“Blockchain Technology” – I Don’t Think it Means What You Think it Means

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During World War II numerous indigenous people of the islands of the Pacific Ocean, who previously had no contact with other civilizations, suddenly witnessed history’s most devastating and hitherto technologically advanced war being fought right on their door steps.

Japanese and Allied Forces arrived with heavy machinery and plenty of supplies to set up bases all around the Pacific Ocean, some close to people who had little to no interaction with modern technology before.

Where soldiers maintained friendly relations with the locals, the supplies and technology they brought made their way into villages. Machinery, radios, electric light, and spectacles were passed around, and the people witnessed ceremonies like flag-raising, parades, and flare-guided airplane landings.

To the locals, these events were indistinguishable from magic, and the people attempted to explain them alongside the existing social, cultural, and religious experiences they held. A common belief was that the soldiers had a special relationship with the ancient gods of the islanders, and the gods were rewarding them with gifts from heaven.

As the war ended and soldiers left their former bases, local people, still unknowing of the processes behind their recent experiences, began to imitate the behavior of soldiers in an attempt to keep the supplies coming.

They carved headphones and radio from wood, continued the flag-raising ceremonies and parades and lit up former air strips in an attempt to recreate the special relationship with the gods that the soldiers had. Cargo cults were born.

Bitcoin is The Dawn of A New Age of Finance

For the first time, a commodity has been issued in a decentralized and predictable way. This pseudonymous electronic commodity is scarce, easy to transfer, divisible, and easily identifiable — meaning it has all the properties of money.

Bitcoin is far from being widely adopted currently, but with the number of transactions almost doubling year-on-year for the past five years it very well might be in another five years.

source: Blockchain.info

While it’s impossible to know for certain, there is an undeniable possibility that Bitcoin, and the applications and protocols built on top of it, will take the bankers’ lunch money. The top three banks in the United States alone made US$ 6 billion from ATM withdrawal and overdraft fees in 2015, the year they were first forced to publicize this information. And over the past twenty years, between 37% and 42% of a bank’s income has come from non-interest fees, according to data from the World Bank.

But it’s not just bank income that is at risk. Our entire financial system is highly politicized. In most of our capitalist world only banks, not the government, have the ability to create money. And they are responsible for financing nation states and the wars they fight against each other. Would we have spent two trillion US dollars on a war in Iraq if we had to borrow the money from citizens?

Control over what transactions are tolerated, and which are not, is also an important tool of government policy. While Wikileaks as an organization was never charged with a crime, it saw its funding channels cut after the US State Department started to send letters to the payment processors. The online classified advertising site, Backpage, had to get a restraining order against a Chicago sheriff after he successfully pressured credit card companies to stop processing payments to their site. The allegation he made that Backpage facilitated prostitution by allowing adult services to advertise on the portal, was never argued in court. Other legal businesses, like pornography and payday lending, have also been targeted without due process by governments and regulators and seen their companies close after payment became impossible.

It’s true that Bitcoin faces some serious scaling issues, but the potential to remove the ability from banks to charge fees, print money, fund wars, and spend lavishly, while simultaneously curbing governments who enforce policies outside of due process is tantamount to the end of finance as we know it.

Blockchains Emerge

In an attempt to dismiss the threat posed by Bitcoin and hopefully retain the upper hand, at least in conversations, the buzzword ‘Blockchain’ was born. The narrative is that Bitcoin can be safely ignored while its technology can be co-opted to enhance the existing financial system. Blockchains make banks stronger, increase profits and make it easier for governments to collect taxes and monitor its citizens. Initially, the phenomenon of taking inspiration from Bitcoin’s functionality to build a better banking infrastructure was referred to as ‘Bitcoin 2.0’, with Ripple Labs being one of its early champions, in 2012.

The code underlying Bitcoin was supposed to spell the end of traditional finance; instead, big banks plan to leverage it to streamline operations and costs, while improving services and products for clients. – Morgan Stanley, 2016

By 2015, this term had morphed into ‘Block Chain 2.0’, and later, simply ‘Blockchain Technology’. The New York Times and the Economist gave the topic, and the term, a broad audience in the late summer of 2015, and the terminology was settled.

Bitcoin in this new narrative was the premature rebellious infant that could be used to buy drugs and pay ransoms, and Blockchain was the more mature cousin who’s time has come, as evident by the cover stories from established news publications, partnerships with accounting firms, central banks, and governments. One such organization, the UK Office for Science, even dares to spot what lies behind blockchain: Distributed Ledger Technology.

Blockchains Are Not Very Interesting

Blockchains are infrastructure for banks and governments, and they are speculated to become replacements for the aging technology backbone of our financial system, which may well still be needed. But blockchains are not, in any way, capable of altering the power structures in politics or the markets.

Having stripped from Bitcoin the capability to be run by anyone and controlled by no one, blockchains have absolutely no potential to be transformative in any meaningful sense. This explains their popularity with those in power, but it does not explain what they are, how they function, and why you would use one. They might not even qualify as being blockchains in the technical sense, as explained in the 2008 paper released by Satoshi Nakamoto (hence the need for the term Distributed Ledger Technology).

When in the history of governance, banking, and journalism have we dedicated so much of our attention and efforts to a database? When has the world of finance and technology ever obsessed over the technicalities of wire transfers?

The answer is that blockchains are a form of cargo cults. They are a result of failing to understand, or refusing to recognize, the technological and social relationships of a cryptocurrency like Bitcoin, coupled with the fear and rejection of being ‘colonized’ by a group of people whose culture and values appear foreign.

Blockchain is the result of observing a technologically incredibly successful system (Bitcoin has had a 99.99% uptime, no sustained network forks, and no loss of funds due to bugs in the protocol) and trying to replicate this success at the surface while reversing the fundamental functions at its core.

How Bitcoin Uses Technology to Work

Bitcoin makes use of elliptic curves to create public/private key pairs, excessively uses hash functions to identify addresses, and links transactions together in Merkle Trees. While Bitcoin is evidently full of cryptography, all of the technology utilized in the protocol was available long before the term blockchain was born.

Consensus isn’t needed in a centralized blockchain

The real innovation of Bitcoin lies entirely in its proof-of-work consensus algorithm, which allows anybody to contribute to the network with their computing power, and rewards them for wasted electricity by giving out tokens, thereby minting the process and creating the Bitcoin money supply.

The chain of blocks owes to this consensus algorithm and serves no specific purpose. It exists out of the necessity of concentrating the efforts of a Bitcoin miner, typically through a 10-minute period, and putting it into a single data file that can quickly be announced to the entire network.

A decentralized, open, and politically transformative blockchain needs proof-of-work (or maybe proof-of-stake) as its consensus protocol and this protocol demands a chain of blocks.

A centralized, permissionless, and politically neutral blockchain has no consensus protocol. It either does not seek consensus at all (because it’s only used to share data) or uses a preset authority to come to a consensus. Either way, it does not demand a chain of blocks.

 There’s no such thing as “Blockchain as a service”

Another misunderstanding stems from the way in which traditional financial institutions view technology. Technology is often something that is bought ‘off the shelf’ from large vendors, while in the cryptocurrency world, technology is something that is to be adopted. Blockchain technology is supposed to be ready to take off the shelf and plugged in seamlessly, ideally with no disruption or effect on the existing business.

In their attempt to recreate Bitcoin, banks turned to the same actors they have always turned to, big technology vendors. Companies like Microsoft and IBM may not have any actual blockchain solutions available, but when faced with customers willing to spend, they will happily point them to existing products, such as IBM Bluemix, or Microsoft Azure. Blockchain as a service makes absolutely no sense, but turning customers away is not a viable business model.

Bitcoin Creates it’s Own Social Ecosystem

Bitcoin not only offers some complicated new technological relationships, that essentially allow anybody to turn electricity into valuable online tokens, they also introduce a complicated and unexplored power dynamic. In Bitcoin, miners, users, developers, and businesses have no formal agreements with each other and are not protected by the rule of law. There are no established legal threats of violence that regulate against attacks on Bitcoin, and anything that is technically possible goes, even in the eyes of many participants.

People trust people, not Math

The very core of the fabric around traditional money is that money has an issuer. This can be a bank, a mint, or a government; but the value of money is only worth as much as the institution behind it. A mint needs to be trusted not to debase coins, a bank needs to be trusted to make due on their promise to pay, and a government ultimately backs the value of the money it issues with their ability to collect taxes.

The fact that Satoshi Nakamoto’s ‘real’ identity remains a mystery is not of interest or importance to someone well familiar with how a cryptocurrency functions, but it is deeply troubling for those who are used to putting their trust into humans and not code. This also explains the relative popularity of the smart contracts platform (and undoubtedly a blockchain) Ethereum, whose founder Vitalik Buterin is known and easily approachable.

Blockchain is a Convenient Terminology

The confusion about the two very different kinds of blockchains exists because both sides of the argument are more than happy to continue to uphold the term. Blockchain allows companies dealing in the delicate space of cryptocurrencies to appease the very institutions they threaten, while a technology company embracing blockchain stays more relevant than if they were to simply admit they are building another shared database.

Additionally, even banking consortiums that have no intention of investing in technological innovation might be playing a political game. They too use the term ‘Blockchain technology’ because they mean to change the political landscape and dethrone monopolists or accumulate power.

The term Distributed Ledger Technology is far more accurate for what most blockchain companies are building, but it sounds far less innovative, relevant, and transformative. Creating a shared ledger for a financial system is not something that we would trust a small a newly founded startup to do, while with Blockchain, anything seems possible.

Scam Artists Prey on the Uninformed

Many leaders of cargo cults have been accused by their more informed peers of running scams. It is impossible to know if a spiritual leader genuinely believes in their preaching, or whether they use the gullibility of the population to enrich themselves. A similar theme exists in the Blockchain world, where many ideas are not fit for a blockchain and can more efficiently run on standard databases.

How many are using the term Blockchain solely as a buzzword to trick investors and partners to believe their product is more valuable or innovative than it actually is?

Cargo Cults Eventually Disappear

Humans are generally smart beings. They might pick up some false correlations, like seeing people wave flares around, or seeing cargo drop from the sky, but they also realize quickly when they are not able to replicate an experiment.

As such, most cargo cults disappeared not too many years after the departure of soldiers. Technology might appear like magic at first, but it is rarely entirely beyond the comprehension of an average intelligent being, and unless we do find some application for blockchain technology (one that exceeds that of a simple label) soon, the term will be forgotten.

We will be left with technology that has proven itself in a free market, a hostile information security landscape, and a confusing jungle of political powers and regulation.

There is no guarantee that Bitcoin will succeed in changing a financial system which boundlessly prints money, funds wars, and exerts unconstitutional control over our lives through extrajudicial enforcement of policies that destroy businesses and deny the marginalized basic banking services.

But if the technology behind Bitcoin can deliver its promises, it will do so in a transformative, disruptive, and egalitarian way, where anybody can use and develop on top of it. It will not happen on top of closed, controlled systems developed by and for the existing big players.

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Leonhard Weese

After my studies of economics in Vienna I moved to Asia to study statistics at Hong Kong University. Through work in a young data mining startup I deepened my interest in data security and privacy. Since 2012 I have been organizing the local Bitcoin meetups, which have since evolved into the Bitcoin Association of Hong Kong. We educate ourselves, the public and all interested parties about the uses, potential and risks of Bitcoin and related technologies.
You can reach me at @LeoAW, my PGP fingerprint is A087 7877 C0CF E886 1B35 118D 832E 6328 4080 D73A.

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