Blockchain and Trust

In his 2008 white paper that first proposed bitcoin, the anonymous Satoshi Nakamoto concluded with: "We have proposed a system for electronic transactions without relying on trust." He was referring to blockchain, the system behind bitcoin cryptocurrency. The circumvention of trust is a great promise, but it's just not true. Yes, bitcoin eliminates certain trusted intermediaries that are inherent in other payment systems like credit cards. But you still have to trust bitcoin -- and everything about it.

Much has been written about blockchains and how they displace, reshape, or eliminate trust. But when you analyze both blockchain and trust, you quickly realize that there is much more hype than value. Blockchain solutions are often much worse than what they replace.

First, a caveat. By blockchain, I mean something very specific: the data structures and protocols that make up a public blockchain. These have three essential elements. The first is a distributed (as in multiple copies) but centralized (as in there's only one) ledger, which is a way of recording what happened and in what order. This ledger is public, meaning that anyone can read it, and immutable, meaning that no one can change what happened in the past.

The second element is the consensus algorithm, which is a way to ensure all the copies of the ledger are the same. This is generally called mining; a critical part of the system is that anyone can participate. It is also distributed, meaning that you don't have to trust any particular node in the consensus network. It can also be extremely expensive, both in data storage and in the energy required to maintain it. Bitcoin has the most expensive consensus algorithm the world has ever seen, by far.

Finally, the third element is the currency. This is some sort of digital token that has value and is publicly traded. Currency is a necessary element of a blockchain to align the incentives of everyone involved. Transactions involving these tokens are stored on the ledger.

Private blockchains are completely uninteresting. (By this, I mean systems that use the blockchain data structure but don't have the above three elements.) In general, they have some external limitation on who can interact with the blockchain and its features. These are not anything new; they're distributed append-only data structures with a list of individuals authorized to add to it. Consensus protocols have been studied in distributed systems for more than 60 years. Append-only data structures have been similarly well covered. They're blockchains in name only, and -- as far as I can tell -- the only reason to operate one is to ride on the blockchain hype.

All three elements of a public blockchain fit together as a single network that offers new security properties. The question is: Is it actually good for anything? It's all a matter of trust.

Trust is essential to society. As a species, humans are wired to trust one another. Society can't function without trust, and the fact that we mostly don't even think about it is a measure of how well trust works.

The word "trust" is loaded with many meanings. There's personal and intimate trust. When we say we trust a friend, we mean that we trust their intentions and know that those intentions will inform their actions. There's also the less intimate, less personal trust -- we might not know someone personally, or know their motivations, but we can trust their future actions. Blockchain enables this sort of trust: We don't know any bitcoin miners, for example, but we trust that they will follow the mining protocol and make the whole system work.

Most blockchain enthusiasts have a unnaturally narrow definition of trust. They're fond of catchphrases like "in code we trust," "in math we trust," and "in crypto we trust." This is trust as verification. But verification isn't the same as trust.

In 2012, I wrote a book about trust and security, Liars and Outliers. In it, I listed four very general systems our species uses to incentivize trustworthy behavior. The first two are morals and reputation. The problem is that they scale only to a certain population size. Primitive systems were good enough for small communities, but larger communities required delegation, and more formalism.

The third is institutions. Institutions have rules and laws that induce people to behave according to the group norm, imposing sanctions on those who do not. In a sense, laws formalize reputation. Finally, the fourth is security systems. These are the wide varieties of security technologies we employ: door locks and tall fences, alarm systems and guards, forensics and audit systems, and so on.

These four elements work together to enable trust. Take banking, for example. Financial institutions, merchants, and individuals are all concerned with their reputations, which prevents theft and fraud. The laws and regulations surrounding every aspect of banking keep everyone in line, including backstops that limit risks in the case of fraud. And there are lots of security systems in place, from anti-counterfeiting technologies to internet-security technologies.

In his 2018 book, Blockchain and the New Architecture of Trust, Kevin Werbach outlines four different "trust architectures." The first is peer-to-peer trust. This basically corresponds to my morals and reputational systems: pairs of people who come to trust each other. His second is leviathan trust, which corresponds to institutional trust. You can see this working in our system of contracts, which allows parties that don't trust each other to enter into an agreement because they both trust that a government system will help resolve disputes. His third is intermediary trust. A good example is the credit card system, which allows untrusting buyers and sellers to engage in commerce. His fourth trust architecture is distributed trust. This is emergent trust in the particular security system that is blockchain.

What blockchain does is shift some of the trust in people and institutions to trust in technology. You need to trust the cryptography, the protocols, the software, the computers and the network. And you need to trust them absolutely, because they're often single points of failure.

When that trust turns out to be misplaced, there is no recourse. If your bitcoin exchange gets hacked, you lose all of your money. If your bitcoin wallet gets hacked, you lose all of your money. If you forget your login credentials, you lose all of your money. If there's a bug in the code of your smart contract, you lose all of your money. If someone successfully hacks the blockchain security, you lose all of your money. In many ways, trusting technology is harder than trusting people. Would you rather trust a human legal system or the details of some computer code you don't have the expertise to audit?

Blockchain enthusiasts point to more traditional forms of trust -- bank processing fees, for example -- as expensive. But blockchain trust is also costly; the cost is just hidden. For bitcoin, that's the cost of the additional bitcoin mined, the transaction fees, and the enormous environmental waste.

Blockchain doesn't eliminate the need to trust human institutions. There will always be a big gap that can't be addressed by technology alone. People still need to be in charge, and there is always a need for governance outside the system. This is obvious in the ongoing debate about changing the bitcoin block size, or in fixing the DAO attack against Ethereum. There's always a need to override the rules, and there's always a need for the ability to make permanent rules changes. As long as hard forks are a possibility -- that's when the people in charge of a blockchain step outside the system to change it -- people will need to be in charge.

Any blockchain system will have to coexist with other, more conventional systems. Modern banking, for example, is designed to be reversible. Bitcoin is not. That makes it hard to make the two compatible, and the result is often an insecurity. Steve Wozniak was scammed out of $70K in bitcoin because he forgot this.

Blockchain technology is often centralized. Bitcoin might theoretically be based on distributed trust, but in practice, that's just not true. Just about everyone using bitcoin has to trust one of the few available wallets and use one of the few available exchanges. People have to trust the software and the operating systems and the computers everything is running on. And we've seen attacks against wallets and exchanges. We've seen Trojans and phishing and password guessing. Criminals have even used flaws in the system that people use to repair their cell phones to steal bitcoin.

Moreover, in any distributed trust system, there are backdoor methods for centralization to creep back in. With bitcoin, there are only a few miners of consequence. There's one company that provides most of the mining hardware. There are only a few dominant exchanges. To the extent that most people interact with bitcoin, it is through these centralized systems. This also allows for attacks against blockchain-based systems.

These issues are not bugs in current blockchain applications, they're inherent in how blockchain works. Any evaluation of the security of the system has to take the whole socio-technical system into account. Too many blockchain enthusiasts focus on the technology and ignore the rest.

To the extent that people don't use bitcoin, it's because they don't trust bitcoin. That has nothing to do with the cryptography or the protocols. In fact, a system where you can lose your life savings if you forget your key or download a piece of malware is not particularly trustworthy. No amount of explaining how SHA-256 works to prevent double-spending will fix that.

Similarly, to the extent that people do use blockchains, it is because they trust them. People either own bitcoin or not based on reputation; that's true even for speculators who own bitcoin simply because they think it will make them rich quickly. People choose a wallet for their cryptocurrency, and an exchange for their transactions, based on reputation. We even evaluate and trust the cryptography that underpins blockchains based on the algorithms' reputation.

To see how this can fail, look at the various supply-chain security systems that are using blockchain. A blockchain isn't a necessary feature of any of them. The reasons they're successful is that everyone has a single software platform to enter their data in. Even though the blockchain systems are built on distributed trust, people don't necessarily accept that. For example, some companies don't trust the IBM/Maersk system because it's not their blockchain.

Irrational? Maybe, but that's how trust works. It can't be replaced by algorithms and protocols. It's much more social than that.

Still, the idea that blockchains can somehow eliminate the need for trust persists. Recently, I received an email from a company that implemented secure messaging using blockchain. It said, in part: "Using the blockchain, as we have done, has eliminated the need for Trust." This sentiment suggests the writer misunderstands both what blockchain does and how trust works.

Do you need a public blockchain? The answer is almost certainly no. A blockchain probably doesn't solve the security problems you think it solves. The security problems it solves are probably not the ones you have. (Manipulating audit data is probably not your major security risk.) A false trust in blockchain can itself be a security risk. The inefficiencies, especially in scaling, are probably not worth it. I have looked at many blockchain applications, and all of them could achieve the same security properties without using a blockchain­ -- of course, then they wouldn't have the cool name.

Honestly, cryptocurrencies are useless. They're only used by speculators looking for quick riches, people who don't like government-backed currencies, and criminals who want a black-market way to exchange money.

To answer the question of whether the blockchain is needed, ask yourself: Does the blockchain change the system of trust in any meaningful way, or just shift it around? Does it just try to replace trust with verification? Does it strengthen existing trust relationships, or try to go against them? How can trust be abused in the new system, and is this better or worse than the potential abuses in the old system? And lastly: What would your system look like if you didn't use blockchain at all?

If you ask yourself those questions, it's likely you'll choose solutions that don't use public blockchain. And that'll be a good thing -- especially when the hype dissipates.

This essay previously appeared on Wired.com.

EDITED TO ADD (2/11): Two commentaries on my essay.

I have wanted to write this essay for over a year. The impetus to finally do it came from an invite to speak at the Hyperledger Global Forum in December. This essay is a version of the talk I wrote for that event, made more accessible to a general audience.

It seems to be the season for blockchain takedowns. James Waldo has an excellent essay in Queue. And Nicholas Weaver gave a talk at the Enigma Conference, summarized here. It's a shortened version of this talk.

EDITED TO ADD (2/17): Reddit thread.

EDITED TO ADD (3/1): Two more articles.

Posted on February 12, 2019 at 6:25 AM • 95 Comments

Comments

Peter GalbavyFebruary 12, 2019 7:07 AM

Love the nonsense in the Morris commentary: "He’s absolutely right about that. But it’s hardly a fatal blow—in fact, it’s a point that’s already well-understood by many serious blockchain architects." - all I could think of was replacing the word "blockchain" with "sand castle" and that worked much better.

I think if you globally replace "blockchain" with "sand castle" it reads much more honestly out there in the world.

lattenwaldFebruary 12, 2019 7:49 AM

@Ismar blockchain and digital signatures are orthogonal, blockchain is data structure and digital signature is one of many applications of cryptographic algorithms.

tobiFebruary 12, 2019 7:53 AM

Cryptocurrencies are not useless. They are functional money. You can pay with them.

They give a bank account to billions of unbanked people.
They provide an exit from defunct currency systems such as in Venezuela.
They make international payments far cheaper and quicker.
They are a way for companies to save credit card fees which are 1-3%.
They make micropayments possible which the existing financial system seems unable to provide.
They are programmatic money enabling lots of new use cases and innovations. Any teenager can now receive and send money programmatically. No licenses.

ChrisFebruary 12, 2019 8:06 AM

Hello Bruce, thank you for your article. A lot of what you say is true. However, just as blockchain enthusiasts are too narrowly focussed on "in code we trust" you are too narrowly focussed on today's state of blockchain, i.e. its usability and its use case.

People can easily lose the keys to their wallets. However, there exist multisig schemes which can mitigate those risks, e.g. additionally to your private keys, there could be a 2 out of 3 notary access to your wallet. Exchanges could implement multisig with you holding part of the keys to protect your funds. Generally speaking, usability and ease of use are still rather poor and still some way away from mainstream adoption, but this will improve over time.

Another thing to consider is competition of trust systems. For instance, Venezuela and Zimbabwe, both face hyper inflation, their governments have failed. Every other trust system -however flawed- would be better at this point. If there was an alternative trust system (Bitcoin) available to the general population, it would help keep the primary trust system (government/institutions) honest.

Bitcoin has the power to transform how our society works by giving additional tools and methods to personal economic freedom which have never existed before.

George H.H. MitchellFebruary 12, 2019 8:13 AM

Apologizing and dodging brickbats in advance for this terribly pedantic comment: Satoshi Nakamoto is pseudonymous, not anonymous.

metaschimaFebruary 12, 2019 9:00 AM

Great essay on the blockchain and trust. I totally agree that the blockchain doesn't eliminate trust. I think bitcoin is indeed for delusional people who think they will get rich quick. In the end it was probably designed to be a scam. I can't understand the hype though. I guess it's just general distrust in government and banking that drive people to try other things. Their slogans are particularly laughable. In code we trust, lol, clearly whoever wrote this has never written code.

Denton ScratchFebruary 12, 2019 9:03 AM

@Bruce

"Take banking, for example. Financial institutions, merchants, and individuals are all concerned with their reputations, which prevents theft and fraud."

Is that really what you meant to say? That bankers' concern with their reputations actually _prevents_ theft and fraud?

tobiFebruary 12, 2019 9:21 AM

There is a lot of bullshit being said in the cryptocurrency community. Ignore it. Don't throw the baby out with the bathwater. There are good and bad things going on. This calls for a nuanced view.

The community has a lot of different viewpoints and factions. It would be a strawman to take the insane viewpoints, correctly attack them and conclude that cryptocurrencies are useless.

It is hard to rely on the mainstream media for this kind of information. They optimize for sensationalistic articles, not for depth and also not for breadth. If you really want to get a feel for this rising phenomenon, and realize what insiders already realize, you need to subscribe to a few blogs and listen to a few podcast. Aim for diversity of opinions.

It is a truly fascinating space. A decentralized currency has *never* existed and we will over time discover what impact it has on the world. In fact, not even hard money has *ever* existed. There always was an issuer who could, and did, abuse their power. Our governments for example like to take 2% out of our pockets every year through artificial inflation. This does not have to be.

Petre Peter February 12, 2019 9:43 AM

Society in cities is built on trust. Communities in villages are built on trust. In both of these systems trust is the requirement for existence because it enables change. Technology increases the speed with which change takes place because technology augments trust. A smart city needs a smart village as much as a smart village needs a smart city. When the last farmer dies, so will my trust in cities. For trust to flourish in both, cities and villages, the entrepreneur must reign in the city and the farmer must reign in the village because one is the reset button of the other.

ErorusFebruary 12, 2019 10:06 AM

Honestly, cryptocurrencies are useless. They're only used by speculators looking for quick riches, people who don't like government-backed currencies, and criminals who want a black-market way to exchange money.

And by people who want to transact online without asking permission from companies like Paypal, Stripe, and Visa. I need to be able to control how I send and receive money in case I want to make transactions that payment companies don't like for political or business reasons. Sometimes their "fraud protection" countermeasures get in the way of legitimate transactions, and we have no recourse.

It's unsafe and irresponsible to rely solely on private companies for the transaction of money. We need something cash-like to exchange value over long distances.

WinterFebruary 12, 2019 10:08 AM

There seems to be a deep rooted believe in the USA that people are not to be trusted, but we can formulate rules, or code, that we can use instead to create the ideal world. In this ideal world, we can live our lives without having to be bothered by other people unless we want to. This idea is best exemplified by hard core libertarians who think they can run an industrial society on interpersonal contracts in a completely free market.

These believes are found in the Bay Area, where social problems are supposedly "solved" with new technology. But it is also found in the USA's legal system, which tries to remove human judgement with a barrage of prescriptive, automatic laws, read "The death of common sense" by Philip K. Howard.

Blockchain is simply the latest religion that comes out of these believes.

The real problems the blockchain prophets are bringing up have deep political roots and do not have a simple technological solution. As our host has remarked before, new technologies tend to strengthen the powerful in the end.

Technical problems are easy to solve, social problems almost never are. Anyone who claims he can solve a persistent social problem with some gadget just shows he has not understood the problem in the first place.

Impossibly StupidFebruary 12, 2019 10:41 AM

An overall nice essay, Bruce, but I would "trust" your analysis much more if you weren't so absolute and you weren't so rosy regarding other existing systems of trust.

I mean, I don't know how anyone can say with a straight face that "laws and regulations surrounding every aspect of banking keep everyone in line". So many people lost their life savings in the last meltdown, and none of it was reversed and no bankers went to jail. There is also a dizzying amount of ongoing fraud in other forms that are engaged in using existing financial system; it undermines your thesis when you attack only cryptocurrencies for that.

Then when you say issues are "not bugs in current blockchain applications, they're inherent in how blockchain works", you clearly must know that is not true. A blockchain approach is new. It's first generation technology. Of course we will see blockchain implementations in the future that address some of the shortcoming that people are finding as they attempt to adopt it as a solution to their problems.

That said, yeah, there is certainly more hype surrounding blockchains than is warranted. But all new technology has a hype cycle. That doesn't mean "cryptocurrencies are useless", or that blockchain concepts can't otherwise be put to good use. The real problem with new technologies, blockchain and otherwise, are the overall trust issues you discuss: people trust the wrong people and institutions based on false morals and reputations. Until that changes they will always fall victim to the con man who leads them to extremes.

Sok PuppetteFebruary 12, 2019 11:25 AM

What cryptocurrency gives you is diversification. Yes, it has serious failure modes, but it doesn't share the same failure modes as the other things you talk about. It can't probably can't and almost certainly shouldn't replace them, but it can usefully augment them.

You seem to look at this only from the point of view of somebody who lives in a very high-trust part of the world... and in a part of the world that's administered relatively fairly for you.

Imagine, on the other hand, that you were a 19-year-old Saudi girl who was hoping to leave the country. You read the news. You know why you'd want to leave. What do you do when all the institutions around you are against you? How are you going to pay for your ticket? You can't even have a bank account without your father's signature. And you can't really bribe a border guard with a bank payment, either.

... and it's almost trite to bring up, say, Nazi seizures of Jewish assets, and how hard that made it for people to even escape with their lives. Or any of the many similar things that have happened throughout history.

Failures of major institutions, definitely including the state, aren't remote hypotheticals. They seem rare, because they don't happen every day... but when they do happen they affect huge numbers of people. At a guess, I'd say the average human has maybe a 20 percent chance of being seriously hurt, in a life changing way, by some massive, state-sized institutional failure during his or her lifetime. That's not insignificant.

Speculation isn't interesting at all. It doesn't add any value to the real world. And obviously nobody should put their life's savings into any one asset, let alone something as technical and volatile as cryptocurrency. But it does add value to have a safety valve.

People point to criminal use, and claim that it's a bad thing that cryptocurrency lets you avoid government controls. And I agree that it shouldn't be easy to do illegal things. Most illegal things in most places should be illegal. But some shouldn't, and that means that sometimes it has to be possible.

If anything, cryptocurrency's inconvenience and has sharp edges make it a better thing for the world as a whole. If it were trivial and completely safe to store and move money without institutional help, and possibly in secret, that would probably lead to more real crime than the world could absorb. At the very least, it'd require adopting a completely different system of taxation. But if those things are possible but hard, that means that people in extremis have a refuge that's less attractive for casual criminality.

Also, and less importantly...

In fact, a system where you can lose your life savings if you forget your key or download a piece of malware is not particularly trustworthy.

... but that's trust in myself. Not that I or anybody should put my entire life's savings in any one place.

It actually turns out that I have some moderately valuable cryptocurrency wallets (containing currency I bought to "play" with long ago when it wasn't worth much).

I won't go into detail on how I protect that currency. I think my protections are at least as reliable as anything any bank has, even if you take into account the insurance systems backstopping the banks. And I do know a fair amount about how banks operate.

Depriving me of the money through crime would take a multipronged, long-term, risky, individualized operation that would probably cost much more than the value of the currency even if it didn't get you caught and arrested. No plausible disaster would deprive me of the currency. Killing me would not deprive my heirs, but they couldn't steal it easily either.

I don't claim that the average person would know how to set up anything similar. And one of the costs is that I don't have instant access to the money. But at least it's possible to protect yourself to a very high degree against accidents or errors, and to an acceptable degree against malware and even physical attacks. With a little thought, even the average person can probably set up a system that's probably too much of a pain to figure out to make actual crime worth it... assuming an "average" amount of money involved.

...and at the very least it's trivially easy not to just lose the damned keys. That's just lame.

You still have exposures to market vagaries, to systemwide "hard fork" protocol changes, and to black swan algorithm and protocol bugs. I'm not saying those aren't real risks, but once again they are different risks than the risks to your bank accounts. So you have some diversity and some protection against common mode failures between cryptocurrency and the traditional financial system.

Many of your exposures are at least mostly under your control, and the ones you control with cryptocurrency are not the same as the the ones you control in the traditional financial system.

You can look at the human institutions that decide on things like hard forks as valuable complements and backups for the human institutions that decide on things like expropriating disliked ethnic groups... or that occasionaly just make bad fiscal decisions on the grand scale.

It's always good to have a backup.

berlinFebruary 12, 2019 11:26 AM

At the financial crisis and Well Fargo scandals have shown, morals, reputation and institutions -- 3 elements of trust that are mentioned in this essay -- are quite vulnerable. Trillions of dollars were wiped out, executives of financial institutions allow frauds and wrongdoing to happen for personal gains and yet the laws have not been effective in the prevention or correction. No one senior bankers have gone to jail.

Another point for public blockchain is transparency. It is not uncommon that one pays a bill and something happens between the messaging or systems of either party's financial institutions and it could take days before one has to go back and forth between parties to records reconciled between two systems. A public blockchain with its ledger visible to both participating parties can reduce those overheads.

The author missed the point about IBM/Maersk. When all the nodes are controlled by one party, it is a centralized trust. there is no security to prevent the party from modifying the entire ledger. there is no difference whether it is a blockchain or centrally managed database.

CallMeLateForSupperFebruary 12, 2019 11:42 AM

ISTR reading articles last year about Bitcoin's being bogged down s-l-o-w blockchain "resolution" rates (my term; don't know correct one) and disincentivized by higher-than-comfortable transaction fees. (Who wants to buy a Starbucks, for example, when the transaction fee doubles its cost. Rhetorical)

Personally, I don't use digital tokens because what I do pay with, cash, works for me, and works very well, and has worked well since the days of silver dollars, 50-cent coins and silver certificates. Also, none of the dozens of local businesses accept Bitcoin - Yes, I have asked, out of curiosity - and that is a powerful DISincentive.)

TonyFebruary 12, 2019 11:54 AM

I avoid bitcoin because of the volatility. It wasn't important when the "value" of a bitcoin was heading upwards. But it sure is now. People tout avoiding a 2% transaction fee when using conventional banking products. But that seems like peanuts to some of the single day plummets in bitcoin recently.

asdfFebruary 12, 2019 12:10 PM

The point about having to trust computers, networks, O/Ss and the rest is irrelevant, because you have to trust those things in order to use the standard banking system as well. None of modern banking would operate correctly without all of the technologies you mentioned, and plenty of fraud and theft in traditional banking occurs precisely because of these vulnerabilities.

Bitcoin seems pretty obviously a way to transfer trust, not eliminate it. There is a real need to be able to transfer trust away from a system that nuked the world economy in 1929 and nearly did so again in 2008, for nearly the same reasons. How long until the next banking fiasco destroys the wealth of millions of people? Fiat-based currencies and inflationary, fractional-reserve banking systems are corrupt and fraudulent. Why wouldn't people want an alternative, despite the risks?

With bitcoin barely 10 years old, it seems premature to criticize the flaws, or to focus on the marketing message (AKA "hype") rather than the value add. Obviously as the technology matures, the security problems will be mitigated; none of them are fundamental.

AlexFebruary 12, 2019 12:13 PM

Bruce,

There is one point you make that undermines your thesis of the uselessness of cryptocurrencies:

>people who don't like government-backed currencies

The same argument was made about strong cryptographic protocols. People who don't want governments reading their communications. That is a legitimate case. So is the ability to store wealth in a medium not bound to the whims of the U.S. government. Go ask Venezuela (not gonna debate who's on the right here, just who can make the call on who gets the money :) ).

In any case, if the U.S. govt. went on a currency printing binge, people would jump to other currencies. If all countries go on a binge, it's gold. If gold stores start being raided by CIA types, where do you go?

asdfFebruary 12, 2019 12:18 PM

Btw, as techniques in proving code correctness improve, I see no reason why "in code we trust" won't make a heck of a lot more sense than trusting in a depository bank.

...keeping in mind that depository banks rely on all the same networks, encryption, O/Ss etc to operate.

Code correctness proofs will someday apply to all code, including blockchain algorithms. But they will never apply to the corruptible humans that operate our banks. This is the true meaning of "in code we trust." (No point in being pedantic about "trust" versus "verify" here.)

DavidFebruary 12, 2019 12:39 PM

What about those occasions historically when people decided that existing trust institutions were no longer working? In those situations, people came up with newer institutions with updated rules and proprietors. Could we not consider the rise of the appearance of blockchain and digital currencies as signaling something similar?

There are all kinds of loudmouths in the blockchain camp bandying about buzzwords like "trustless" and "decentralized." In reality, there are many level-headed people using and building blockchain technologies who realize that the need for trust cannot be completely eliminated. Many of those people are in a position to know enough about the underlying technologies that they actually *do* feel more comfortable interacting with an "institution" (blockchain, in this case) that is *more* autonomous than a traditional institution like a bank.

Chris BonattiFebruary 12, 2019 12:39 PM

Great column. While blockchain technology is being widely hyped as the solution to practically everything, it fails a lot of tests in doing what it purports to do for crypto-currencies. Being entirely observable, it remains only for state-level surveillance agencies to disambiguate Bitcoin addresses (and identifiers in all other similar crypto-currencies) to completely pierce the anonymity of the system. This has been done. Consensus protocols can be trivially undermined by applying sufficient resources to "stack the vote", and then do virtually anything to the transaction history. This has been done to reputation-based systems at Yelp and Facebook, and it has been done to Bitcoin too.

Another flaw that Bruce alludes to is beyond the scope of blockchain technology and trust, but also critically undermines all current crypto-currencies. That is, irrespective of its operational details, Bitcoin is what monetary theoreticians (economists?) would describe as a "fiat currency". This means that it is a medium of exchange that is backed by nothing that has inherent value. This is no different than today's US dollar or the British pound, however, for Bitcoin the problem is worse because the market capitalization (and hence liquidity) of Bitcoin is orders of magnitude smaller. Having no inherent value behind it, Bitcoins are substantially reliant on a handful of exchanges to establish and maintain their value. Past shocks to Bitcoin valuation when such exchanges are hacked give ample proof of this. So in spite of the clever use of proof of work incorporated into its design, Bitcoin nonetheless still incorporates the worst flaw so far discovered in monetary systems. Yes, Bitcoins are worth something, but what that value will be is far less stabilized than many seem to believe.

I do agree with many that some form of crypto-currency is in the future of human society. However, I think that Bitcoin and its present competitors represent a v0.9 effort, and perhaps a widespread beta-test, at best. The fragmentation of the crypto-currency market should be sufficient proof of that. It's time to be honest about the shortcomings of the current crop of contenders, and work towards a more solid and unified v1.0. I would also argue that some economists need to be at the table too... not just computer scientists.

uh, MikeFebruary 12, 2019 12:54 PM

Bitcoin can work when you trust your trading partner more than you trust established authority.
Presently, in states that have legalized marijuana, traders can't trust the banking system.
Some marijuana stores are using instant bitcoin transactions in order to accept (launder) credit card payments.
Blockchains can thrive in the cracks between human and institutional behavior.

Yoshiaki SuzukiFebruary 12, 2019 1:03 PM

@Bruce, Sorry, but lots of inaccurate statements in that article.

Lots of hacks don't result in all money lost. Ethereum hack was reversed. Then the hackers set up their own blockchain, where the hack wasn't reversed, giving everyone with ETH extra funds on the new ETC blockchain. Weird things happen in the blockverse.

If an exchange gets hacked, they try to repay your lost funds, out of their ongoing profits, using a new coin. If they find a vulnerability, sometimes it gets patched without losses (e.g. Zcash patch of Jan. 2019). In another case, a vulnerability in a wallet allowed black hatters to steal funds. So white hatters hacked as many wallets as they could, made the funds safe, and returned them to owners (Parity client ETH wallets, 2017).

If you can't remember your passphrase, you should have written it down. But sometimes you can use a program to help you try different combinations, if you remember it partially (e.g. Ardor).

Not so black and white as you said.

WeatherFebruary 12, 2019 1:06 PM

Asdf
Your mixing the points of computer and humans, yes humans are fable but they have 21 years of time locked knowledge, a computer 1 sec.

DanielFebruary 12, 2019 1:17 PM

@bruce writes, " As a species, humans are wired to trust one another. Society can't function without trust, and the fact that we mostly don't even think about it is a measure of how well trust works."

As a strictly philosophical matter, I agree with you that society cannot function without trust but I disagree that we are "wired" to do so, at least if by wired you mean "hard wired," in the sense there is some genetic or evolutionary basis for trust. The wires in trust are all software and no hardware whatsoever is involved.

vas pupFebruary 12, 2019 2:02 PM

@Daniel and all respected bloggers regarding what humans are really wired to including some aspects of the trust (put political correctness and illusions aside):
https://www.newyorker.com/magazine/2008/04/21/vengeance-is-ours

General thoughts on trust to government:
(1)we have two orthogonal features of folks working for the government (government is functioning through people not by itself): intellect and morality. You may have very intellectual folks but immoral, stupid folks with good morals, intellectual folks with good morals (that what want I guess) and stupid folks with bad morals (the worst case). So, trust folks based on their good morals only we will get useful idiots easily manipulated by lobbyists or/and party interests/demagogues. They could not deliver results useful for society because of mental mediocrity. I am talking here primary on legislative and judicial branch. In executive branch its is more relevant for political appointees, not career professionals with expertise in particular sphere of life. They are delivering actions and results versus talking.
Merits (intellectual and moral - with measurable features - not so called holistic BS)not demographics should be base for transparent procedure for recruiting to the government.
I'll set up minimum score on IQ test for prospective members of the Congress - just as precaution.
I guess it is difficult to trust legislature which creates laws benefiting primary either too rich or too poor and abandoning for many years actual needs of middle class which is core of society stability.
(2) It is difficult trust executive branch and judicial branch when they selectively apply on regular basis already biased laws. Unfortunately, they are often (with very rear exception) sided not by the regular folks, but by wealthy and/or big business further increasing imbalance of power in society. They delivered due process, but not justice.
(3)Trust is Two-way street. If federal agent could lie to you and this is legitimized by SCOTUS decision, and you can't (Title 18, 1001) - that is undermining trust substantially in a long term.

SteveFebruary 12, 2019 2:30 PM

Cryptocurrencies useless? Not entirely. They are a new form of economy outside the control of governments. Of course they can be abused, but if you are under a repressive regime they may give you back some power.

The main one I'm playing with is Steem (https://steemit.com). It's a platform for posting contest that pays users in crypto. I like that nobody controls it totally, although the 'whales' have a lot of influence. Anyone in the world can earn something there and a few dollars can be life-changing for some. People are building apps on it, including games. It's an alternative to the centralised platforms that are exploiting our data and I think we need alternatives.

I'm not a drug dealer or a political radical, but I've made enough for a nice guitar and a couple of trips to their conferences. It works for me.

BTW I don't get anything if you join up. I just want more people to take advantage of what it offers.

Jan-WillemFebruary 12, 2019 2:31 PM

To be honest, I don't think that Bitcoin or BlockChain is useless. Especially in countries where corruption is huge and nearly none governmental organisations can be trusted, Blockchain (with smart contracts or with cryptocurrencies) can help to keep your investment in money or in buildings safe. Although in such countries governmental "helpers" can force you with a gun on your head to give your passphrase for the wallet.

But in countries with a reasonably good banking system or reasonably good governmental organisation, I don't see an added value for block chain, especially not since block chain costs a huge amount of energy.

The main risk at the moment is that the number or large miners is decreasing and we can't trust that these miners will not cooperate and at that moment distributed trust will be gone.

zachFebruary 12, 2019 3:42 PM

It really pains me to see folks in cryptography and security fields Kow towing to regulated, fully corrupt institutions, banks, and government. You are supposed to better than this. Respectable economists and cryptographers fully understand “the” blockchain, and this is only Bitcoin. Bitcoin is the best, most sound money humanity has EVER seen and to see you just using blanket statements instead of digging into the cryptography and how it’s trust works.

Jesse ThompsonFebruary 12, 2019 4:19 PM

Honestly, cryptocurrencies are useless. They're only used by..

No uses.
Wait, I mean three uses.

speculators looking for quick riches

EG: a fancy form of gambling. Compare/contrast Satoshidice.

Does this also make the stock-market useless? Because basically all money trading hands there follows the same maxim of "race everybody else to earn gains from arbitrary events": EG, value speculation.

And I would argue that all government-backed currencies hang their value upon this activity, so... (?)



people who don't like government-backed currencies

Well, you've mentioned that Bitcoin exchanges and wallets and even wallet software tends to centralize, as a way of cutting against this hope of avoiding government centralization.

But the wallet software is open source, and the protocol is open source, so I can at least in principal write my own wallet software and it will still work.

I can of course run my own bitcoin node and wallet application, and then the protocol guarantees me a perfect unforgeable personal copy of the ledger. I do not have to personally mine to get this so the expense is pretty small.

And I don't have to use a large, centralized exchange. If the need arises, I can trade with individuals over LocalBitcoins or even just Craigslist or people that I meet through Meetup.com.

The costs to do all of this are more than most people will pay when they can instead run centralized hosted wallets and use centralized exchanges and earn 0 cost transactions in exchange for this loss of autonomy.

That is, until the central institutions begin actually breaking public trust. And then the costs of any one person spinning up their own alternative institution for a cryptocurrency are FAR lower than the cost of trying to build your own Bank when there is a recession, and the costs to minimally autonomous end-users to switch to the alternative institutions remain very close to zero.

In the traditional currency world, when every bank on earth screws you simultaneously (which frequently happens, more frequently in some countries than in others) creating a new bank clean from that corruption takes what steps, again?

Government backed currencies require submission to a network of institutions such that any one person anywhere in the chain can commit fraud so easily that *every* person at *every* link of the chain gets completely buried in rules and paperwork and arbitrary punitive threats just for the privilege of participating at all.

Case in point, I work for an ISP that took years and years to finally get signed in with an Automated Clearing House (ACH) to be able to participate in electronic checking. Now we are laden with untold regulations and threats of penalty because we can, just by typing the wrong keys in the wrong order, debit virtually any amount of money from virtually any bank account in the US with no other immediate oversight.

In my view that is far more capability than any node in our position ought to be exposed to, but our banking system lacks the flexibility to maintain any more clear boundaries at any step of the chain.

Could you imagine if your local gym had no locks on their lockers, and everyone just had to use cubbyholes and the honor system with a draconian set of punishments for whoever gets caught stealing other people's items? A set of punishments that mean nothing to whoever figures out how to get away with it? Because that's our banking system right now.

Cryptocurrencies offer at least the potential to trade some of that constant sociopolitical insecurity for the complementary insecurity of "can I keep this application running on this computer system from being hacked".

Not much of a trade either, because whoever can hack the computer you use to log into your banking website gets access to all of your traditional money already. Have you ever tried convincing your bank to reverse website-authorized money movements due to "I was pwnt"?

It's the precise same tradeoff that everyone who uses PGP/GPG to make their communications unreadable by the government makes when they choose to verify/trust "the code" to keep their messages discreet in preference to choosing the benevolence of the government to do the same for them.

So I don't understand why you argue against government backdoors in communication but then basically demand government backdoors in our money. :/



criminals who want a black-market way to exchange money.

Case in point, you tout communication unhearable by the government as noble yet movements of money untrackable by the government you call evil and criminal by definition.

I cannot understand why your money and your mouth diverge so heavily on this issue, Bruce.

Rach ElFebruary 12, 2019 6:17 PM


Tobi

They give a bank account to billions of unbanked people.
They provide an exit from defunct currency systems such as in Venezuela.
They make international payments far cheaper and quicker.
They are a way for companies to save credit card fees which are 1-3%.
They make micropayments possible which the existing financial system seems unable to provide.
They are programmatic money enabling lots of new use cases and innovations. Any teenager can now receive and send money programmatically. No licenses.


It's funny, basically everyone one of your points here are wrong.

If people are too impoverished or disconnected to have a bank account - how will they afford or access blockchain? And so on and so forth.
Blockchain is slow, expensive, resource intensive, and loaded with fees and charges.
International payments are already cheap and quick.
How are micropayments unavailable elsewhere? How are the micropayments you claim available via blockchain not fraught with liability?

And, blockchain is not money. Oh, and 'new use cases and innovations' is meaningless Silicon Valley blabber. Like taking a restaurant serviette and inventing an origami shape.

The single greatest error that is so rarely alluded to, is that this so called currency or money is not backed by anything of value. It is not supported by labour. It has no substance. This is catastrophic for a whole range of reasons. It would be nice of all of these enthusiasts actually understood money and economics

Rach ElFebruary 12, 2019 6:32 PM

David

"That is, irrespective of its operational details, Bitcoin is what monetary theoreticians (economists?) would describe as a "fiat currency". This means that it is a medium of exchange that is backed by nothing that has inherent value."

David, bitcoin is not a fiat currency. Further, fiat currency does have value despite not being on the gold standard.

The most common response is fiat is required to pay tax. However its value is measurable in other ways

Interestingly, bitcoins value continues to be measured by conversion to a corresponding fiat currency of worth.

Thank you everyone for your mature and informed responses. It's a significant contribution, as ever here at Schneier on Security.
A well composed piece, Mr Schnier

Bruce SchneierFebruary 12, 2019 8:02 PM

@Ismar

"Where does this leave technologies like digital signatures which to the best of my knowledge are legally binding at least in the USA ?"

I'm not sure what you're asking. Or, at least, why you think blockchain and those Docusign things are in any way comparable. The reason Docusign -- and all of those fake Internet signature technologies -- work is because signing isn't what most people think it is. It is more about the ritual of signing than any unforgability property.

Bruce SchneierFebruary 12, 2019 8:03 PM

@tobi

"They give a bank account to billions of unbanked people.
"They provide an exit from defunct currency systems such as in Venezuela.
"They make international payments far cheaper and quicker.
"They are a way for companies to save credit card fees which are 1-3%.
"They make micropayments possible which the existing financial system seems unable to provide.
"They are programmatic money enabling lots of new use cases and innovations. Any teenager can now receive and send money programmatically. No licenses."

The thing is, they basically do none of those things. It's all fairy stories.

Bruce SchneierFebruary 12, 2019 8:04 PM

@Chris:

"Bitcoin has the power to transform how our society works by giving additional tools and methods to personal economic freedom which have never existed before."

Sorry. I don't believe it. It does none of those things. It gives no additional tools, and doesn't do anything for personal economic freedom.

Bruce SchneierFebruary 12, 2019 8:07 PM

@Erorus:

"And by people who want to transact online without asking permission from companies like Paypal, Stripe, and Visa. I need to be able to control how I send and receive money in case I want to make transactions that payment companies don't like for political or business reasons. Sometimes their 'fraud protection' countermeasures get in the way of legitimate transactions, and we have no recourse.

"It's unsafe and irresponsible to rely solely on private companies for the transaction of money. We need something cash-like to exchange value over long distances."

Yet, you do have to -- even with Bitcoin. There's too big a risk of fraud if you are the first one to act in a cryptocurrency transaction. And then you're back in the middle of private companies -- exchanges -- again.

Sorry, the ideal isn't the same as the reality.

Bruce SchneierFebruary 12, 2019 8:08 PM

@George H.H. Mitchell:

"Apologizing and dodging brickbats in advance for this terribly pedantic comment: Satoshi Nakamoto is pseudonymous, not anonymous."

I know that. I decided it was too big a word for the first paragraph of the essay.

Bruce SchneierFebruary 12, 2019 8:10 PM

@Sok Puppette:

I understand what you're saying about low-trust areas of the world. What people do in those areas is move to a more stable, foreign, currency if at all possible. Cryptocurrency isn't going to be a better option in those areas.

Bruce SchneierFebruary 12, 2019 8:12 PM

@berlin:

"Another point for public blockchain is transparency. It is not uncommon that one pays a bill and something happens between the messaging or systems of either party's financial institutions and it could take days before one has to go back and forth between parties to records reconciled between two systems. A public blockchain with its ledger visible to both participating parties can reduce those overheads."

Yes, and so could many other non-blockchain technologies. I'm not saying that you haven't identified a problem, only that blockchain is about the most inefficient possible solution to that problem.

Bruce SchneierFebruary 12, 2019 8:13 PM

@asdf:

"With bitcoin barely 10 years old, it seems premature to criticize the flaws, or to focus on the marketing message (AKA "hype") rather than the value add. Obviously as the technology matures, the security problems will be mitigated; none of them are fundamental."

The point of my essay is to say that the problems are fundamental. They are inherent in the definition of a public blockchain; no amount of technological maturity will change them.

Bruce SchneierFebruary 12, 2019 8:15 PM

@Alex:

"In any case, if the U.S. govt. went on a currency printing binge, people would jump to other currencies. If all countries go on a binge, it's gold. If gold stores start being raided by CIA types, where do you go?"

It doesn't matter where you go. If that actually happens, society will look very different than it looks today and you have a lot more problems than a non-government currency can solve.

Bruce SchneierFebruary 12, 2019 8:17 PM

@David:

"What about those occasions historically when people decided that existing trust institutions were no longer working? In those situations, people came up with newer institutions with updated rules and proprietors. Could we not consider the rise of the appearance of blockchain and digital currencies as signaling something similar?"

I really don't think so. Or, at least, to the extent that blockchain represents "newer institutions" has nothing to do with the blockchain data structure. We'd be better off ditching the blockchain and sticking with those newer institutions.

Bruce SchneierFebruary 12, 2019 8:19 PM

@Zach:

"Bitcoin is the best, most sound money humanity has EVER seen and to see you just using blanket statements instead of digging into the cryptography and how it’s trust works."

My point is that Bitcoin's trust -- or lack thereof -- has nothing to do with its cryptography.

Bruce SchneierFebruary 12, 2019 8:20 PM

That's enough for now. I'll try to poke back into this thread tomorrow.

Thank you all for your thougtful -- and civil -- comments.

sooth sayerFebruary 12, 2019 9:17 PM

I have never seen Bruce rebut this many postings ever!

My only comment is that he should have addressed the trust aspect of hard forks more.

With a hard fork you are fully blowing up the trust argument. This single "feature" is the end of all blockchains.

sitaramFebruary 12, 2019 11:17 PM

"They're blockchains in name only, and -- as far as I can tell -- the only reason to operate one is to ride on the blockchain hype."

Ummm, no. There *are* applications where, say, N entities do business together, and each doesn't trust any of the others. Several kinds of fraud involve back-dating entries in various ways (create/update/delete something in the past). Going into consortium mode, and having a way to store data immutably, helps.

While "distributed" has been studied for decades, I am not so sure of "append-only" being so old hat as you appear to be saying it is.

WeatherFebruary 13, 2019 1:04 AM

About labor to give it value, is a good point, but it won't pass the threshold to get to that point.

A computer can be given 21 years of data, but even if it process that in 1 sec can it do it then again and again for 21 years ,with one or two crashes which it automatic restart from and continued. Will trust it then.

Sorry to flog a dead horse, but is the cryptosystem really good, and can it always be.

WinterFebruary 13, 2019 2:33 AM

Many of the supposed benefits of crypto currencies are just implementations of underground banking systems, like the (in)famous hawala banking.

https://aic.gov.au/publications/tandi/tandi300

As a modern automatized hawala system, I do see a role for public block chains. Probably embeded in the global financial system.

But the practical block chain that will make such a payment system will not be based on the exceptionally expensive proof-of-work consensus of bitcoin. It has to be much more efficient.

Jim WillekeFebruary 13, 2019 6:14 AM

"Would you rather trust a human legal system or the details of some computer code you don't have the expertise to audit?"

Are you implying that people have enough expertise to audit the "human legal system" more than "some computer code"?

PhaeteFebruary 13, 2019 6:34 AM

Can we eliminate trust in trading?
I don't think so, it will always be an integral part of any trade.
With direct barter you need to trust that the goods are in order.
Banks and paper money require trust in them to function.
Trading with rare commodities allows fakes or other misrepresentations.
Trading via third parties need trust in those.

I'd say some kind of trust is integral for trade, and thus for the trade method/currency.

Guarantees of what will happen when trust is misplaced during trade is the best thing to minimise the influence of trust on trading.

Banks had this very well covered, until they got too greedy and crashed the world economy.
Digital currency still has too many "Oops we lost you money, my bad" with exchanges, software issues and bad security.

But what else can we use to support a decentralised, global digital currency but blockchain?

FaustusFebruary 13, 2019 8:19 AM

At this point I take the disproportionate avalanche of criticism of blockchain as an indication that it makes the powers to be very uncomfortable and therefore it is on the right track. The companies that finance everybody, including most pundits, don't want to be cut out of the action.

It is pointless - I guess - to observe that the same criticisms met any technology that was in early evolution. Tactic one: ignore that it is a work in progress. "Of course cars will never work. It is incredibly inefficient to carry a massive steam boiler around. QED!" Tactic two: ignore any counter arguments and just keep repeating the same thing.

I'm not going to waste any more time on this here. I guess this topic is the poster boy for massive regulation of the internet and general purpose computing. I forecast that this forum will be promoting regulation of cryptography in due course.

If not, why not? Cryptography can be horribilized in all sorts of similar ways. Blockchain and cryptography are both math that affects society. They both can be used for ""evil"". (I thought that that deserved double scare quotes.) What is the line that separates them?

Today they come for your blockchain. Tomorrow it's your computer. I won't be there.


FaustusFebruary 13, 2019 9:46 AM

I used to think Ayn Rand was ridiculous, arguing against a society that didn't exist. But I was born in the 60s and I have lived mostly in the freedom of spirit that that decade set into motion. Were there mistakes? Plenty. That's how people knew they were actually doing something. There is no progress without mistakes.

"Throughout the centuries there were men (sic) who took first steps down new roads armed with nothing but their own vision. Their goals differed, but they all had this in common: that the step was first, the road new, the vision unborrowed, and the response they received—hatred. The great creators—the thinkers, the artists, the scientists, the inventors—stood alone against the men of their time. Every great new thought was opposed. Every great new invention was denounced. The first motor was considered foolish. The first airplane was considered impossible. The power loom was considered vicious. Anesthesia was considered sinful. But the men of unborrowed vision went ahead. They fought, they suffered and they paid. But they won."

The Fountainhead

Sok PuppetteFebruary 13, 2019 10:15 AM

@Bruce Schneir:

I understand what you're saying about low-trust areas of the world. What people do in those areas is move to a more stable, foreign, currency if at all possible. Cryptocurrency isn't going to be a better option in those areas.

I gave two examples: a female Saudi teenager and a person fleeing ethnic persecution. Foreign currencies aren't practically available to either one. What you suggest is not really at all possible for them, and it's unfair to ignore that fact.

And, just to be clear, my point has nothing at all to do with the stability of the currency's value. I'm not interested in that gold-bug nonsense. It's about the accessibility of the currency and the ability to actually use it for something, even when your local institutions have actively turned against you, personally.

My examples can't get bank accounts, or probably even prepaid credit cards, in foreign currency. That idea is just a non-starter. The only way to do something like that is to go through institutions that won't permit it. Their local institutions won't permit it because they're part of the apparatus of their oppression. For other possible examples, there may not even be any functioning local institutions. And foreign institutions won't permit it because they're crippled by ever-tightening AML/KYC rules put in place by people with, um, undue faith in the infallibility of institutions.

OK, yes, they could probably get their hands on, say, US dollars in paper form. At least up to a few thousand dollars. At least until those guardians of institutional power manage to eliminate paper cash entirely.

They'd have to navigate a bit of the underworld to get the paper, and they'd probably get a rotten exchange rate, but in fairness both are also true for getting cryptocurrency.

Once they get that foreign paper money, they can transact with people they can physically meet. So, admittedly, they could use it to, say, pay a bribe. For that matter, they could also use local paper money for that. Or gold jewelry, for that matter.

But that paper currency is dangerous to possess. It's hard to hide, it's hard to explain, it's easy to lose, and it's easy to steal. Carrying a lot of mony as paper (or gold, or whatever) is far, far riskier than even the most slapdash crypto key management.

If you're a 19 year old Saudi girl, and your father finds that paper, he will literally lock you up, and very possibly beat you as well. If you're anybody with real worries, and the "authorities" find that paper, they will at a minimum confiscate it, and probably lock you up too.

Paper is also hard to use. It only works in person. You can't use paper money to line up somebody to pick you up on the other side of a border. You can't use it to buy a ticket on a more "legitimate" transportation system on the other side of the border either. You can't use it to guarantee a hotel reservation. You have less chance of using paper currency to pay for a fake passport than of using cryptocurrency to pay for one online... and the transaction is more dangerous in person.

... and the quantity you can get or manage is limited. If you're an established person being dispossessed, as opposed to a 19-year-old trying to scrape together enough money to get out at all, then you can't use paper to move enough of your net worth to help you set up in your new home.

Assuming it were to catch on, you could use cryptocurrency for those things. If your institutions have actively turned against you, it's a far, far superior choice to foreign currency.

RhizomeFebruary 13, 2019 11:30 AM

Yes, but...

It's far from all being limited to just Bitcoin and/or Ethereum or even simply 'blockchain'.

I think Ceptr/Holochain (which is not a blockchain and does not have a notion of network wide consensus, i.e. is something entirely different in its aims, assumptions and purpose) is fascinating and could possibly bring about the conditions and circumstances that make possible a whole range of ways to organize, coordinate and problem-solve at scale.

IOTA and its so-called tangle, a DAG-valued stochastic process serving as the ledger/data transport layer is also really interesting and bringing together a lot of concepts and technologies that go way beyond blockchains and cryptocurrencies.

I agree with what you say, it's a much needed antidote to all the hype and marketing pixie dust buzzwordery surrounding it (among other things less desirable and not as benign), but would be really interested to know what you think about these other undertakings and their angles, if you happen to have looked at them in more detail.

MarkHFebruary 13, 2019 1:33 PM

Thanks to Bruce, for thoroughly (and strongly) countering the claims made for so-called "cryptocurrency".

I understand the idealism that motivates the evangelists. The powerful waves of theory often atomize into spray when they meet the rocky shores of reality ... and then passion displaces fact and reason.

As Bruce and his professional colleagues well know, anyone proposing a new cryptographic tool or system must answer, "what can this do that can't be done with comparable efficiency by what we already know?"

BitCoin is wonderfully handy for crime facilitation, no doubt.

Clive BoultonFebruary 13, 2019 1:50 PM

Don't throw the bitcoin baby out with the insecurity bathwater.

As Facebook (Cambridge Analytica) and many other data breaches have shown it is extremely difficult to conduct modern businesses with shared data by building systems with current software development practises. Solving computer insecurity by strengthening the ecosystem and providing economic incentives to do so - I posit was the point of 'Satoshi Nakamoto's' whitepaper. From the lessons learned we can now develop private blockchains such as Hyperledger and backfit many currently insecure systems especially in the modern web ecosystem. More so as AGI is used to discover new security discontinues, after all we need the same focus to improve computer system security that Alan Turing used to crack the Enigma code.

phillipsjkFebruary 13, 2019 7:35 PM

re: your reply to Tobi:

"The thing is, they basically do none of those things. It's all fairy stories."

Are you confusing the dominant coin with Blockchains in general?

High fees are now an explicit goal of the Bitcoin Core developers. The idea is that high fees are eventually needed to pay for the network. There is also a view that everybody should run their own node: which is obviously not going to happen.

BItcoin Cash, which forked off in 2017, takes the view that fees should be as low as technology allows. The idea is that miners will make money by processing a high volume of transactions. Mobile uses still get high assurances that their payments were accepted by the network though Simplified payment verification.

The fork I mention preserves the micropayment use-case: which you claim is a fantasy. When I estimated the marginal transaction costs, I came up with a figure of around 3 cents: assuming 1000 nodes replicating the transactions world-wide. Such low fees are possible, despite the inherent inefficiency of the network, because transaction verification is fully automated.

Rach ElFebruary 13, 2019 11:56 PM

Faustus

"At this point I take the disproportionate avalanche of criticism of blockchain as an indication that it makes the powers to be very uncomfortable and therefore it is on the right track. "

You are an intelligent and reasonable person, this much is clear from your posts so far. There is nonetheless a considerable leap in the above sentence.

1.. ' Criticism of blockhain..' - this is occurring and it is warranted.
2. 'powers that be are uncomfortable' may be yes, may be no, but this is not necessarily related to the fact of the criticism and
3.' Is therefore on the right track..' - this is a huge extrapolation


Point taken about people being critical of something just because it's new.
But, what you call disproportionate should therefore have a clarifying, refining effect, like rubbing alcohol burning away the dross leaving a pure produt. Like founders of a new start up seeking capital. They have their idea torn down in every conceivable fashion. When they continue to justify their work and overcome that barrage, they prove their worth

There are plenty of new ideas that are just outright hazourdous and absurd and don't deserve to subsist. If blockchain/bitcoin is not one of them as you say, then it will survive the criticism. Won't it?

And, sorry, but plenty of the arguments against blockchain just simply don't have a convincing, if any, rebuttal. The flaws are there and they are yet to be rationalised or explained away.

Another bug [cough] feature of blockchain is how exlusive and elitist it is. It is most certainly not widely distributed. Some animals are more equal than others

Someone made a good point about the error in a hard fork. Ethereum hard forking
voided any contract, by definition, and is proof of how ridiculous they are .
'We'll just make shit up as we go along'


And I'll close with the 10 Maxims of Commercial Law, which must be included in any discussion of blockchain technology laying claim to commerce. This is one of the more accesible versions of the maxim, ignore the biblical quotes they are not relevant however they do hold in a court room, so there's that

https://ozff.org/freedomfighters/CommerceLawMaxims.html

FaustusFebruary 14, 2019 8:16 AM

@ Rach El

As I have said, I am pretty much over this. I have no problems with constructive criticism. That is what cryptocurrencies are doing right now to improve themselves. It is dishonest criticism, bought and paid for by the status quo, that absurdly claims that, unlike every other new technology, crypto must work perfectly out of the gate, with the intention of suppressing it, that bothers me.

There is no argument against the blockchain that does not have a response. Bitcoin has worked from the beginning and continues to work. That, by itself, is a comprehensive rebuttal.

People mix up the cryptocurrencies to try to tar all of the them with the weakest one. I am talking particularly about bitcoin in this discussion because it is the oldest and most successful. Bitcoin's policy is to avoid hard forks. Other currencies, like Ethereum, are more open to using hard forks to manage the blockchain. But the hard fork is part of all the specs and it has its role.

Should crypto be improved? Yes. Can it be? Yes. Like every other piece of technology it has this property.

Your maxims of business are slightly upgraded "Maxims of the Playground".

My maxim - this is a general policy, not a statement directed at you - is "Mind your own business"

There are the people that create things and everyone else. I've got work to do.

andreaFebruary 14, 2019 8:54 AM

Sorry in advance for my rude language.

IMHO immutability is really a bad security policy, above all when shit happens...

...And trust me it isn't a question if it will happen, but it is just a question of time, that is: when it will happen.

FaustusFebruary 14, 2019 9:05 AM

@ Rach El

The "elitest" thing stuck in my head. You realize that you can just download the daemon and join the bitcoin network. Anybody can. All you need is a PC and an internet connection.

Bitcoin is particularly used in areas of the world that are poor and in turmoil, where people don't trust their local currency.

To buy bitcoin, if you don't know a seller personally you open an account at an exchange, with the usual "Know Your Customer" procedure that banks apply.

The only thing that might prevent you is that your bank may close your account if you involve yourself in bitcoin. Denying you banking to protect you? Or to protect themselves? If it is to protect you, why not protect you against even more speculative investments, like derivatives? Could it be because they make money selling you derivatives? Do you really think that your bank holds your interest above its own?

Or you could mine bitcoin, but that requires special equipment to do competitively these days. Monero is another coin that can be mined with CPU or GPU so that allows easier entry. Or you could plop down $1000 or so for a specialized bitcoin miner. Anybody can mine.

That fact that everybody doesn't use bitcoin reflects that it is complex and most people don't need it or want it, not that they are not welcome in the bitcoin world.

FaustusFebruary 14, 2019 9:13 AM

@ andrea

It appears that you don't understand immutability. It means that the record of transactions doesn't change. It doesn't mean errors cannot be corrected. They are corrected by adding a new transaction that offsets the incorrect one. That way you have a true record of what happened.

This is the way all accounting systems work. Think of your bank statement. When there is a mistake it does not disappear. A new entry is made that reverses the error. This is essential to security, otherwise people could change balances and past transactions and leave no trace.

andreaFebruary 14, 2019 9:39 AM

@Fuastus

I am pretty aware of what immutability means, it changes its meaning based on the context in what you are talking about.

Naturally if the context is traditional banking and currencies systems I could mostly agree with you.

Unfortunately it seams to me that you don't understand the context in which we are talking about: if we are talking about Bitcoins transactions, immutability means that you can not reverse a transaction.

Modern banking, for example, is designed to be reversible. Bitcoin is not.

Steve Wozniak was scammed out of $70K.

c1ueFebruary 14, 2019 9:47 AM

I would add one additional note: There is a huge technological threat to blockchain in the form of quantum computing.
Should quantum computing achieve a scale which can attack the blockchain encryption methodology, there will immediately ensue a race between "good" and "bad" blockchain users to see who can decode and rewrite the entire existing blockchain, first.

FaustusFebruary 14, 2019 10:20 AM

@ andrea

In the context of bitcoin, the non-reversibility of a transaction is an intended feature, so that people can transact without interference of third parties. The owner of an account is defined as whoever has the private key. This system works as intended.

This results in a system in which one has to carefully protect one's private keys. Yes, personal responsibility. Out of fashion, but the breakfast of champions.

Certainly, the features of bitcoin make it inappropriate in many situations. Escrow can be added to provide some protection, but generally it works best in situations where parties have external motivation (often reputation) to fulfill transactions fairly. And where they understand that knowledge of the private keys is equivalent to ownership of the money.

It is unwise to regard bitcoin as anything more than an experiment, or a tool for specific situations. It is not appropriate for all transactions, but that does not make inappropriate for all.

People have a right to explore options and not be shut down by the entrenched interests of the current system. And you have a right not to use bitcoin if it doesn't serve you.

Bitcon SupporterFebruary 14, 2019 10:41 AM

JP Morgan Chase gets in on the block-chain action.

In a first for a major US bank, JPMorgan said on Thursday it would launch a cryptocurrency tied to the US dollar. The bank said the coin, called the "JPM Coin" is intended to "make instantaneous payments using blockchain technology." JPMorgan's chief executive officer, Jamie Dimon, said in late 2017 that bitcoin, the largest cryptocurrency, was a "fraud." He later regretted the comments.
BusinessInsider link, Rebecca Ungarino, Feb. 14, 2019, 09:27 AM

vas pupFebruary 14, 2019 3:01 PM

@all:
This new research basically provide scientific explanation why interrogation in native language is more fruitful rather than usage of interpreter/translator human or software application:

The language of conversation impacts on the 'synchronization' of our brains:
https://www.sciencedaily.com/releases/2019/02/190214100050.htm
"Following a script, the pairs engaged in a general conversation alternating their native language with a foreign language. Using electroencephalography (EEG) -- a non-invasive test that analyzes the electrical activity of the brain -- scientists measured the activity of brain waves simultaneously.

"We have seen how the alignment of brain waves occurs differently when the conversation takes place in a native language or in a foreign language. This study has allowed us to move forward and show that brain synchrony depends on the linguistic context," Pérez explained"

Moreover, IC community and/or counterintelligence units of LEAs could utilize this technique to find out what is REAL native language of suspect versus claimed ('Americans'). The only trouble is with folks from Singapore: they have both English and Chinese as native language.

I guess authors should claim grant from IARPA on their research.

In people I DO NOT trustFebruary 15, 2019 2:54 AM

You seem to at least acknowledge that cryptocurrencies provide financial privacy with the statement:

"Honestly, cryptocurrencies are useless. They're only used by speculators looking for quick riches, people who don't like government-backed currencies, and criminals who want a black-market way to exchange money."

So, are you actually saying that you consider financial privacy "useless?" Or, that only "criminals" would seek to not have their financial information caught by government dragnet surveillance?

If so, I beg to differ. Privacy is not "useless;" it is a basic human right and a necessity for freedom.

This article has me completely flabbergasted.

phillipsjkFebruary 15, 2019 1:17 PM

@ c1ue

If you can avoid address re-use, it is possible to send coins without revealing the public key of the recipient. The transaction hash matches an arbitrary number of public keys. It is not something quantum computing can reverse easily.

If quantum computing is routinely reversing public key crytography, cryto-currency may actually be less severely effected than the traditional banking system, which relies on those techniques for website authentication.

phillipsjkFebruary 15, 2019 1:35 PM

Correction: Should had said "address hash", not "transaction hash" in the above comment. (Even used 'preview')

The pigeonhole principle may also reduce the number of possibilities to a few (equally valid) candidates. My understanding is that quantum computing is not really able to reverse most hash functions though.

Jörn FrankeFebruary 15, 2019 6:15 PM

I think your arguments are valid with respect to blockchain, but similar to other people commenting here, I believe that this perspective is a little bit narrow.

Yes, Bitcoin and other blockchains are not the most efficient at the moment and they have other issues, but they show a remarkable process and engineering skills behind them that shows great potential to move them to another level.

About trust in software: Don't we trust the open and closed source code that it implements correctly security? Don't we trust in major browser and operating system vendors that they put the correct root certificate in the list? That they do not remove root certificates, because they are created by a competitor?

Is the web of trust not a similar system as blockchain? Why is email encryption still a complex hazzle? etc. etc.

In the end, it is not so easy to say. I guess we should wait the next 10 years and then do a review of blockchain. It could turn out that some parts will be valuable in different context and they have been developed because of blockchain. It could be also that an international public blockchain can somehow work, if it is transparent (including the ecosystem and known centralization tendencies in form of software development team, software distribution, transaction validators and miners, if they are still needed).
Even if it all might turn out to be not useful, people working on this topic gained highly demanded skills in distributed systems in a complex setting. That will help them when working on other distributed applications for sure.

The good thing now is that the hype is going away so people can work on real stuff related to blockchain.

WaelFebruary 15, 2019 7:45 PM

Many of the blockchain solutions leverage the buzzword and could be implemented more efficiently with a database. The concept itself isn't that new; TPMs use similar structures in "extend operations".

I don't doubt there are legitimate reasons to use blockchain, and some are in usage today.

My experience with blockchains is not pretty -- I lost my investment and got hard forked, so to speak. I won't be able to retire in my lifetime.

wumpusFebruary 16, 2019 1:44 PM

@Denton @Bruce
"""
"Take banking, for example. Financial institutions, merchants, and individuals are all concerned with their reputations, which prevents theft and fraud."

Is that really what you meant to say? That bankers' concern with their reputations actually _prevents_ theft and fraud?
"""

Oddly enough, Machiavelli spends a good chunk of "The Prince" pointing out how people seemed to trust Princes regardless of how many times they abused this trust (and apparently ignoring Psalm 146:3-5 'Do not put your trust in Princes') and suggesting that a Prince should be much more eager to similarly take advantage of this trust.

Some banks seem to be taking Machiavelli's words to heart.

@Winter
"These believes are found in the Bay Area, where social problems are supposedly "solved" with new technology. But it is also found in the USA's legal system, which tries to remove human judgement with a barrage of prescriptive, automatic laws, read "The death of common sense" by Philip K. Howard.

Blockchain is simply the latest religion that comes out of these believes."

One issue with "human judgment" is that it requires a ton of axioms to deal with social situations (the issues for laws and business transactions). One culture's "common sense" is another culture's crime. Dotting the "i"s and crossing the "t"s legally makes it possible for people unaware of each others' culture to deal with transactions without lengthy negotiations.

@Bruce @Ismar
"""
"Where does this leave technologies like digital signatures which to the best of my knowledge are legally binding at least in the USA ?"

I'm not sure what you're asking. Or, at least, why you think blockchain and those Docusign things are in any way comparable. The reason Docusign -- and all of those fake Internet signature technologies -- work is because signing isn't what most people think it is. It is more about the ritual of signing than any unforgability property.
"""
I have to admit this was a huge surprise for me when "digital signatures" became legally binding. Perhaps you (and the rest of the crypto community) should have called them "sigils" or similar, as signatures really never were about avoiding forgery.

@ phillipsjk
re: your reply to Tobi:
"The thing is, they basically do none of those things. It's all fairy stories."
Are you confusing the dominant coin with Blockchains in general?
...I came up with a figure of around 3 cents...

Any single-ledger blockchain (like Bitcoin) will run up against Bitcoin's current issue, that global updates occur slowly, and all the updates have to be on the "winning" hash. Some sort of "blockfabric" may alleviate that, but it will take a lot of updates to get such a thing working.

@Faustus
" Tactic one: ignore that it is a work in progress. "Of course cars will never work. It is incredibly inefficient to carry a massive steam boiler around. QED!" Tactic two: ignore any counter arguments and just keep repeating the same thing."

The issue with cryptocurrency being a work in progress is that you run into Bruce's "debugging vs. security issues". A car can be debugged, and produced (occasionally requiring recalls thanks to defects unnoticed in testing or not the same as the tested car). A cryptosystem requires checking the math to debug it. Getting the security right. Getting people to trust the system (of which the security is only part of the issue). Getting people to *use* the system. And only then determining if it scales better than Bitcoin (which appear to scale well past it's designed in limits).

I don't expect a functional cryptocurrency anytime soon.

A Nonny BunnyFebruary 16, 2019 3:47 PM

@zach

Bitcoin is the best, most sound money humanity has EVER seen
Have you converted all your life savings to bitcoin? Would you?


Cause I for one prefer currency that doesn't fluctuate wildly and unpredictably. Sure, it's great if your life savings doubled in value in a year, but not so much when it goes the other way. Bitcoin's dollar-value is now down more than 80% since it's peak slightly over a year ago. And still going down.

Money is a promise. It is worth only as much as the trust one has in those that make the promise and those that back it. That's why the Venezuelan bolívar is no longer worth the paper it's printed on: no one trusts the Venezuelan government and institutions anymore.

As for bitcoin, no one of any consequence backs it. It's nothing more than empty promises that vanish into the wind. Therefore it is decidedly unsound as money.

Erdem MemisyaziciFebruary 17, 2019 4:32 AM

From the SHA-256 article:

It’s a one-way function meaning that the same input always returns the same output and you can’t reverse engineer the input.

Fair enough...

Importantly, no two inputs will return the same output so every output is unique.

No.

BuzlaigheFebruary 18, 2019 8:14 AM

Dear Schneier,

I would really appreciate if you could provide more details for the following points:

1) you defined the "public blockchains" as those providing i) "a distributed (as in multiple copies) but centralized (as in there's only one) ledger", ii) "the consensus algorithm, which is a way to ensure all the copies of the ledger are the same" and iii) "the currency as a necessary element of a blockchain to align the incentives of everyone involved". Then you defined "private chains as those that use the blockchain data structure but don't have the above three elements".

The first question on this point is, if what you called private blockchains do not have point (i), what do you mean by "use the blockchain data structure"? What kind of data structure are you referring to if it is not the ledger? The second question is, if "private blockchains" do not have the above three elements, how do you call those solutions (such as Hyperledger) that use (or used initially) protocols such as BFT, P-BFT etc?


2) You said that consensus protocols, "which have been studied in distributed systems for more than 60 years" (I think it should be at max 40 since Lamport published his logical clocks work in 1978), as well as append-only data structures "are blockchains in name only, and -- as far as I can tell -- the only reason to operate one is to ride on the blockchain hype". So the question is, are you saying that state machine replication systems as a whole domain is useless and that we should all fall back to mainframes?


3) Although I share with you that "blockchain is about shifting some of the trust in people and institutions to trust in technology", I do not believe that "you need to trust them absolutely, because they're often single points of failure". Indeed, what I think blockchain technology is doing (in its many forms) is trying to enhance the byzantine fault-tolerant systems domain in which the trust in cryptography, protocols, software, computers and networks is not taken for granted.

I hope you'll find some time to reply
My best

Flavio CastroFebruary 18, 2019 4:59 PM

Nice article. Reasonable skepticism is always good

Crypto currencies are undoubtedly a way to escape from government-backed currencies. Understand that although people born and raised in developed countries don't know how good they have it by never having to care about government abuse of power. Some people need to live through hyper inflation scenarios.

That said, I urge you to travel to Venezuela and tell them cryptocurrencies are useless.

CBFebruary 20, 2019 11:10 AM

Many people here advocate cryptocurrencies as a mean to help people under government duress. But cryptocurrencies need a reliable and secure access to the Internet.

If you're under government duress you don't have that secure access.

@Faustus
A block-chain doesn't allow you to cancel a transaction by writing a negative transaction of the same amount. Each transaction comes with a fee. Writing two transactions to the blockchain means you pay two fees. So the overall result is not identical to a cancellation of the initial transaction. The miners keep the fee for the bad transaction they validated and ask for another fee to validate the money-back transaction. With standard banking a wrong transaction is fully cancelled to the last cent and you get all your money back, plus it's considered to have never left your account so it still generates interests on the period between error and correction.

GeorgeFebruary 25, 2019 2:41 AM

This is presumably what they said about "government" or "bank" issued notes when they were handed out to replace silver and gold nuggets.

GeorgeFebruary 25, 2019 3:01 AM

@Jim Willeke wrote,

Are you implying that people have enough expertise to audit the "human legal system" more than "some computer code"?

This could be a multi trillion dollar question. Maintaining a healthy government-bonds backed currency, isn't exactly efficient, nor is it without "waste."

As you pointed out, the human legal system is also bound by the same type of Trust issues as Mr. Schneier puts it

There's always a need to override the rules, and there's always a need for the ability to make permanent rules changes. As long as hard forks are a possibility -- that's when the people in charge of a blockchain step outside the system to change it -- people will need to be in charge.

When they minted the U.S. dollar, they did get it right as far as putting it "in god we trust"

Bilgin IbryamMarch 22, 2019 12:51 PM

Given enough time, reputation in any single system is bound to fail.

Blockchain improves trust by decentralizing it (as much as possible today). Decentralization is important for some people more than others.

Since there is no absolute decentralization, any centralized element in the blockchain is a potential attack vector for its reputation.

Decentralization itself can also be a drawback and limitation, but that is different concern.

AnuraMarch 22, 2019 1:18 PM

@Bilgin Ibryam

Blockchain is centralized trust on decentralized storage, web of trust is decentralized trust. The point of blockchain is that you trust the system instead of the people, and the point of web of trust is you, personally, decide who you can trust. Web of trust is much more robust, as you can't ever attack the whole system.

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LudovicApril 23, 2019 2:14 PM

I think one of the big things that people miss about the whole blockchain movement is it's a hell of a story. It's a story that, although mostly uninformed, allows people to feel like they are part of something. It's uniting and it doesn't necessarily have to ever work or even be based on evidence.

Just go to Reddit and look at some of the commentary about crypto.

Clive RobinsonApril 24, 2019 5:35 PM

@ dbjdbj,

The problem is Marketing.

I prefer to call it "hype" or "hyperbole" depending on who the audiance is. But where con artists are concerned they call that sort of marketing "telling the tale".

There is an old saying that "You can not con an honest man" and so far those who were shall we say cautious in their outlook have not been shown to be wrong with regards the blockchain. Whilst that is not true for most of those who were as you suggest "marketing" the idea.

Whilst there are uses for which the blockchain is usefull they are few and far between, and mostly not that usefull for various reasons.

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