Lee Reiners of Duke Law recently wrote an op-ed for the Wall Street Journal where he states, “I have yet to identify a single task or process that crypto makes easier, better, cheaper or faster”. He concludes that cryptocurrencies should be banned because they encourage ransomware attacks and serve no purpose aside from making a “quick buck”.
To be sure, ransomware attacks and other exploits are serious problems and they should be addressed. However, cryptocurrencies’ primary use case is totally unrelated to efficiency and speed. Rather, they are designed to encourage decentralized decision-making with the aim of producing a more democratic and antifragile society.
People who live in developed countries have never experienced a total meltdown in the fabric of society. So they assume that “easier” and “faster” systems are the goal and they take stability for granted. However, for those who have experienced debilitating political adversity, the picture is very different. Imagine you live in Russia in 1919 and the Red Army confiscated your property. Or you live in a country that suffers through perpetual hyperinflation due to incompetent policy-makers. Or you live in a moment of ethnic cleansing where your property is confiscated and your citizenship is stripped.
In these cases, you want a set of systems that are robust to the various ways that political power can be abused or corrupted. Decentralization via an ingenious consensus algorithm is Bitcoin’s solution to this problem. Bitcoin’s narrow application was to address corruption in monetary policy. However, the principle of decentralization can be applied to many political problems.
The rest of this post considers various properties of blockchain technology, in an attempt to provide some context for those who are ambivalent about its widespread adoption.
The Four Faces of Blockchain Technology
1. “Decentralized / Trustless”
“Decentralized” means that no single central authority is required to keep the system functioning. “Trustless” means that you don’t need to trust a centralized authority.
In contrast, almost every other aspect of life requires centralization to some extent. For example, representative democracy was a huge leap forward in decentralizing political activity. However, in 2021, we still need a physical national capital with legislators to represent us; as a result, there are perpetual injustices in the form of lobbying, unholy bargains, side deals, etc. Blockchain technology might enable us to create the first truly democratic institutions i.e., democracy without representation.
2. “Immutable / Censorship-Resistant”
“Immutability” means that transactions cannot be reverted and it is a byproduct of the Bitcoin consensus algorithm. But that doesn’t mean that we can’t build mutable systems that are also decentralized. In other words, we could build systems where decisions to revert transactions are also handled in a decentralized fashion.
To be sure, immutability encourages ransomware attacks and hacks of decentralized applications. For example, if a hacker is successful in draining a DeFi protocol’s smart contracts, those transactions cannot be reverted. In contrast, if a piece of bank software is faulty and customers receive $1mm accidentally, such transactions can usually be reverted.
On the other hand, immutability also has key advantages. One example is that it enables censorship-resistant applications e.g., hosting a Twitter clone on a public blockchain. Another example is that decentralized applications only need to be audited once. (There are no continuous deployments like traditional web applications that might inadvertently introduce a bug.)
Overall, I think the verdict is out on immutability being a virtue of blockchain technology. It would be nice to see a new blockchain that could support transaction reversions in a completely decentralized fashion.
People sometimes quote transparency as being a virtue of blockchain technology. However, this is not accurate. It is true that transactions can be viewed on the Bitcoin and Ethereum blockchains. In general, however, centralized systems can be designed to be transparent and decentralized systems can be designed to be opaque e.g., Zcash.
4. “Cheaper / Better / Faster”
Almost all technology innovations until Bitcoin were about “easier”, “cheaper” and “faster”. As mentioned above, Bitcoin introduced a completely new use case for software technology: antifragility. That said, recent innovations in blockchain technology are also revealing use cases that are truly cheaper and faster than traditional software designs.
For example, a company token can be created and listed on a decentralized exchange in less than 1 minute and for just a few hundred dollars. In contrast, it would cost millions to issue public stock using traditional financial systems.
In short, Lee Reiners is right about the need to address ransomware attacks and other exploits. However, such solutions can and will come from the cryptocurrency development community, not from heavy-handed regulation.