May 29: Why I still believe cryptocurrency is a slow-motion catastrophe

DISCLOSURE: I do not currently, nor have I ever, held any cryptocurrency assets.

I usually blog about the technical nitty-gritty of software engineering, but today’s post is going to be a little different.

Even for the technologically uninitiated, cryptocurrency has become impossible to ignore. Celebrities promote it, big business is investing in it, and many, many ordinary people are obsessed with it. Some are even getting rich.

I won’t bore you with a detailed explanation of cryptocurrency — you’ll find one easily for yourself, explained by someone much more qualified than I to do so. I also won’t pretend to be a neutral observer; I’ve always been suspicious of crypto and, as stated above, have never “invested” in it. Even now, as crypto fever keeps rising and shows no sign of breaking, I remain more convinced than ever that it’s a speculative asset bubble with potentially dangerous consequences for our economy, our industry and our society. In this blog post, I’ll share a few reasons why.

The most glaring flaw in the current generation of cryptocurrencies is that they aren’t fit for purpose because they fail to scale to a ridiculous degree.

As of this writing in May 2021, the Bitcoin blockchain is now over 337 gigabytes — equivalent to the full series of Breaking Bad in 4K hi-def. That’s more than 5 hours’ download time on my Spectrum connection here in New York City (which is faster than the USA average).

For some time now Bitcoin has averaged around 3–7 transactions per second. That sounds like a lot — until you compare it with Visa, which averages thousands of transactions per second and claims a capacity many times larger… or PayPal (nearly a thousand per second claimed)… or even Western Union (34 per second claimed).

The scaling problem is widely discussed, and many bitcoin forks and lesser-known cryptocurrencies have claimed progress in solving it. But academic literature from computer science departments around the world suggests otherwise, and I remain (to put it mildly) a bit skeptical, because the problem is, in a sense, not a bug but a feature of crypto’s decentralized, distributed nature. The same cryptography that powers bitcoin also leaves it at the mercy of not just network latency (the same reason you have to wait for your credit card to be approved) but also the time it takes for the transaction to be processed and stored around that huge, decentralized network.

Confirmation times for payments fluctuate wildly, but in even a best-case scenario, a bitcoin transaction is supposed to take on average about ten minutes! That’s barely workable even for network ordering, let alone point-of-sale use! And in practice, average transaction times have now exploded to nearly an hour, and anecdotal evidence suggests they are increasing rapidly. And numerous stress tests have demonstrated that all it takes to blow up confirmation times for the most widely used coins is a few dozen lines of Python.

The fact that a malevolent (or inept) actor can cause such chaos in crypto should make my next point unsurprising…

There’s a tangible cult-like zealotry to the most hardened crypto true believers — people who want to believe in its perceived promise of a libertarian techno-utopia free from the oppressive heavy hand of Big Brother. It seems that’s why many of its most vocal users assert a supreme, pansophical, almost religious confidence in it.

If [Bitcoin does] not [reach $500.000 by the end of 2020], I will eat my dick on national television.
– John McAfee

In [2022], if you use fiat currency, [people] will laugh at you.
– Tim Draper

Blind trust in cryptography is a dangerously dim view of human nature. Cryptography is only ever as secure as the human beings who employ it — and history shows that the humans using crypto are often hilariously naïve and incompetent.

• Vietnamese exchange VinDAX was fleeced for a cool half million
• New Zealand-based Cryptopia suffered two multi-million dollar hacks within a fortnight
• Singaporean exchange Bitrue let thieves get away with $5 million
• Another Singaporean exchange, DragonEx, lost $7 million thanks to some embarrassingly basic malware from North Korea
• European exchange GateHub lost $10 million to scammers
• Japanese exchange Bitpoint was scammed of $30 million, recovering only about 15¢ of every dollar stolen
• South Korean exchange CoinBin, which had already changed its trading name several times due to a shady reputation, was scammed of millions by its CEO and folded owing customers more than $30 million
• Binance, domiciled in the Cayman Islands, let $40 million slip through its fingers, worsening an already-sloppy track record with security
• Korean exchange Upbit was had for a cool $48.5 million
• Another Singaporean exchange, CoinBene, responded to a whopping $100 million going up in smoke with denial and frantic, possibly illegal loss-covering
• Canadian exchange Quadriga lost access to possibly hundreds of millions in coins after its CEO died on vacation under suspicious circumstances

This list barely scratches the surface, as a quick search for “crypto exchange hack” will confirm. Surprise, surprise: it turns out running a currency exchange require a bit more expertise than running a Magic: the Gathering Online server. Real banks use highly redundant multi-million-dollar mainframe configurations, backed up many times over — not AWS virtual servers with no backup. (There’s a good reason cryptocurrencies are sometimes called “Dunning-Krugerrands.”)

But I would argue the really sad thing isn’t when a big business or a multi-zillionaire like Elon Musk loses a lot of crypto: it’s when a normal jamoke with dollar signs in his eyes pours his life savings into Ripple, keeps his wallet passwords in a plaintext file on his Windows desktop, and loses it all in a flash to some simple malware. Which leads me headfirst to my next point…

Media discussion of crypto frequently focuses on its connection to crime. Evidence suggests it’s a significant source of funding for terrorist groups and a favored medium of exchange for trade in contraband like narcotics, forgeries or stolen goods. Likely the most notorious example remains Silk Road, the “Amazon for illegal drugs,” seized by the FBI in 2013. Though its founder will likely never take a free breath for the rest of his life, imitators sprouted up like psilocybin mushrooms almost as soon as Silk Road went down, and many remain highly active.

Crypto has also been a boon for pirates and fraudsters — crimes not of violence but of trust, which I’d argue are just as heinous. Bitcoin is ridiculously easy to launder — a dream come true for data pirates, like the gang that extracted $5 million in bitcoin from the Colonial Pipeline Company earlier this month. Yet another flavor of crypto fraud is the Bitcoin Ponzi/pyramid scheme, more or less the same as the ones around since the time of Charles Dickens: some, like OneCoin and Bitconnect, are naked frauds promoted as cryptocurrencies, while others like VQR are styled as “hedge funds” claiming to invest hard currency in crypto or accepting crypto directly.

To be clear, I believe nothing should be prohibited, restricted or discouraged because of the mere potential for evil. (If I believed that, I wouldn’t be a software engineer.) Crypto can absolutely be used for noble purposes — to support dissidents in repressive countries, or to stave off economic ruin if you live in a country like Zimbabwe or Venezuela where the local currency is worthless.

My point is not that crypto’s bad because it can be used for nasty stuff. My point is that crypto’s all about MONEY — not “privacy” or “empowerment” or “freedom from fiat currency.” It’s not a currency at all: it’s an asset, a deeply unequal and exploitative one. Only a very small fraction of cryptocurrency coins actually circulate, and most are highly concentrated in the hands of a few large owners; at one point it was estimated that nearly a quarter of all bitcoin were owned by a single person.

The value of crypto almost never comes from the labor or capital a currency typically represents. No matter what John McAffee or Elon Musk says, it seems instead to nearly alway come from the suffering of society’s most vulnerable: addicts, victims, and well-meaning “investors” duped by a hope for nothing more audacious than a comfortable life. And it’s subsidized by tax dollars, used to build power plants that spew filth and melt our planet as they’re strained past the point of rolling blackouts by by crypto miners— not to create goods or services, not to power heaters or lights or stoves or machines, but to run SHA-256 over and over in a loop as fast as possible.

This all brings us to my last point — one that’s discussed much less frequently and gets fewer hits and clicks than crime or intrigue, but one with much more disturbing implications…

For all these reasons and many others, crypto has undermined the integrity of the entire software industry, and arguably, by extension, all industry.

Public trust in the tech industry has cratered, and shows no sign of improvement. Crypto has contributed to the trend by twisting and perverting this industry’s incentives: software is no longer for creating or capturing capital, but for extracting it. I can’t tell you the number of times I’ve heard of what sounds like a promising, innovative new technology, only to eventually find out that it’s just crypto/blockchain claptrap.

This fervor has ushered in a new category of Internet crime distinct from those addressed above: since crypto’s explosive rise in the past few years, every IT business providing publicly-available CPU resources has suffered a massive outbreak of abuse for cryptocurrency mining. Hackers steal login credentials for legitimate users to use their accounts, use CPU limiters to duck under the radar of system monitoring tools, and install mining software into innocuous-looking builds — all to crunch numbers in pursuit of a new coin. It’s a big business, undertaken by professional, organized criminals who have crippled these important services and rendered them unworkable and unprofitable.

Crypto has also contributed to a devastating shortage of chips, processors and hard drives. Instead of powering cars or appliances or machines, they’re put to work solving a math problem with a $40,000 payout. Those chips and processors are made of silicon, copper, gold, silver, platinum, and iridium, supply of which is finite, and mining of which is just about dirtiest industry on the planet. Most heavy metals aren’t recycled, and even the ones that are get recovered by burning electronics and having small children sift through toxic garbage.

One could argue, (somewhat) correctly, that some of the issues I’ve highlighted are problems of regulation and governance — not of crypto per se. But at this point, that’s a distinction without a difference. If blockchain technology in one form or another really is here to stay, our task now must be to manage the fallout and minimize the harm.

And y’know what? I’m man enough to admit I might be wrong — I don’t have a crystal ball. Maybe Tim Draper’s right, and I’ll look back on this post a year from now, clucking my tongue darkly as I pay my electricity bill in DogeCoin. But even if that happens, I’ll still sleep like a baby because the facts almost certainly won’t have changed: crypto fails as a currency, exploits the vulnerable, wastes precious resources and perverts the technology/software industry. I’ll take moral backbone over crypto millions every day of the week and twice on Sunday.

In a gold rush, the smart money’s on shovels. Cash up front, please.

Source: https://joshgoestoflatiron.medium.com/may-29-why-i-still-believe-cryptocurrency-is-a-slow-motion-catastrophe-15333bbb1627?source=rss——-8—————–cryptocurrency