Wednesday, October 04, 2017

Irreversibility, anonymity: Bitcoin's flaws, not virtues

Since the end of July, this is the 14th blog post about the Bitcoin so it may be fair to say that I became sort of interested in it. The possibility to decentralize the validation of transactions is cute, although not too practically useful, and I mentioned it's analogous to the dependence of the wave functions on observers, i.e. the subjectivity of quantum mechanics.

But most of the posts have been about the irrationality of the proponents of the "Bitcoin economy" which is an entirely different set of questions – because economics and computer science are two different disciplines.

I have mentioned that the "voting by the miners' majority" hasn't made it impossible for the "validators" of the transactions to abuse the system. It has just changed the identity of the validators and "decentralized them". But if China cleverly nationalizes the miners on its territory, it will be in the full control of the Bitcoin. To take over the smaller Bitcoin-like currencies (known as "altcoins") is vastly easier and a dollar millionaire may be rich enough to buy the required GPUs.

I have also mentioned five good reasons why governments will want to ban the Bitcoin: protection of small investors against crashes, usage of the cryptocurrencies by criminals and drug traffickers and terrorists and North Korea, the risk that someone – China or someone less official – takes over the majority of mining, tax evasion and circumvention of other aspects of government regulation, and the storage of copyrighted and classified and illegally offensive material within the blockchain.

But there are really lots of characteristics of the Bitcoin that are almost religiously presented as holy virtues of the system but that are actually flaws, pretty much serious if not lethal flaws.

A reader who belongs to the Bitcoin cult told me that it's not true that the Bitcoin consumes lots of electricity. But the Bitcoin mining consumes a huge amount of electricity, over 1000 megawatts at each moment, i.e. the whole VVR reactor of the Czech Temelín Nuclear Power Plant. The electricity price is comparable to billions of dollars a year – and I don't count the price of the GPU chips that many people have bought.

Even the Ethereum consumes as much electricity as a small nation. The reader objected that the credit card industry consumes more electricity. The stupidity of such comments is incredible.
  1. The volume of useful transactions denominated in the Bitcoins is many thousands times smaller than in the regular currencies so the absolute amount of electricity in the Bitcoin is "expected" to be much smaller than the electricity devoured by regular fiat currencies. But it's actually not smaller.
  2. If the Bitcoin economy expanded to be comparable to the economy based on a major fiat currency (and the Bitcoin trading volume approached those on the Forex markets – that are thousands times higher today), the electricity consumption would scale almost proportionally – it would be comparable to all the electricity produced in the world.
  3. One credit card swipe consumes thousands of times less electricity than one Bitcoin transaction.
  4. Equally importantly, the whole comparison is silly because even if we switched from crowns and dollars to the Bitcoins, we wouldn't sacrifice plastic payment cards, would we?
Concerning the amount of electricity, I think that the situation is clear to every reader. The cryptocurrencies were really designed to eat as much electricity as possible because to get more of the new money than others, you need to spend more electricity for mining. So a whole industry is motivated in "arms races" that devour electricity.

Just imagine that the world economy will already run on the Bitcoins in 2018. There will be some 17 million Bitcoins in circulation and this amount increases to 18 million a year or two. The miners get this new money supply and they spend much/most of this revenue on the GPUs and electricity (if their profit margin were much comparable to 100% or higher, new miners would emerge and reduce the profit margin). Because 18-17 is over 5% of the Bitcoin money supply, it means that a big fraction of 5% of the world's GDP in these years would go to mining and the GPUs! We're obviously nowhere near this point but I want to say that this situation would be absolutely ludicrous and unacceptable – and nevertheless, the Bitcoin is often sold by the statement that the whole world economy could use it as the currency which is just absolutely idiotic claim because it can be used to deduce these unacceptable results about the percentage of the world's GDP spent on this totally unnecessary activity (and the GPUs).

But let me discuss the last point – that the analogy compares apple and oranges. The point is that the blockchain isn't a replacement for the plastic credit cards at all! A credit card is a light, convenient object you can place in your wallet or pocket that contains some data that allow you to use the money on your account to pay without coins or banknotes. The account may be denominated in the dollars, crowns, euros – but in principle, also in the Bitcoins or another cryptocurrency.

The debit and credit cards aren't being used as a replacement for online banking. Online banking is done at home, credit cards are used in the restaurants. They're used instead of banknotes in the real world. So the blockchain has nothing whatever to do with the debit and credit cards. They are technology addressing different parts of our lives. Was the Bitcoin cultist really unable to figure this simple point out?

My understanding is that this person – and lots of others – don't really worship the Bitcoin because they understand the new idea of the blockchains that are combining clever ideas in cryptography. Instead, the Bitcoin has become just a fancy new symbol in their hysterical fight against the money-using society, banks, and capitalism in general. They would like to "liberate" the whole world from these things and introduce some kind of a communist utopia, one in which wealth and classes don't exist and where the people are rewarded by a Soviet-style committee of the faithful believers in the cult. The Soviets and committees could be called The Bitcoin Foundation or the Association of Miners but they would play very analogous roles as the top bodies of the Soviet Communist Party.

This guy didn't figure out that the Bitcoins wouldn't actually replace the credit cards for a simple reason: Because he takes it for granted that credit cards are a part of the old capitalist world so they must be destroyed and banned as well! Sorry, I won't sacrifice the debit and credit cards, and neither will billions of people. If something replaces them, it must be something playing the same functions and enjoying the same practical advantages. Even if we switched to a cryptocurrency of a sort, there will be banks and credit card providers that will allow you to do pretty much the same that you can do with the cards today. They will exist as long as people continue to be free – these providers will exist because they can make a profit from this service; and there is an obvious demand for this service!

Funny, just seconds ago, I saw a Twitter notification about a contest whose winner will receive some Litecoin-denominated contactless card!

Anonymity, irreversibility

But I was happy to see a blog post by a fan of gold and silver that I could fully subscribe to. Many of these people's comments about the economy as we know it – and the fiat money – are pretty much equivalent i.e. equally stupid as the comments by the Bitcoin cultists. But this particular essay turned out to be right on the money.

So Keith Weiner mentions some of the fundamental flaws of the Bitcoin I have written about. First, the scarcity is a huge flaw, not a virtue. If you assume the mankind uses the Bitcoin for all payments and you hold one Bitcoin, you are guaranteed to have at least 1/21,000,000 of the world's money supply (at least in the narrowest sense) forever. But if that were so, it would be better to hold the Bitcoin than almost anything else. The percentage of your share in the world's real estate market is bound to decrease with time because the number of houses is basically increasing – e.g. because the world population increases by 1% a year in average. And it's similar with other things.

Given these assumptions, it would therefore be always great to hoard Bitcoins. You wouldn't want to spend them for pizzas because Laszlo Hanyecz is still hysterical about that decision he made in 2010. For this reason, you would prefer to locate some other form of cash that you would be using for regular expenses such as pizzas. A new alternative currency that "you're not afraid to spend a little bit" would be adopted on top of the Bitcoins. But that would mean that people would really stop using the Bitcoin as a currency again, and they would ask why they believe that this thing that is not used for any regular things at all should be as valuable as the world's money supply. And be sure, the answer is that indeed, it shouldn't be, so the price of the Bitcoin would drop towards zero, just like in other scenarios. The only justifiable and sustainable price of the Bitcoin in markets dominated by rational players is zero. The Bitcoin price is nonzero because the markets are imperfect and people are stupid – and the deviation of the Bitcoin price from the fair price, i.e. from zero (i.e. the whole price) quantifies how large the mankind's total Bitcoin-related insanity is at a given moment. If you rationally buy the Bitcoin, you bet that the total Bitcoin-like stupidity of all the people in the world will go up before you sell it. It can go up and you will blame me that you sold the Bitcoin early but believe me, most people may suddenly get rational at one moment, too.

If a currency is supposed to be usable, it's extremely important for "your share" to evolve similarly as if you hold cash; as if you hold other average things that can be bought for the cash. That's why the elastic money is key to price stability and a practically useful currency and why you shouldn't be afraid that a "currency" with a fixed or bounded supply can ever replace the money whose supply may be regulated – usually increased! The replacement is just impossible. The fixed Bitcoin money supply automatically implies the lethal "deflation" problem discussed above; as well as the persistent huge volatility. (The volatility could be ended if a big player decided to peg the Bitcoin to something with a pre-existing intrinsic value by some mechanisms or commitments.)

But I want to return to Weiner's article and the two flaws mentioned in the title: irreversibility and anonymity.

The blockchain is a ledger of transactions and the whole point of the mining and the consensus between the miners is to guarantee that no one can retroactively "erase" or "unconfirm" some older, already confirmed transactions from the records. The whole point is to guarantee the irreversibility of the transactions. They may be refunded but the recipient has to agree.

Again, the Bitcoin cultists sell this characteristic as a virtue. In some counting, the Bitcoin is "perfect" because – assuming that China doesn't exist – no miners can ever get the control needed to reverse some older transactions. More generally, all the rules are perfectly dictated by the computers, not humans. This irreversibility is a part of the Bitcoin's "perfection" but this characteristic is only positive or perfect from some very idealized viewpoint that is theoretical and not practical.

Because from any practical viewpoint, the irreversibility is clearly a serious flaw of the whole system.

We indeed often want the transactions to be reversed because some payments are obvious mistakes. Your secretary is told to send the money to Mr Green but she sends it to Mr Greene. The names sound almost the same but believe me, they are not the same. If the payment goes through some Internet banking, the bank itself may be asked to try to fix the mistake. Similar things must have happened to you. They have happened to me. Well, in most cases, you may perceive the fix as a refund but in some internal records of the bank, the transaction could have been completely reversed.

The more general point is that computers – or computers operated by imperfect humans – may do stupid things and you want some "reasonable humans" above them, after all. The Bitcoin removes this possibility – reasonable humans cannot be in charge anymore.

And more importantly, there are clear scams. In Fall 2005, I was a victim of a phishing attack. Nine fraudulent transactions immediately robbed my account of $3,000 or so. Bank of America actually guaranteed some kind of insurance so I could get the money back from the bank if they couldn't prove that I was behind the spending. But I didn't want to rely on that so I began to contact all the shops. They were often capable of figuring out that it was some young criminals who really weren't using their debit card number etc. At any rate, I got all the money – to the last penny – before I could even start to negotiate about the problem with the Bank of America.

But sometimes your money may be stolen in some way and you simply don't want this annoying event to be the end of the story. You believe that it's possible to investigate, trace the money, find the money, and get the money back – and be sure that the thief won't have the money, too. In fact, most people still expect that a thief should not only return the stolen money but go to jail, too. So there surely exist situations in which you simply want the money to be traceable in principle. You don't really want your money to be traced all the time (especially not by the people who could abuse the data or laugh at you) but if the money cannot be traced at all, it's a problem. And if the transactions can't be undone even when it's proven that the transactions were fraudulent, it's also a problem.

When you're robbed, you want to have some chance to get the money once you sue the thief. But there must exist a chance to find the thief. And it can be done in such a way that there's even no chance. So in this sense, the dreamed about "Bitcoin economy" makes courts impotent in their fight against any thieves of the money! Maybe the Bitcoin proponents love this feature – it's where some really wonderful kind of anarchy begins – but I surely don't. I want the police and courts to have some capability of catching criminals.

When the Bitcoin advocates say that it's "good" that the transactions are anonymous, we must ask what the word "good" means. Good for whom? As Weiner, your humble correspondent, and many others have said, it's really good for criminals who have very good reasons to obfuscate what they're doing.

Now, I believe that the FBI has already mapped most of the larger transactions in the Bitcoin blockchain that were done without some special arrangements so lots of people are much less anonymous than they believe to be. And your Bitcoin exchange would almost certainly have to unmask some data about your transfer if it were asked by the investigators, too. However, one can make the payments in such a way that it becomes really impossible to trace the transactions. You may use the Bitcoin mixer. It is plausible that most of the criminals are using it all the time. Maybe even seemingly kosher users of the Bitcoin use it. The mixer divides the payer's coin into smaller amounts and they're consolidated along with random pieces of other payers' coins to create "totally new coins", and those arrive to the recipients.

Is it good that these flows may be masked? Is it bad? It's good for those who can be invisible – and those are more likely to be criminals than for visible money transfers. And it's bad for those whose task is to catch the criminals! So whether you consider this anonymity to be good or bad largely depends on whether you root for the cops or for the villains when you watch the Hollywood movies. I mostly root for the good cops ;-) so I would say that the anonymity is mostly a bad thing.

But let me say that the anonymity may turn to a bad thing for the law-abiding payers, too. Why? Because the anonymity clumps all the payers into one "uniform group of individuals" and when it's known that some crime was done using the Bitcoin but it's not known who did it, everyone is a suspect!

So in the real world with the police that tries to look for criminals, the anonymity is really a bad thing for the law-abiding users as well simply because they share the guilt with the law-violating Bitcoin users! They automatically become suspects. And they may be unable to prove that they have used the Bitcoin in a legally kosher way.

Weiner agrees that this kind of anonymity is ultimately undesirable. And Bitcoin users who are still loyal enough citizens of the society as we know it today actually do keep some record or memory about the senders and recipients of the payments they participated in. So even though it may be impossible to extract all the information directly from the blockchain, all the good people's transactions may be reconstructed just by asking them. Whom did you pay? Who paid you? How much?

I suspect that the typical hardcore cultists want to transform the whole society. I mentioned that they want to destroy not only the central banks and the big commercial banks we know but even the convenient plastic credit and debit cards. But those are still "rather technical details" we could perhaps sacrifice. But these people really want to liquidate the potent police, courts, the usual justice system, and the very perception of justice as we have known it for a long time. They want to redefine what justice means. If you receive a huge amount of money by a mistake, it's just for you to keep it even if you know the sender.

And as I have previously said, because they want all the world's money supply to be created out of this bubble-like speculative virtual piece of nothing, they want to redistribute the wealth in the whole world – basically towards Satoshi Nakamoto and the early enough adopters of the Bitcoin. They literally want a revolution in the way how the human society works and I am not aware of a single feature of their proposed "new world" that I would find acceptable.

So I think that this profound communist-style revolution is being planned to destroy everything that has evolved in the mankind and the world economy to make it work – to make our society more advanced than the chimps' society and most other species' societies. This destructive social dimension is what actually drives the most hardcore pro-Bitcoin bigots. In this sense, the Bitcoin religion is analogous to the climate alarmist religion. It's not about the tenths of a Celsius degree and it's not about the decentralized blockchain ideas – the members of both cults know that these technical details don't matter. It's about the elimination of the aspects of the free, capitalist, democratic society based on the rule of law that has gradually improved so much by inventions and consensual contracts between humans in recent thousands of years.

They're fanatical loons and they're selling a catastrophic dystopia as a paradise.

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