Common arguments against Bitcoin, Blockchain, and Cryptocurrency
So Grandma has been reading these articles and she’s interested. Just like that 2-for-1 special on anti-aging face cream at Nordstrom’s, cryptocurrency has caught her eye. But Grandma didn’t live such a long life by throwing her money at any old peddler who came to town. She’s done research, put in her debate dentures, and she has questions.
What About A 51% Attack?
“Wow Grandma, great question, I had no idea you knew so much about this.” But Grandma doesn’t like being patronized. “I’ve lived through WWII and watergate,” she says. “And besides, that Noam Levenson is such a good writer, and such a fine Jewish boy…” — but I digress.
So Grandma understands that chaos can erupt on the Bitcoin network if any miner was to gain 51% of the computing power. With 51% of the power, the malicious actor could prevent other miners from confirming transactions — monopolizing the mining rewards. They could also spend Bitcoin, and then reverse the transaction (double spending)—like my sister used to do in Monopoly. It’s important to understand though that someone with 51% of the power can’t modify past transactions; they can only influence future ones. That means that once a transaction goes into the blockchain, it’s safe from this attack. There is a caveat to this. Blocks can still be vulnerable to change until they have about six new blocks on top of them. That’s why it’s recommended to never consider a Bitcoin transaction final until those other blocks have been confirmed.
This type of attack could be accomplished several ways. First, a single person or government could purchase the necessary computing power to overwhelm the network. A second more probable method builds off of what miners do already. Because it takes such enormous computing resources to mine bitcoin, miners join their resources together and split the rewards. Probability dictates that if Bob joins a mining group, he won’t earn more bitcoin than he would alone, but his payouts will be smaller and more frequent — convenient if he wants to pay the monthly electricity bill.
So it’s possible that one of these mining groups could get 51% of the power. Even if the one to achieve 51% of the mining power isn’t malicious, it still means that Bitcoin has become centralized — defeating the whole purpose behind it. At that point, it becomes a worse version of PayPal.
Here’s how you should respond to Grandma’s question. First, complement her on her shade of lipstick so that she might take it easy on you with the next question. Secondly, tell her that Bitcoin is protected against an attack primarily by the enormous cost and lack of any economic incentive to conduct one. The cost of an individual or government purchasing enough power to reach the 51% mark is estimated to be a whopping $4.1 billion. That’s a lot of money. But considering people have spent more on a yacht, that’s not impossible, especially for governments.
The question then is, what’s the incentive? We already know that a 51% attack wouldn’t allow one to change the history of the blockchain. It isn’t the “Clear Search History” button of Bitcoin. Speaking of which…
If the incentive is to destroy Bitcoin from a pure anarchist perspective, the 51% attack would work. The network would take notice of the malicious activity and the Bitcoin blockchain would be compromised. Users and miners would move to a different chain or coin. Would this be bad for investors? Absolutely. But the attacker would have just spent $4.1 billion on specialized mining hardware that would now be of little use to them. The genius of Bitcoin is that an investment into the network is required before an attack could be made. Any attack immediately devalues their substantial investment.
So while this is theoretically possible, Bitcoin’s decentralized proof of work protocol ensures that the costs are extraordinary and that there is a lack of economic incentive to do so.
In every instance where someone has come close to the 51% mark, we’ve seen that with that much computing power, it’s much more profitable to play by the rules on the network than to illegitimately influence transactions.
Bitcoin Is Killing The Environment
Even though Grandma buys plastic water bottles by the case at Costco, this is a valid point. Here are some shocking facts. Bitcoin currently uses almost as much energy as Denmark. Bitcoin could power 2,996,536 American homes for a year. Bitcoin uses 0.14% of the total world’s energy output. By some estimates, if Bitcoin continues it’s atomic run, Bitcoin’s total energy consumption will be on par with the world’s collective consumption by the year 2020. While these are only rough estimates, the fact remains that this a serious concern.
Some hypothesize that as Bitcoin’s block rewards decrease, the incentive to mine will drop along with energy consumption. Because Bitcoin is capped at 21 million tokens, the bitcoin being paid out to miners to reward them for confirming blocks in the blockchain, decreases over time. They hypothesize that this decrease will diminish the profitability of mining, and thus, less will do it. I disagree with this argument. If Bitcoin continues to explode in value, its mining profitability will increase, regardless of the decreasing mining rewards. This will encourage more not less people to begin mining Bitcoin. This won’t solve anything.
I think Bitcoin needs to change. They need to change from a Proof of Work (PoW) protocol to a Proof of Stake (PoS) protocol. I explored this in an article I wrote on NEO, but will discuss it here too. Remember these acronyms (PoW and PoS) as I use them frequently from here on out.
Proof of Work gets its name from computers on the network using their computational power as work to prove the validity of transactions. Proof of Stake works similarly to PoW except that instead of computers validating the network and receiving rewards equivalent to their relative computing power, PoS uses token holders. Those who hold tokens (so anyone participating in the network) assist the network and gain rewards. Anyone can “stake” their tokens (staking means to temporarily place the tokens in a locked smart contract — until staking is over) and in exchange, confirm transactions and receive rewards based on the relative number of tokens held. In PoW, if you operate 5% of the total computing power of the network, you can expect to get 5% of the block rewards. In PoS, if you own 5% of tokens, you can also expect to receive 5% of block rewards.
The solution to Bitcoin’s energy problem is not drill-baby-drill or reduce the mining rewards: it’s proof of stake. PoS requires very little energy and I would argue that it actually improves security. With Bitcoin, and all other cryptocurrencies that use PoW protocols, the difficulty algorithm (how hard it is to solve the mathematical formula) must constantly be updated to account for better computer hardware and more powerful mining groups — otherwise, in 10 years, the more powerful computers could solve Bitcoin’s current algorithms in seconds instead of the mandated 10 minutes. With PoS there is no need to do this.
With both PoS and PoW there is the possibility of a 51% attack. However, with PoS, the incentive to attack is even lower than in PoW. With PoW, even though the attacker would have comprised the network, they would still have physical hardware sitting in their garage with which they could potentially launch more attacks against other PoW coins. However, with PoS, because you must stake your coins, any malicious behavior results in the loss of all staked coins. So if you bought 51% of all tokens, you would immediately lose your substantial investment.
In addition, the costs of purchasing 51% of the network tokens are equal for everyone. The costs of obtaining 51% of computer power are not. People who purchase mining units in mass can receive bulk discounts. Those who live in countries with extremely cheap electricity have an advantage. But the price of a token is the same, whether you buy 50 of them or 1 million. There is no advantage to the wealthy.
Governments Will Ban It
Grandma has been worrying about government bans ever since prohibition. But still, a legitimate question Grandma. Before we ask why the governments would ban Bitcoin, let’s ask how would they? Currently, anyone with a phone and a Bitcoin wallet can send and receive bitcoin. The government can’t touch this aspect. Under the most extreme circumstances, what they could do is shut down exchanges, the main on-boarding method for users. While technically they could prosecute anyone proved of using cryptocurrency, I think that is very farfetched. So they could shut down exchanges. What would be the incentive of the government to do this?
I think the main concern right now for the United States government is that they are unable to collect taxes from people’s transactions. Banning it is not the solution. If it were, the feds would have already done so. They will continue to work with exchanges like Coinbase — that already require personal identification for new accounts — and will become better at tracking digital currencies. The IRS will eventually crackdown and set a precedent, but they won’t ban exchanges.
Any government that does ban cryptocurrency, risks being left behind by the world. Blockchain is a seriously disruptive technology. Similar to how the internet disrupted much of the establishment and intuitions, blockchain could very well do the same. But governments had to recognize that fighting the internet to protect industry wasn’t possible. Everyone had to adapt, governments included. That doesn’t mean the government didn’t regulate the internet, and won’t try to regulate Bitcoin. But regulation isn’t the same as banning it.
In addition, I don’t believe the issue of anonymity is relevant to whether governments will ban Bitcoin. Bitcoin is less anonymous than cash. I do however believe that the fully anonymous coins are more vulnerable to governmental crackdown than Bitcoin. The government will just become better at tracking usage and connecting it to illicit purchases.
It’s also difficult for countries to regulate a truly international digital commodity. National borders mean nothing if the currency can be contained in a digital wallet.
It Will Become Centralized
Grandma is not the first to raise this point. This is one of the most common issues I hear raised. Bitcoin could one day become centralized; it’s already moderately centralized. The issue here can be looked at from two different perspectives: Will blockchain become centralized and will Bitcoin become centralized?
Blockchains in my opinion will never see mass centralization. Decentralization is inherent to its design. The ease with which people can fork and create similar blockchains — I could fork Ethereum and create a similar Ethereum if I had the knowledge — ensures that the power remains in the hands of the users. If the product stops being competitive, or the blockchain becomes centralized, or the developers begin abusing their power, users will leave that specific blockchain and transition to another network. Their information can be transferred as well. Today, if you disagree with what Facebook is doing, your options are limited. You can delete your Facebook and risk missing out on what Tiffany ate for lunch yesterday. You can move to another social media site, but Facebook maintains control over your information. You can’t transfer it or take it with you. However, with blockchains, unpopular behavior will be met with a massive exit of users. So while a specific blockchain could become centralized, the inherent nature of the technology and network ensures that the majority stay decentralized.
However, Bitcoin could certainly become centralized. In some sense it’s already happening. The cost of mining bitcoin is so prohibitive that the entry barrier is enormous. Miners group together as I mentioned earlier, and currently, 6 mining groups control 75% of the network. However, a change to a new proof of stake protocol would help solve this.
In addition, it’s important to recognize the decentralization takes on many forms. Vitalik Buterin in this brilliant article, highlights three types of decentralization. Architectural decentralization is the type we are discussing — a network of decentralized computers. But political decentralization still plays a roll. The political decision making process of Bitcoin is decentralized. The fact that most developers are in America while most miners are in Asia creates a language, distance, and cultural barrier that prevents effective collaboration.
I’ll Get Hacked!
Grandma, there isn’t anything to hack. Bitcoin is not stored on your computer. Remember how in this past article I wrote about how there is no physical bitcoin. Instead, we have a distributed ledger (a book where transactions are recorded) that contains all the transactions and all the account information. So when I say: “I have one bitcoin,” what I mean is: “the ledger reflects that my accounts contain one bitcoin.” So you can’t steal a bitcoin. You can try to illegitimately change the ledger, but as we spoke about above, that takes an enormous amount of computing power. Definitely more than you have in your whole nursing home, Grandma, so don’t get any ideas.
However, it is important to know that your bitcoin is only as safe as you make it. If you leave your private keys (passwords) around where anyone can find them, or even on your hard drive where hackers could get them, you might lose your money. But if you store your bitcoin in a safe wallet, and store your private passcodes in a safe place, there is no way for people to hack your bitcoin.
There is a good analogy for how difficult it would be to guess someone’s private key. If within every grain of sand on the earth today, existed another world with as many grains of sand as are contained in ours, that number is how many possible private key combinations there are.
It’s Drug Money
Criminals are innovators. They have to stay ahead of the law. And criminals don’t have the bureaucratic overhead determining whether they should evolve their old practices; if the new method is better than the old, criminals will be the first to change. But just because people use bitcoin to buy drugs doesn’t mean the technology isn’t revolutionary. I would argue that because criminals use bitcoin for illegal activities, bitcoin’s technology is revolutionary. It’s like how I never watch a new show until everyone around me is talking about it. I just now started watching Rick and Morty. I don’t have time to be the one sifting through all the terrible shows to find the quality ones. My friends unknowingly do it for me. Well, criminals are the sifters for new disruptive technologies. And when they start using it, the rest of us had better climb on board.
Criminals use the internet; criminals use encryption; criminals use guns — but all of those still serve significant roles in our world. And besides Grandma, I know you’ve been looking for a way to buy that illegal botox from China.
Immutability Is A Myth
Grandma has identified a contradiction in my articles. How can I keep saying Bitcoin is immutable if Bitcoin can both fork and be vulnerable to a 51% attack?
First the definition of immutable: “unchanging over time or unable to be changed.”
The blockchain is not immutable. I know this might upset you after I’ve used that word so much, but it’s about as close to immutable as anything is in our world. But it’s not carved onto the ten commandments. Regardless, their are very few conditions under which Bitcoin’s blockchain can be changed. First, it’s important to understand that the further a transaction gets into the blockchain, the more immutable it is. As I wrote earlier, a 51% attack doesn’t enable someone to change the history of the blockchain, but merely allows them to influence incoming transactions. The previous history of the blockchain is nearly impossible to change, even with significantly more than 51% of the computing power.
And even if a network was compromised, the information in the blockchain is still relevant. We would be able to identify when the attack happened, and all the information prior could be transferred to a new blockchain.
So while the blockchain is not entirely immutable, it does provide a system more secure and trust-less than any we have today, and ensures that any illegitimate activity can be seen by everybody. Not like much of the fraud being committed today in our financial world.
Bitcoin and blockchain are not perfect technologies. They’re incredibly new and will encounter many growing pains as they begin to become mainstream. Blockchain, like our industries today, will never be perfect. The question then is, are they better than what we have now? That — because of the inherent decentralization, the near immutability, and the trust-less nature of the technology — is indisputable. If Bitcoin’s bright future was certain, its price would be much higher. Some of its risk is inherently priced in.
With four articles, we’ve covered what makes Bitcoin unique, where its valuation comes from, other potential uses for the blockchain (Ethereum), and now some of the common concerns surrounding Bitcoin. Stick with me because we still have a lot to learn.
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Disclaimer: This is not investment advice. Do your own research.
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