Systemic issues with Cryptocurrencies

This blog post is really just my notes and highlights after reading the very well put article by David Rosenthal on Cryptocurrencies https://blog.dshr.org/2022/02/ee380-talk.html

His post is definitely worth the read for anyone who’s a crypto lover or hater.
It covers some of the good points, but a lot of the systemic issues with Cryptocurrencies as they currently exist.
It articulates what’s been just vague nagging feelings floating around in my brain and covers things from a thermodynamics, cultural and technical perspective and has lots of references and links.

My notes below are mostly just highlights to get you to go read it.

The key point is that Bitcoin, but also Ethereum and other Proof of Work blockchains are currently using extreme amounts of energy and resources but not in an effective way because in trying to counter Sybil attacks they end up needing to have a Cryptocurrency to incentivise mining but because of market forces and the power of scale, that ends up with concentrated mining pools and similar forces usually mean there’s a lot of the currency owned by a relatively small number of people.
The concentration of wealth aspect is even worse for Proof of Stake distributed ledgers where the increasing inequality is built into the system.

Exchanges are a major sticking point. Read the article for more about them.

The point of the cryptocurrencies is distrust of institutions but there’s trust issues in even more places and less recourse if something major goes wrong (e.g the Ethereum hard fork because of the DAO… Ethereum classic is still around because of that and you can’t do a fork each time there’s a theft ).

Have a read and he explains well how there’s a fundamental issue with the massive decentralisation from something like Ethereum or BTC not actually being that secure in reality and certainly isn’t fast. The other option of having say 20 elected, trusted nodes do the processing can actually be much faster, but has other downsides.

Some Other points

  • There’s major externalities. Both environmental from energy production and e-Waste, but also infrastructure and supply chain related as well.
  • There’s been a massive increase in ransomware because of crypto (especially with cryptocurrencies like Monero)

Externalities

Bitcoin is notorious for consuming as much electricity as the Netherlands, but there are around 10,000 other cryptocurrencies, most using similar infrastructure and thus also in aggregate consuming unsustainable amounts of electricity. Bitcoin alone generates as much e-waste as the Netherlands, cryptocurrencies suffer an epidemic of pump-and-dump schemes and wash trading, they enable a $5.2B/year ransomware industry, they have disrupted supply chains for GPUs, hard disks, SSDs and other chips, they have made it impossible for web services to offer free tiers, and they are responsible for a massive crime wave including fraud, theft, tax evasion, funding of rogue states such as North Korea, drug smuggling, and even as documented by Jameson Lopp’s list of physical attacks, armed robbery, kidnapping, torture and murder.

Trust

Here is a list of institutions that a real-world user of cryptocurrencies as they actually exist cannot avoid trusting:

  • The owners and operators of the dominant mining pools not to collude.
  • The operators of the exchanges not to manipulate the markets or to commit fraud.
  • The core developers of the blockchain software not to write bugs.
  • The developers of your wallet software not to write bugs.
  • The developers of the exchanges not to write bugs.

And, if your cryptocurrency has Ethereum-like “smart contracts”:

  • The developers of your “smart contracts” not to write bugs.
  • The owners of the smart contracts to keep their secret key secret.
  • Every one of these has examples where trust was misplaced.

My personal take

I’ve wondered when the best time to sell Bitcoin is if you don’t mind waiting many years. The answer is that Bitcoin and most crypto will be useless after Quantum computing gets powerful enough to crack crypto wallets which is likely between 2030 and 2044, but also there’s already been 18.9 Million Bitcoin mined and there’s just over 2 million left to be mined. Whilst the number being mined does half every now and then, and the last Bitcoin isn’t expected to be mined until 2140, a collapse of the market is likely to happen well before then.

BTC is the 1st generation of Crypto, Ethereum is the 2nd gen and there’s a few examples of 3rd gen e.g Tezos and Near, with Hedera (Hashgraph) seemingly the 4th gen.
I think by the 5th or 6th generation we could iron out a lot of the major issues and when transitioning to a Post-Scarcity Society we would have a programmable distributed ledger work as what the late Mario Matiev called the Resource Engine. A system which can track resources and their usage. A system which would replace the majority of politics with algorithms for resource allocation and processing.

So I do think there’s a lot of potential and it can be a very fundamental piece of infrastructure in the future. Being able to look through the records and see what’s happened and have some idea of why, that’s powerful.

But it’s not there yet and in the mean time there’s a lot of speculation.
I do believe in the Web 3.0 vision. In the Verida style of owning your own data. I am plagued by slow International transfers and I really with my taxes was automatically processed as I got paid (I’m a freelancer so this doesn’t happen for me) and creating a submission was simply a single button I press. So I do want DeFi now, but I’m also looking forward to being able to transition to something even more free later on.

If you’ve read this far but haven’t read the actual article, I highly recommend you go read it.

By Michael Kubler

Photographer, cinematographer, web master/coder.

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