Blockchain Revolution (updated)

by Don Tapscott

  “The cost for having no central authority is the cost of that energy,” said Eric Jennings, CEO of Filament, an industrial wireless sensor network.16 That’s one side of the argument. The energy is what it is, and it’s comparable to the cost incurred in securing fiat currency. “All forms of money have a relationship to energy,” said Stephen Pair of BitPay. He revisited the gold analogy. “Gold atoms are rare on earth because an intense amount of energy is needed to form them.” Gold is precious because of its physical properties, and those properties derive from energy. Pair mused that artificially manufacturing gold would require nuclear fusion.17

  From one perspective, all this electricity consumption makes sense. Erik Voorhees, founder of the coin exchange ShapeShift, said critics were unfair in calling the energy spent on bitcoin mining a waste. “The electricity is being burned for a purpose. There is a real service being provided, the securing of these payments.” He urged critics to compare it with the energy burned by the current financial system. Think of the big vaults, the bunkerlike architecture with majestic Grecian facades, HVAC systems pushing frigid air into bright lobbies, competing branches on every corner, and ATMs in between. “The next time you see a Brink’s armored truck pumping black soot into the air, compare that to the burning of electricity in bitcoining. It is not quite clear which is worse,” Voorhees said.18

  The second energy-related issue is computer architecture itself. For backward compatibility with slower-changing legacy systems, your laptop or PC is likely a type of complex instruction set computer (CISC) that can run a wide range of math apps that the average person will never ever use. When engineers realized that they’d seriously overshot the market, they created the reduced instruction set computer (RISC). Your mobile device is likely an advanced RISC machine (ARM). What miners realized was that they could also harness their graphics processing unit to increase processing speed. Because modern GPUs have thousands of computing cores on each chip, they are ideal for computations that can be done in parallel, such as the hashing done in bitcoin mining, There were some trade-offs, and estimating the machine’s energy consumption got slightly more complicated, but for the most part GPUs could do the work.19

  “If I can design a RISC computer to be oh-so-superfast and massively, near insanely parallel to try the billions of kazillions of codes simultaneously with little or no electricity, I will make money out of thin air,”20 said Bob Tapscott, Don’s CIO brother. That’s what the BitFury Group has done: built a massively parallel bitcoin solver with application specific integrated circuits (ASICs) that are energy efficient and designed solely to mine bitcoins. Its founder and CEO, Valery Vavilov, argued the view that machines and mining operations overall will continue to get more energy efficient and environmentally friendly. Some of that depends on relocating to cold climates where energy is cheap and preferably renewable, such as hydro or geothermal, and where either Mother Nature handles the cooling or manufacturers figure out an efficient way to capture the heat. BitFury, for example, has two data centers—one in Iceland and another in the country of Georgia—with plans for additional centers in North America, and it acquired the Hong Kong–based start-up Allied Control, which specializes in immersion cooling technology.21 And so BitFury is working to reduce the ecological impact of the bitcoin infrastructure.

  Even if these initiatives limit mining’s carbon footprint, we still have the rapid consumption and disposal of these continually upgraded devices. Miners who want to make a career of it must continually upgrade and specialize their systems. Most mining equipment has a useful life span of three to six months.22 Bob Tapscott likened firms such as BitFury to those Yukon shopkeepers during the great gold rush: they made their real fortune by selling better and better shovels to the miners.23 We found one miner’s description of his Cointerra TerraMiner IV bitcoin with an ASIC chip that was so energy intensive that his home’s electrical system couldn’t handle it. “I am selling three units because my house is old and has substandard wiring. I do not want a fire.” The starting bid was five thousand dollars.24 Vendors such as MRI of Australia are applying new approaches to recycling, first disassembling rather than shredding all these computing components, and then managing resulting waste streams. Such creative processes are enabling them to reclaim precious metals and reuse up to 98 percent of product by weight.25 Unfortunately, hardware recycling is still not widely available to most consumers.

  For bitcoin’s core developers, the concern is legitimate and worth solving: “If bitcoin really does become a global team network, I think we will need to slowly move away from proof of work as the only way it’s secure,” said Andresen. “In the very long run, maybe we will move away from proof of work as the way the network is secured, and we’ll combine it with something else.”26

  That’s what several altchains have done: explored alternative consensus algorithms such as proof of stake for securing the network while retaining decentralization. The open source nature of the bitcoin protocol makes it technically easy to do. Remember, the purpose of consensus algorithms is to distribute the right to decide what the state of the blockchain is to a decentralized set of users. To the mind of Vitalik Buterin, the visionary behind Ethereum, there are only three securely decentralized sets of users, and each set corresponds to a set of consensus algorithms: owners of computing power, with standard proof-of-work algorithm; stakeholders, with various proof-of-stake algorithms in wallet software; and members of a social network, with a “federated style” consensus algorithm.27 Note that only one of those consensus mechanisms includes the word power. Ethereum version 2.0 will be built on a proof-of-stake model, whereas Ripple uses a federated model, a small controlled group akin to something like SWIFT, the global provider of secure financial messaging, where authorized groups reach consensus on the state of the blockchain.28

  Those systems don’t burn electricity as the bitcoin blockchain does. Bram Cohen, founder of Tor, has introduced a fourth way to address the energy waste, what he calls “proof of disk,” where owners of disk storage space—people who have committed a chunk of computer memory to maintaining a network and performing network functions—defines the economic set of users. Of these alternatives to proof of work, Blockstream’s Austin Hill cautioned against using alternative methods for securing consensus. “Experimentation with your proof-of-work algorithm is dangerous, and it’s a new area of computer science.”29 It adds an additional dimension to innovation: not only must developers worry about whether their new features and functions will work in their own right, but they must also check how the choice of consensus algorithm keeps them secure and distributed to the most appropriate economic set.

  Overall, the expression “If there is a will, there is a way” applies. The smartest technologists on the planet are working on creative solutions to the energy problem, with more efficient devices and use of renewable energy. Further, as computers become inexorably smarter, they will undoubtedly provide their own solutions. Bitcoin angel investor Roger Ver, nicknamed Bitcoin Jesus, said, “Say the smartest human has an IQ up close to 200. Imagine artificial intelligences with an IQ of 250, or say 500, or 5,000 or 5 million. There will be solutions, if we humans want them.”30

  3. GOVERNMENTS WILL STIFLE OR TWIST IT

  To libertarians and anarchists, Satoshi Nakamoto wrote, “You will not find a solution to political problems in cryptography.”31 They would have to look elsewhere for a cure-all to big government. Satoshi viewed his experiment as a gain in a new territory of freedom, not a total upheaval. Where governments had succeeded in beheading centrally controlled networks like Napster, pure peer-to-peer networks like Tor were able to persist. Could the bitcoin blockchain network hold its own against mighty central authorities?

  That might be the biggest unknown. What will legislators, regulators, and adjudicators around the world make of blockchain technologies? “The courts are going to get it wrong. They’ve already started to get it wrong, applying intellectual property rules to anything that is intang
ible. They think that physicality is the dividing line between virtual property and intellectual property, and it’s not,” said Josh Fairfield. “There’s no intellectual property element, there’s no part of a bitcoin that is intellectual property, there’s no creative spark for copyright, there’s no patentable idea, there’s no patent, there’s no trademark.”32 According to Stephen Pair of BitPay, “The biggest threat to bitcoin is that it becomes so heavily regulated at some point that a competitor that’s more private and more anonymous shows up and everybody switches to that.”33 One thing’s for sure: “Whatever the particular policy issue is, if you don’t understand the technology and you don’t understand the implications, you’re setting yourself up for failure,” said Jerry Brito of the bitcoin policy think tank Coin Center. “If you don’t understand it, you can introduce law and policy that’s going to harm the development of the technology. We just want you to understand what you’re doing.”34

  So their challenge is formidable. They must oversee the unforeseeable. On the one hand, they must avoid stifling innovation by overreacting to worst cases—human trafficking, illicit drug trade, gunrunning, child pornography, terrorism, tax evasion, and counterfeiting, for instance. On the other hand, they must not twist new but unproven applications such as blockchain-based platforms for identity management to restrict civil liberties. There must be a stable approach to regulation, legislation, and the international negotiation of treaties to minimize regulatory uncertainty, so that investors will continue to support the technology’s global development.

  Jurisdiction already matters when it comes to using bitcoin. Some governments have banned it or banned state banks from exchanging it, as China has done. Brito said, “In a typically Chinese way, it’s not illegal, but it could be at any moment and everybody knows it.”35 China is allowing a serious professional mining community to flourish and those mining pools have become quite influential in debates over upgrades to the bitcoin protocol. What happens to blockchain security if China suddenly bans mining, too? Other jurisdictions have moved to define bitcoin narrowly, as the U.S. Internal Revenue Service has done. The IRS has labeled bitcoin as an asset for calculating taxes on the appreciation of value.

  Legal frameworks also matter. Legal scholars De Filippi and Wright don’t think the current one can handle the questions raised by smart property deployed globally at scale. Smart contracts both define and manage ownership rights. Their code makes no assumptions about the assignment of rights, and code can’t arbitrarily seize, divest, or transfer these rights. For example, if during the process of land registration, government officials assigned the ownership of a parcel of land to someone who isn’t the legal owner of that parcel, that person would have absolute sovereignty over the parcel, and the legal owner couldn’t simply reverse the assignment.

  Josh Fairfield focuses more on process: “The common law isn’t affecting technology law; the common law is technology law. The common law is the process of adapting human systems to technological change . . . the real fight is how do we take old rules meant for old technology and adapt them rapidly and competently,” so that they are recognizable when we start using them but iterated so that they’re state of the art when the technology really hits.36

  Last but not least, and this should be no surprise, identity matters big-time—or at least how we construct it on the blockchain matters. “People have a very simplistic view of identity,” said Andreas Antonopoulos. “I am actually terrified of the implications of digital identity because I think people will take shortcuts. . . . If we transfer identity to the digital world where views are inflexible, we actually end up with a construct that does not resemble the social construct of identity, but is a terrifying, fascist copy of it.”37

  Combine a precisely coded version of personhood with a precisely coded version of society, and you get the stuff of science fiction novels and Arnold Schwarzenegger movies. Legal scholars De Filippi and Wright conjured images of “self-enforcing contracts, walled gardens or trusted systems, owned and managed by a sophisticated network of decentralized organizations that dictate what people can or cannot do, without any kind of constitutional safeguards or constraints.” In other words, a machine-driven totalitarian regime.

  Artificial intelligence expert Steve Omohundro threw this phrase at us: the dictator’s learning curve, or how cave dwellers end up with space age technology. Think about all the AI labs out there staffed by the world’s smartest PhDs with access to the world’s most powerful computers. PhDs might fork the bitcoin code or write a smart contract that controls a drone’s delivery of a package, where bitcoin is held in escrow until that exact moment when the package arrives. Let’s say these PhDs post that software as open source code to the Internet, because that’s what they do to move their ideas forward; they share ideas. So now ISIS doesn’t need an AI lab, it doesn’t need a software development team. It just needs to substitute a grenade for the package. That’s the dictator’s learning curve, and it’s not steep. But don’t blame the code or the culture of sharing. It’s not necessarily what we do with the code; it’s what we don’t realize we’re doing with it—the unintended consequences of a friction-free world.

  4. POWERFUL INCUMBENTS OF THE OLD PARADIGM WILL USURP IT

  Many of our concerns about the first generation of the Internet have come true. Powerful corporations have captured much of the technology and are using it in their vast private empires to extract most of the value. They have closed off opportunity and privatized much of our digital experience. We use proprietary stores to acquire and use new apps on our phones, tablets, and now watches. Search engines and marketing departments alike interrupt our content with advertising. Big companies that promote and prosper from consumer transparency are notoriously secretive about their activities, plans, technology infrastructures, and information assets. To be sure, some companies have opened up voluntarily, but many others have merely reacted to the sunlight of whistleblowers and investigative journalism. Such disclosures are dwarfed by efforts to hide operations and conceal information.

  Simply put, they haven’t been good stewards of the public trust.

  Case in point: the banking industry. “Banks are traditionally secret keepers,” according to Kaminska of the Financial Times. She explained that banks make good judgments about whom to lend to and how to process payments when they have good access to private information, and they get that information by promising to keep the secret. The more secrets they hold, the greater the information asymmetry and the greater their advantages, but those advantages have harmful systemic implications.38 So what’s to prevent huge corporations or powerful nation-states from capturing blockchain technologies for their own narrow interests? “Any consensus mechanism that you have is going to be susceptible to marketing—where powerful interests spend money trying to convince people to do a certain thing,” said Pair of BitPay.39

  To be clear, we are not suggesting that corporations and governments should leave this technology alone. After all, blockchain technology is emerging as an important global resource that could enable new capabilities. Moreover, society needs governments to deliver services for their citizenry and corporations to create jobs and wealth. But that’s different from capturing a disruptive technology and its largesse in ways that limit its greater benefits to society.

  Also consider what the core developers and blockchain companies are already doing to secure their networks, anticipating and responding quickly to worst-case scenarios. For example, in 2014, thieves stole eight million VeriCoins, a proof-of-stake cryptocurrency, from the MintPal exchange. Within days of the attack, VeriCoin developers released new code that forked the VeriCoin blockchain prior to the hack—in a sense, they rolled back time—and collaborated with exchanges to make sure it was adopted.40 Similarly, “if money and power do try to capture the network, the miners would stop them by going to the real version of bitcoin and initiating a fork,”41 according to Keonne Rodriguez, product lead at Blockchain.

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sp; What’s to prevent China from aiming all its state processing assets and all its mining pools at the bitcoin blockchain to stage a 51 percent attack or at minimum destabilize the process? Let’s say some wealthy despot has decided that bitcoin, like the Internet before it, has become so influential that it is eroding his power. This despot could seize all the mining power within reach and purchase the rest from countries that still tolerate his bad behavior, to put him over the 50 percent hash rate threshold. He could then decide which transactions to include in blocks and which to reject. With controlling interest, he could also decide whether to fork the code and introduce a few prohibitions, maybe blacklisting addresses associated with gambling or free speech. So do honest nodes adopt this centrally controlled fork or do they fork over to a new code? Andrew Vegetabile, director of the Litecoin Association, said there was no escape from such a scenario because the despot controlled 51 percent of the network. And he needn’t represent a government; he could be one of the world’s wealthiest people or an executive of a highly profitable company with substantial purchasing power.42

  A third scenario is that the incumbents will defend their territory, lobbying to make sure existing regulations for well-established firms apply to small start-ups, and suing any start-up that survives the regulatory inquisition. This litigate-not-innovate strategy may buy them time to sort out a strategy. Or it may simply drain the incumbent of whatever real value it contains. Think of those twin tyrants—legacy systems and active inertia. Academics have well documented the effects of lock-in and switching costs and have identified the challenges of postmerger systems integration. Organizations with huge technology investments in their installed base may be more likely to throw more money at their old system, sharpening their knives for the pistol fight rather than conducting strategic experiments on the blockchain.