker, and that they actually care, which is similarly unlikely because they are more likely driven by (short-term) profit considerations than by ensuring network honesty. This is one of those things that only works in theory if the stars align, but almost certainly not in practice. Not to mention the major mining companies which definitely control their own hardware and mining operations.

You're still wrong and clearly do not understand how mining works on a technical level. This is my day job, I do.

As you said, miners are motivated by profit. Any smart business is motivated by profit. Therefore, a miner is going to pay attention to their business.

There is nothing in mining that can get hacked, thanks to math. Work is either valid or is rejected by the pool/network. Since a miner is literally investing in the network through capex / opex, they have every financial incentive to do the right thing. The games miners play are with efficiency. My farm is more efficient than most other farms and therefore my ROI is higher.

Size is relative, so major minor or small miner... doesn't matter... everyone is invested in the same end goal.

@ChristianRamseier

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@ChristianRamseier ChristianRamseier commented Sep 7, 2021

@lookfirst … Since a miner is literally investing in the network through capex / opex, they have every financial incentive to do the right thing. The games miners play are with efficiency. My farm is more efficient than most other farms and therefore my ROI is higher…

One of the right things to do would certainly be switching Bitcoin to a less energy intensive consensus algorithm. But such a change would need the support of miners (> 50% of the total mining power at least). This is highly unlikely to happen, as miners are sitting on very expensive hardware that is not capable of doing anything beyond today’s process. You may play your miner role better and more efficient than others, but when it comes to doing the right thing, you‘re constrained by the rules of the Bitcoin system with all its unresolved design flaws.

@joepie91

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@joepie91 joepie91 commented Sep 7, 2021

@jlykins:

Insofar as no coins have been double spent (or other undesirable tampering been discovered), would it not be fair to describe the system as being in the state a reasonable person might describe as "working"?

No. Because anecdata about how something operates on a small scale doesn't really tell you anything about how it would operate on a large scale. And when proposing for something to essentially take over the financial system, you need to methodically reason through its security properties, and see whether they hold up, and essentially 'predict' how things will go at scale.

I'm essentially applying the same baseline here as is normally used for anything cryptography: there is a certain expected 'design behaviour' of a system, it is well-specified, and to consider an implementation 'working' it must exactly conform to that design behaviour. If it deviates in any way, even a seemingly subtle way, that means that the original design assumptions were not accurate and therefore the conclusion about its viability cannot be trusted.

This is why SHA1 was considered "effectively broken, needs replacing" when the first attack appeared that allowed to weaken its security guarantees. Not because you could literally immediately tamper with any hash, but because the weakening demonstrated that its design assumptions were wrong, and that calls into question the entire design (and indeed, such algorithms routinely get broken further as time progresses).

The same applies to cryptocurrency and its designed incentives. It's not behaving as designed (people scale mining resources rather than endlessly optimizing them, power centralizes in the hands of a few, etc.) and therefore the entire design is no longer trustworthy, because it calls into question whether the design goals can be reached.

To be convinced that cryptocurrency can 'work', I would need to essentially see an updated design (of similar quality to the Bitcoin whitepaper) that does match with how cryptocurrencies are actually developing, and which can plausibly argue that even under those circumstances it still presents a significant improvement over the 'traditional' financial system and so is still worth it. I have not seen such a thing, and I very much have my doubts that especially that last point can be satisfied. "No centralized power" was pretty much the selling point.

@joepie91

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@joepie91 joepie91 commented Sep 7, 2021

@lookfirst:

As you said, miners are motivated by profit. Any smart business is motivated by profit. Therefore, a miner is going to pay attention to their business.

Considering the frankly surreal amount of capital waste and 'short-term profit at the cost of long-term profit' that occurs within for-profit companies around the world, I'm gonna call that claim in doubt. You're assuming humans to be perfectly rational economic actors, which they are not. This is a neat spherical-cow argument, but not something to make the integrity of an actual real-world system rely upon.

There is nothing in mining that can get hacked, thanks to math. Work is either valid or is rejected by the pool/network.

That is not how mining works. The only part of mining that is independently verifiable by "math", is the proof of work. Mining pools are free to include/exclude/substitute transactions in a block as they desire. The consensus mechanism exists to prevent this from being used maliciously through computational requirements and the longest-chain mechanism, but that mechanism breaks down when mining power is heavily centralized, which is precisely the problem here.

If blocks were truly 100% verifiable by "math", then we wouldn't need miners or proof-of-work or any other proof scheme at all. It'd all just work. But it doesn't, and so we do, and the decentralization of mining power is really important as a result.

@ChristianRamseier

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@ChristianRamseier ChristianRamseier commented Sep 7, 2021

While I agree with the article to great extent, I miss the perspective of today‘s financial infrastructure reality: A complex web of custodians, banks and other intermediaries that are forming a network where money/assets can flow. Altough they operate globally, they are forced to obey local regulations. These rules often require significant software changes and prevent a wider harmonization. A globally accepted technical solution could never catch up with all the regulatory changes.
Local regulation is driven by politics (taxes, liquidity requirements, power, etc), not technology. Harmonization goals are easily sacrificed by national interests.
Cryptocurrency and DLT technology is promoted as a revolutionary, globally scalable infrastructure alternative to the complex and intransparent workings of today‘s system. For the marketing to work better, the regulatory perspective is just ignored.
The article concludes with „the tech just doesn‘t work“. I‘d rather say that the „tech“ sets out to solve a problem that is not a technical one. It’s a political one - and technology is not going to make it disappear.

@joepie91

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@joepie91 joepie91 commented Sep 7, 2021

@ChristianRamseier While I fully agree with that - there's a reason that this infrastructure has been rapidly replicating itself in the cryptocurrency industry, after all - I intentionally chose not to address the situation from that angle in this article, for two major reasons:

  1. This article is mainly aimed at people who don't really know particularly much about financial systems or cryptocurrency, and who are threatening to get taken in by slick cryptocurrency marketing. "You can't solve this problem with technology at all" is, while a correct argument, also an argument that is basically impossible to fully understand why it is true unless you've done a deep dive into finance and cryptocurrency as a whole. I did not feel that I could explain it well enough here either, without basically writing an entire book's length.
  2. My experience is that cryptocurrency proponents take advantage of point 1, and just use it as a way to claim that "well, my cryptocurrency makes all that complexity unnecessary!", taking advantage of the fact that a layman would not be able to understand why it couldn't possibly do that - remember, proponents hide behind complexity. So centering the article around that particular issue would have just provided more opportunities for bad-faith proponents to shill their favourite cryptocurrency.

So yeah, I agree with your view, and I think it is useful to point out. It's just that I've found "the technology doesn't work as advertised" to be an easier point to argue and explain, and that in and of itself should already be enough reason not to bother with cryptocurrencies anyway.

(As a mostly unrelated aside, I think that those who truly believe that harmonization is fundamentally impossible and therefore requires cryptocurrency, as opposed to just difficult, should have a closer look at how SEPA works.)

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@8teAPi 8teAPi commented Sep 7, 2021

I agree with every single thing your article says. However here are some perspectives which may be interesting, and provide some balancing arguments as to why cryptocurrencies may be a foundational technology.

The End of US Currency Hegemony

A currency hegemon necessarily has to allow other countries to depreciate against its currency. This is doable while the hegemon is economically dominant, but as the hegemon's economy declines over time, this becomes difficult. The US economy has declined from 40% of global GDP in the 1960s to about 25% now. The currency hegemon has to accept trade deficits and capital surplus. China is not willing to accept those trade deficits. So we are in a weird period of time, where we potentially have a switch back to gold, oil, or other such commodity as the underlying settlement basis for global transactions. Bitcoin is not a bad choice for this role at this moment in time.

Regulatory Arb By Other Means

There are distinct regulatory failures in the US where the US political system is unable to resolve these failures in a timely fashion leading to lower consumer welfare overall. US startups specifically use specious technology halo arguments to arbitrage regulatory regimes in order to deliver desired consumer experiences. This is visible in Uber (it's not a taxi service), Airbnb (it's not a hotel) etc. etc. Cryptocurrencies are a social methodology of using the tech halo to break open the regulatory blocks in the financial sector. They don't necessarily have to be technically capable of achieving their promises, just as Uber never created an autonomous vehicle. Is US regulation stifling innovation in the financial sector? If you had asked me 3 years ago, I would not have said the FDA was stifling innovation in the US pharma sector, but my opinion today is very different. I do not think US regulators are competent in unblocking paths for good innovation.

Translation of Law to Code

I do not believe Code is Law, and should ever be. However lots of law can and should be executed as code, under the purview of a court that can step in when things go wrong. Do you think today's lawyers, most of whom went into law because they couldn't do math (would have gone into banking or software otherwise) are competent to write this code? Nope. Smart contracts built by coders are probably the best option. Decentralized? Nope. At some point the smart contract builders will have to acknowledge their status and control (SEC investigation of Uniswap is the start of this process).

Re-establishment of markets to fund risky ventures

Let's just assume most cryptocurrencies are just stock in extremely risky ventures. The US used to be very good at funding risky ventures. Most companies on stock markets till the late 90s had plenty of bezzle and risk in them. The regulations stemming from the dotcom crisis and the Global Financial Crisis killed those markets. Obama's Jumpstart Our Business Act was a recognition that the pendulum had swung too far the other way. New venture creation plunged to an all time low before the pandemic start. The cryptocurrency market has basically established a worldwide small cap stock exchange. 99% of these ventures will fail. However there are at least 2 trillion dollar ventures (Bitcoin and Ethereum) already, and likely to be more created over the near future.

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@shikari7 shikari7 commented Sep 7, 2021

if the currency is controlled by those who have most of it, how is this any different from government-issued currency, if it's the wealthy controlling the financial system either way? And you'd be completely right. There isn't really a difference.

I'd say there's one big difference: control of the supply is out of the hands of any specific individual. I believe this would go a long way in having a form of sound money that wouldn't be terribly devalued by emission of new currency.

Cryptocurrency replaces democratically elected elites with self appointed elites. What could go wrong?

https://bitcoinera.app/arewedecentralizedyet/

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@lookfirst lookfirst commented Sep 7, 2021

@ChristianRamseier One of the right things to do would certainly be switching Bitcoin to a less energy intensive consensus algorithm. But such a change would need the support of miners (> 50% of the total mining power at least). This is highly unlikely to happen, as miners are sitting on very expensive hardware that is not capable of doing anything beyond today’s process. You may play your miner role better and more efficient than others, but when it comes to doing the right thing, you‘re constrained by the rules of the Bitcoin system with all its unresolved design flaws.

You assumed I mine bitcoin, which I do not.

Theoretically, bitcoin could add a difficultly bomb similar to ETH. This would of course require 51% of the miners to support it, which might be hard. But, if there was enough support, it would allow for a consensus change sometime in the future.

@joepie91 Considering the frankly surreal amount of capital waste and 'short-term profit at the cost of long-term profit' that occurs within for-profit companies around the world, I'm gonna call that claim in doubt. You're assuming humans to be perfectly rational economic actors, which they are not. This is a neat spherical-cow argument, but not something to make the integrity of an actual real-world system rely upon.

I'm not assuming anything. I see this in practice all the time. Certainly, there are plenty of 'dumb' businesses out there as well.

@joepie91 That is not how mining works. The only part of mining that is independently verifiable by "math", is the proof of work. Mining pools are free to include/exclude/substitute transactions in a block as they desire. The consensus mechanism exists to prevent this from being used maliciously through computational requirements and the longest-chain mechanism, but that mechanism breaks down when mining power is heavily centralized, which is precisely the problem here.

We're back to my original point. If a pool starts mucking with things, the miners will leave. Again, nothing ties miners to a pool. This has already happened

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@ZacharyTalis ZacharyTalis commented Sep 7, 2021

Hey just wanted to say briefly: excellent write-up, thank you!!

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@harrouet harrouet commented Sep 8, 2021

This article fails to note an important point: energy consumption costs a lot of money, and currently miners finance this cost with the issuance of new bitcoins. But Bitcoin is designed to stop issuing new tokens at some point. So, no more energy financing, no more financing for mining. As a consequence, it will even fail as a transactional media.
Not a currency, by a long shot.

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@miracle2k miracle2k commented Sep 8, 2021

I note that there seems to be somewhat of an incongruence between the argument that cryptocurrency is a pyramid-scheme, and the argument that Proof-of-Stake currencies, in particular, lead to a centralization of power, namely the following: The first argument assumes that early investors are seeking to cash out as soon as they can find a greater fool to buy their holdings (explicitly spelled out above), while the second one suggests that they are interested in playing a role within the system in the long-term.

The argument here is not that owners of crypto-currency do not have a financial interest in bringing new-comers into the system; merely that the nefarious intent implied in "By the time you figure out it was all just smoke and mirrors, they're long gone with their profits" does not seem to rhyme with the desire to become a Proof-of-Stake whale.

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@pikesley pikesley commented Sep 8, 2021

Bitcoin could be used by the whole world with mining only happening on a laptop. That would not change anything for Bitcoin users.

Have you bumped your head, @ploum?

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@robertknutzen robertknutzen commented Sep 8, 2021

+-----------------+
|      ₦1,000     |
|   One Thousand  |
|      NoCoin     |
+-----------------+

Please accept this NoCoin as payment for writing this

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@mads-in-zero mads-in-zero commented Sep 11, 2021

This is also the reason why proponents of cryptocurrencies are always so mysterious about how it works, invoking jargon and telling you how much complicated work 'the team' has done on it. The goal is to make you believe that 'there must be something to it' for long enough that you will buy in and they can sell off. By the time you figure out it was all just smoke and mirrors, they're long gone with their profits.

This bit hit me like a tonne of bricks.

I'm in one particular discord for a particular series of visual novels. There's one user in particular, who is the biggest Cryptocurrency defender in the server. I (with no additional comment) posted a screenshot of the paragraph above, knowing he'd want to rebuke it. He posted a meme about how "wow, people sure say crypto is bad for the environemnt, but the US Dollar is backed by petrol and oil!"

Very transparently not what I was actually bringing up. Which was, of course, a running theme with this user. I once said that, even if we accept that fiat currency and cryptocurrency both are tied to pollution (and ignoring the fact that they don't pollute equally), why bother to introduce more standards? Shouldn't we stick with the "polluting" currency we have, rather than have two (fiat and crypto)?

And most importantly - what does cryptocurrency allow you to do that fiat currency does not?

"If you used cryptocurrency you would know" he said. "The fact that you've never had to use crypto shows you're privliged."

So, I ask what he realized when he first used it - even if I haven't, surely he could explain what cryptocurrency does that fiat currency can't. But no, that's foolishness. "You have to use it to understand." (The conversation became trapped in a loop from there).

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@dm17 dm17 commented Sep 11, 2021

I'm gonna take this apart because it is full of ubiquitous logical fallacies:

You're still wrong and clearly do not understand how mining works on a technical level. This is my day job, I do.

Appeal to authority

As you said, miners are motivated by profit. Any smart business is motivated by profit. Therefore, a miner is going to pay attention to their business.

Not an argument

There is nothing in mining that can get hacked, thanks to math.

You can prove the absence of something? How's that? Where's the evidence that this domain is special vs the rest of computer software.

  • miners are connected to the internet
  • miners could be rejected from the pool/network even when doing the work due to an attack
  • energy attacks are obvious, power outages etc
  • I shouldn't have to list every possible attack vector; there are lots

they have every financial incentive to do the right thing. The games miners play are with efficiency. My farm is more efficient than most other farms and therefore my ROI is higher.

Again, not an argument. The people trying to do the right thing are the miners adhering to the crypto game. That is an artificially narrow categorization. There are plenty of financial incentives to attack a cryptocurrency (including via miners) for those playing different games (perhaps those who can print fiat).

everyone is invested in the same end goal.

Evidence? You can't prove what "everyone" is invested in because you don't know everyone.

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@lookfirst lookfirst commented Sep 11, 2021

@dm17 Argument from fallacy.

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@dm17 dm17 commented Sep 11, 2021

@dm17 Argument from fallacy.

I explained my argumentation where it was not self evident. I'm happy to explain any parts you did not understand. However, you don't sound interested in being understood as I've presented many arguments and you won't even clarify to which you're replying.

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@lookfirst lookfirst commented Sep 11, 2021

@dm17 You provide no value to the conversation other than to pick apart what I said. Go troll somewhere else.

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@dm17 dm17 commented Sep 11, 2021

@dm17 You provide no value to the conversation other than to pick apart what I said. Go troll somewhere else.

ad hominem

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@lookfirst lookfirst commented Sep 11, 2021

Exactly. You can keep "winning" with fallacies, which goes back to the argument from fallacy and has nothing to do with the OP. Yawn.

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@dm17 dm17 commented Sep 11, 2021

Exactly. You can keep "winning" with fallacies, which goes back to the argument from fallacy and has nothing to do with the OP. Yawn.

I'm not interested in winning - just truth.

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@lookfirst lookfirst commented Sep 11, 2021

Exactly. You can keep "winning" with fallacies, which goes back to the argument from fallacy and has nothing to do with the OP. Yawn.

I'm not interested in winning - just truth.

Then tell the truth, rather than just pointing out fallacies.

  • I agree with your appeal to authority. And?
  • Not an argument - how?
  • 4,634 days of operation, without a successful hack. (aka: double spend)
  • The beauty of the system is that miners don't need to be trusted.
  • Oh come on... the argument of fallacies.
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@dm17 dm17 commented Sep 12, 2021

Exactly. You can keep "winning" with fallacies, which goes back to the argument from fallacy and has nothing to do with the OP. Yawn.

I'm not interested in winning - just truth.

Then tell the truth, rather than just pointing out fallacies.

Pointing out fallacies and telling the truth are not at odds. Please reference my earlier reply, but I'm adding more beneath each point:

* I agree with your appeal to authority. And?

You agree with my claim that yours was an appeal to authority, right? I didn't make any appeals to authority, did I?

* Not an argument - how?

"As you said, miners are motivated by profit. Any smart business is motivated by profit. Therefore, a miner is going to pay attention to their business." -> Is not an argument against the opposition. The opposition isn't claiming that miners do not have profit motivates. The opposition is not claiming that a business isn't motivated by profit or that miners will not pay attention to their business.

* 4,634 days of operation, without a successful hack. (aka: double spend)

I've covered this earlier. That isn't evidence that a hack cannot be done - or an exploit doesn't exist. Just the fact that fiat can be printed and used to buy loads of crypto and pump/dump it is a great exploit. 4000 days? I'm sure we can find examples of "fool proof" systems that ran for decades that eventually failed...

* The beauty of the system is that miners don't need to be trusted.

No one is claiming they need to be trusted. No one is claiming that the truth of the miner is the weak point in the system.

* Oh come on... the argument of fallacies.

And you're just repeating that my arguments are fallacious without explaining why.

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@lookfirst lookfirst commented Sep 12, 2021

You agree with my claim that yours was an appeal to authority, right? I didn't make any appeals to authority, did I?

Who cares.

"As you said, miners are motivated by profit. Any smart business is motivated by profit. Therefore, a miner is going to pay attention to their business." -> Is not an argument against the opposition. The opposition isn't claiming that miners do not have profit motivates. The opposition is not claiming that a business isn't motivated by profit or that miners will not pay attention to their business.

Go back and read the anti-miner stance above.

I've covered this earlier. That isn't evidence that a hack cannot be done - or an exploit doesn't exist. Just the fact that fiat can be printed and used to buy loads of crypto and pump/dump it is a great exploit. 4000 days? I'm sure we can find examples of "fool proof" systems that ran for decades that eventually failed...

Given that there is an $862,285,735,123 bounty at hand, I'd say that is proof enough.

No one is claiming they need to be trusted. No one is claiming that the truth of the miner is the weak point in the system.

The OP's original claim was that mining is centralized, which is inherently a weak point in the system.

And you're just repeating that my arguments are fallacious without explaining why.

Nobody has asked me to explain why.

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@williamcyoung williamcyoung commented Sep 12, 2021

There are no useful cryptocurrencies today, and there will not be any at any time in the near future. The tech just doesn't work.

Unless you’ve read all of the white papers out there in detail, and seeing as though there are many I’m pretty sure you haven’t, I find it a little weird that you would feel confident enough to make such an absolute statement.

Most of your article only seems to address the proof schemes and energy consumption issues of Bitcoin, with a very passing mention of proof of stake and basically no mention of how other projects like Ethereum work. I feel like you haven’t put a ton of thought into why so many people have decided to engage in the cryptocurrency world beyond just speculating (which I admit many people are guilty of right now).

A group of ~15 are able to build and run a decentralized exchange on top of Ethereum. Do you know how many people are employed to run the NYSE? Do you know how much they charge for exchange data that an exchange like Uniswap doesn’t charge a nickel for?

Then there are the lending protocols that run parallel to the existing financial system. In a world where you can literally “earn” negative interest in a bank account, getting high single digit interest through staking or a protocol like compound sounds pretty good.

There are problems with most of the cryptocurrencies out there but by calling them all useless I think you’re assuming a lot of people are dumber than you give them credit for.

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@MangoCats MangoCats commented Sep 13, 2021

You're not wrong, about proof of work or proof of stake - both are fundamentally flawed and the whole thing is a pyramid scheme of hype and hope, but... similar things could be said about all forms of money throughout time.

Proof of work needs to go away, anybody who doesn't believe needs to try to use Bitcoin or Ethereum(1) and pay a few transaction fees, which in some ways represent the energy cost of recording your transaction. No, the lightning network doesn't solve all that, it just puts more smoke in front of the mirrors.

While "one chain to rule them all" proof of stake is horribly beholden to "big money" - I feel that smaller, individually run blockchains might just be a way to use proof of stake, or even simple proof of trust to make a cryptocurrency that works. Next time you're in front of a gift card rack, stop and think about what that represents. Those gift cards are just promises to give your money back in an attractive little package, running on simple cryptographic algorithms. The issuers only care that they have been paid for the card, they readily accept them as payment, and they do so because it drives business to them and they also profit when cards get lost before they are redeemed.

If individuals ran their own "gift card" type of blockchains, they could either secure them with closely held proof of stake where they hold more than 50% of the value on the chain and certify the transactions, or they could simply sign transactions proving that they agree it is a valid transaction, not a double spend. Individuals who run their blockchains fairly and reliably would have the equivalence of good credit with their chains - individuals who don't develop a history of fair dealing basically won't be trusted much at all and blockchain will either be worthless to them, or much less advantageous than for someone who has maintained a fair chain for decades. This can all be automatically audited, in the open for all to see. It's not much for a Dread Pirate Roberts marketplace of illegal wares and illicit transactions, but then Bitcoin really wasn't that either, was it?

That's my idea for where "cryptocurrency" could go in the future, sort of an electronically accessible ledger for individual IOUs. They could be traded among people who know each other, whether in real life or virtually through auditing of the public records. They would be an excellent vehicle for microloans, and people who do the majority of their business through a public ledger should be more readily trusted, and perhaps even more lightly taxed by governments who can easily audit their finances. O.K. that last one is a stretch, but not without some basis.

Who would profit from such a system? Mostly the little people who use it to increase their personal liquidity and perhaps make some interest on microloans. Thus: it lacks the investment and development effort put into schemes like Stellar, Ripple, Ethereum, etc. which all seek to centralize all transactions and then take a cut of them like Visa and MasterCard.

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