by Don Tapscott
CULTURE ON THE BLOCKCHAIN AND YOU
After two world wars in a single generation, global leaders admitted that political and economic agreements could not—would never—maintain long-term world peace. Those conditions changed, sometimes frequently, sometimes drastically so. Peace had to be rooted in something richer, more universal, in the shared moral values and intellectual freedoms of society. In 1945, three dozen nations convened to form an educational body of sorts that would model a culture of peace. It became known as the UN Educational, Scientific, and Cultural Organization (UNESCO). Its mission in the world today is “to create the conditions for dialogue among civilizations, cultures, and peoples.”47
Through the lens of blockchain technologies, musicians, artists, journalists, and educators are seeing the contours of a world that protects, cherishes, and rewards their efforts fairly. All of us should care. We are a species that survives by its ideas, not by its instincts. We all benefit when creative industries thrive and when the creatives themselves can make a living. Moreover, these are the bellwethers of our economy—they reveal faster than nearly any other industry how both producers and consumers will adopt and then adapt a technology to their lives. Musicians have long been among the first to exploit innovations for the benefit of a great many others, too often at their own expense. These dedicated members of our society inspire us, and every business executive, government official, and other organizational leader has much to learn from them about the new era of the digital age.
PART III
PROMISE AND PERIL
CHAPTER 10
OVERCOMING SHOWSTOPPERS:
TEN IMPLEMENTATION CHALLENGES
Lev Sergeyevich Termen was a gifted musician, but he preferred playing with physics. Born into Russian aristocracy before the turn of the twentieth century, Termen joined the Bolsheviks in dismantling the tsarist autocracy. One of his early missions was to create a device that could measure the electrical conductivity and capacity of various gases. He tried gas-filled lamps, he tried a high-frequency oscillator, and he even tried hypnosis.1 The oscillator ended up working well, and so Termen’s boss encouraged him to seek other applications for it. Two apps would become legendary. The more whimsical of the two started out as two metal terminals with nothing between them, like a lamp without the glass. Termen discovered that, if he infused this void with gas, he could gauge the gas’s electrical properties. His design was brilliant: he substituted headphones for dials so that he could take acoustic rather than visual readings, monitoring the pitch of the signal that each gas produced. It was way ahead of its time, the stuff of Dr. Emmett Brown’s garage in Back to the Future.
Devotees of TED talks and students of technological history already know the end of this story: Termen stumbled upon a means of making music out of thin air. Whenever he put his hands near the metal terminals, the pitch of the signal changed. He learned that he could manipulate the pitch by the precise position and motion of his hands. He called his device the “etherphone,” known today as the theremin, an anglicized version of his name. The other app was a larger-scale version of this apparatus, one that was sensitive to movement within a radius of several meters. It was the first motion detector—sentry of the ether. He demonstrated both of these instruments at the Kremlin, playing his etherphone with abandon for Comrade Lenin. While Lenin delighted in the etherphone, he put the motion detector immediately to work in watching over the Soviet stashes of gold. If anyone crossed the electromagnetic line around the gold, they’d set off a silent alarm. Big Brother suddenly had electric eyes.
The moral of the story is simple: Termen’s devices brought both light and darkness to the world. In a poignant talk, “Our Comrade the Electron,” Maciej Ceglowski pointed out these two themes in all of Termen’s inventions: as soon as they gave shape to airy nothing, they were usurped by dark forces. Lenin even co-opted electricity in his propaganda, equating communism with Soviet power plus the electrification of the country.2 But it was Stalin who rounded up Termen and his peers, threw them into the Kolyma gulag, and forced them to invent instruments of tyranny.
We’ve heard bitcoin used with similar grandiosity in campaigns of all stripes. Like every revolutionary technology, the bitcoin blockchain has its upside and its downside. In the previous chapters, we’ve walked you through the many promises of this technology. This chapter shines a spotlight on ten showstoppers—problems and perils. Forgive us if some of these are technically complicated. We think it imprudent to supersimplify these issues: we need a certain level of detail for precision.
As well, after reading this section you may be tempted to dismiss these blockchain innovators because they face serious obstacles. We encourage you to consider whether these are either “reasons the blockchain is a bad idea” or “implementation challenges to overcome.” We think it’s the latter, and we’d like innovators to view these as important problems to solve creatively as we transition to the second era of the Internet. For each challenge, we propose some solutions. In the final chapter, we present our thinking on what we can do overall to ensure the fulfillment of the blockchain’s promise.
1. THE TECHNOLOGY IS NOT READY FOR PRIME TIME
As of this writing, most people have only a vague understanding of bitcoin the cryptocurrency, and very few have heard of blockchain the technology. You the reader are among the forward-thinking few. Bitcoin conjures images ranging from a pyramid scheme and a money Laundromat to a financial E-ZPass on the economic highway for value. Either way, the infrastructure isn’t ready for prime time, so goes the argument.
The challenge is multifaceted. The first facet borrows from science fiction author William Gibson, that the future is here; its infrastructure is just unevenly distributed. Had Greek citizens known about bitcoin during their country’s economic crash in 2015, they still would’ve been hard-pressed to locate a bitcoin exchange or a bitcoin ATM anywhere in Athens. They wouldn’t have been able to transfer their drachmas into bitcoins to hedge against the plummeting fiat currency. Computer scientist Nick Szabo and information security expert Andreas Antonopoulos both argued that robust infrastructure matters and can’t be bootstrapped during catastrophes. Antonopoulos said that Greece’s blockchain infrastructure was lacking at the time of the crisis, and there was insufficient bitcoin liquidity for an entire population to move its troubled fiat currency into it.
On the other hand, the bitcoin blockchain isn’t ready for Greece either. That’s the second facet: it falls short on security controls for such a massive bump in usage. “The system lacks the transactional capacity to on-board ten million people. That would represent almost a tenfold increase in user base overnight,” said Antonopoulos. “Remember what happened when AOL dumped 2.3 million e-mail accounts onto the Internet? We quickly discovered that the Internet wasn’t ready, in terms of spam protection and Net etiquette, to absorb 2.3 million noobs who didn’t have the culture. That’s not good for an immature technology.”3 The blockchain would be susceptible to capacity problems, system failures, unanticipated bugs, and perhaps most damaging, the huge disappointment of technically unsophisticated users, none of which it needs at the moment.
That relates to the third facet of this showstopper, its inaccessibility to the average person. There’s not enough wallet support, and many interfaces are user-unfriendly, requiring a high tolerance for alphanumeric code and geekspeak. Most bitcoin addresses are simply strings of between twenty-six and thirty-five characters beginning with a one or a three, quite tedious to type. As Tyler Winklevoss said, “When you go to Google.com you don’t type in a string of numbers. You don’t type in an IP address. You type in a name, a word that you can remember. And the same goes with the bitcoin addresses. Bitcoin addresses shouldn’t be exposed to the average user. Little things like that make a difference.”4 So there’s much work to be done in basic user interface and experience.
Critics have also raised concerns about long-term illiquidity because bitcoin is finite in quantity—21 million by 214
0—and mined at a diminishing rate. It’s a rules-based monetary policy intended to prevent inflation triggered by arbitrary and discretionary monetary policies, a phenomenon commonplace for many fiat currencies. Satoshi wrote, “It’s more typical of a precious metal. Instead of the supply changing to keep the value the same, the supply is predetermined and the value changes. As the number of users grows, the value per coin increases. It has the potential for a positive feedback loop; as users increase, the value goes up, which could attract more users to take advantage of the increasing value.”5
At the margin, coins stored in lost wallets or sent to addresses whose owners have lost their private keys are not recoverable; they just sit dormant on the blockchain, and so there will be fewer than 21 million in circulation. Early adopters have tended to hold on to bitcoin as they hold on to gold, hoping that its value will increase in the long run, and therefore treating bitcoin as an asset rather than as a medium of exchange. According to economic theorists, low or no inflation motivates holders to hoard rather than spend their bitcoin. Still, if more trusted bitcoin exchanges facilitate consumers’ movement in and out of bitcoin, then the frequency and volume of trading could increase. If more merchants accept bitcoin as a medium of payment, then people who’ve been sitting on bitcoins may start to use their store for purchases, thereby freeing up more bitcoins. If merchants begin to issue bitcoin-denominated gift cards, then more people should be exposed to cryptocurrencies and become more comfortable transacting in bitcoin. And so, hypothetically, people will have fewer reasons to hoard bitcoin. Advocates of the bitcoin protocol argue that, because bitcoins are divisible to eight decimal places—the smallest unit is called a Satoshi, worth one hundredth of a millionth of a bitcoin—the smallest denominations will buy more if demand for bitcoin increases. There’s also the possibility of tweaking the protocols to allow for greater divisibility, say, picopayments (trillionths of a bitcoin) and to remine stranded bitcoin after a period of dormancy.
A fifth dimension is high latency: for the bitcoin blockchain network, the process of clearing and settling transactions takes about ten minutes, which is far faster end to end than most payment mechanisms. But clearing transactions at the point of sale instantaneously is not the issue; the real problem is that ten minutes is simply too long for the Internet of Things where devices need to interact continuously. Core developer Gavin Andresen said solving for a trillion connected objects is “a different design space from bitcoin,” a space where low latency is more critical and fraud is less of an issue or where parties could establish an acceptable level of trust without the bitcoin network. Ten minutes is also too long for financial transactions where timing matters to get an asset at a particular price, and where latency exposes traders to time-based arbitrage weaknesses such as market timing attacks.6 The immediate solution for entrepreneurs has been to fork the bitcoin code base, that is, to modify the source code by tweaking a few parameters, and to launch a new blockchain with an altcoin in place of bitcoin as incentive to participate. Litecoin is a popular altcoin with a block time of 2.5 minutes, and Ripple and Ethereum are entirely reengineered blockchain platforms that have latency of seconds, not minutes.
A sixth dimension is behavioral change in a deeper sense than Netiquette. Today, many people count on their bank or credit card company, even talking with a real person, when they make an accounting error, forget their passwords, or lose their wallets or checkbooks. Most people with bank accounts aren’t in the habit of backing up their money on a flash drive or a second device, securing their passwords so that they needn’t rely on a service provider’s password reset function, or keeping these backups in separate locations so that, if they lose their computer and all other possessions in a house fire, they don’t lose their money. Without this discipline, they might as well stuff their mattress with cash. With greater freedom—better privacy, stronger security, and autonomy from third-party cost structures and system failures—comes greater responsibility. For those consumers who don’t trust themselves to keep safe backups of their private keys, third-party storage providers could provide backup service.
A seventh dimension is societal change. Money is still a social construct representing what a society values. It is endogenous to that society, it manifests because of human relationships, and it adapts to evolving human needs. “You can’t take the social out of money,” said Izabella Kaminska of the Financial Times. “A lot of these protocols attempt to do that by creating an absolutist and very objectified system. It just doesn’t reflect the world as it is.” She pointed to the euro system as an example of how one size—one set of protocols—doesn’t fit all countries.7 She echoed what Antonopoulos said about the very human need for societies to forgive and forget in order to move on. “There’s a very long tradition in finance of obliterating records, because we as a society believe that it’s wrong to persecute or discriminate against individuals for something they did ten or fifteen years ago. We have this whole debt jubilee-esque mentality because we think people should be given another chance. Creating a system that never forgets is slightly sociopathic,” she said.8
That leads us to the eighth dimension, the lack of legal recourse in a world of irrevocable transactions and unvoidable smart contracts. According to legal scholars Primavera De Filippi and Aaron Wright, “People are, indeed, free to decide the particular set of rules to which they want to abide, but—after the choice has been made—can no longer deviate from these rules, to the extent that smart contracts are automatically enforced by the underlying code of the technology, regardless of the will of the parties.”9 This very high degree of certainty—mathematical certainty—as to the outcome of a transaction or a smart contract is unprecedented in society. It delivers greater efficiencies and effectively eliminates nonperformance risk because we have no choice of breach, no choice of damages. But that’s also a downside. It allows no room for human beings. To Josh Fairfield of Washington and Lee University School of Law, that means “more messiness, not less. We’re going to see more fights. ‘You didn’t actually renovate my house, I want my money back.’ We’re going to see more human messiness, but more human messiness doesn’t mean the technology is bad.”10
But will people actually take the counterparty to court? De Filippi estimated that, in the analog world, 80 percent of contract breaches aren’t enforced because they’re too costly to pursue in court, too expensive to go into proceedings. Why should those numbers improve in a blockchain world? When the code indicates that the contract has been fully executed rather than breached, except one party is dissatisfied with the outcome, will the dissatisfied party actually pursue a lawsuit? Will the courts recognize the case? Will the small business owner back away from the corporate legal team of Dewey, Cheatham, and Howe or—with his modest resources—even be able to identify his anonymous counterparty, so that he could file a lawsuit in the first place?
2. THE ENERGY CONSUMED IS UNSUSTAINABLE
In these primordial days of the bitcoin blockchain, the proof-of-work method described in chapter 2 has been critical to building people’s trust. Years from now, we will look back and appreciate the genius of its deployment, from minting and allocating new bitcoins to assigning identity and preventing double spending. Pretty remarkable. And pretty unsustainable, according to critics of cryptocurrencies that use proof of work to keep the network safe and pseudonymous.
Hashing, the process of running pending transactions through the secure hash algorithm 256 (SHA-256) to validate them and solve a block, burns a lot of electricity. Some people in the blockchain ecosystem are making back-of-the-envelope calculations that become memes in the community. Estimates liken the bitcoin network’s energy consumption to the power used by nearly seven hundred average American homes at the low end of the spectrum and to the energy consumed by the island of Cyprus at the high end.11 That’s more than 4.409 billion kilowatt-hours,12 a Godzilla-sized carbon footprint, and it’s by design. It’s what secures the network and keeps nodes honest.
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br /> In early 2015, The New Republic reported that the combined processing power of the bitcoin network was hundreds of times greater than the aggregate output of the world’s top five hundred supercomputers. “Processing and protecting the more than $3 billion worth of bitcoins in circulation requires more than $100 million in electricity each year, generating a volume of carbon emissions to match.” The article’s author, Nathan Schneider, wrote what has been on our minds ever since: “All that computing power, which could be curing cancer or exploring the stars, is locked up in machines that do nothing but process bitcoin-type transactions.”13
As citizens who care about our planet, we should all be concerned. There are two issues, one around the electricity used to run the machines and another around the energy used to cool them so that they don’t fail. Here’s a rule of thumb: for every dollar a computer burns up in electricity, it needs fifty cents to cool down.14 The acute drought in California has raised serious concerns over using precious water to cool data centers and bitcoin mining operations.
As the value of bitcoin increases, the competition for mining new bitcoin increases. As more computing power is directed at mining, the computational problem that miners need to solve becomes more difficult. One measure of the total processing power of the bitcoin network is the hash rate. Gavin Andresen explains: “Let’s say we have millions of transactions per block, each paying an average of a dollar transaction fee. Miners would be paid millions of dollars per block, and they would spend a little less than that in electricity to do that work. That’s how the proof-of-work economics work out. It really is the price of bitcoin and however much reward is in a block that drives how much hashing is done.”15 The hash rate has been increasing considerably over the last two years, rising forty-five-fold in less than a year. And the trend is toward using more energy, not less.