Sohrab Andaz


There’s nothing beyond the bitcoin bubble

February 3rd 2018

This exposition is probably a little late, with Bitcoin prices slumping to $9,300 a coin today from a high of $19,000 in mid-December. Maybe the world’s traders, currency enthusiasts, and media elite have sobered up and realized what some of us already know, that bitcoin and blockchain are just good marketing, and the price has moved to reflect that realization. But nonetheless, I think the thoughts are valuable, especially because we find ourselves time and time again unable to reign in our vestigial instinct and fervor for hyping technologies and ideas from mild-uselessness to gleaming saviordom. Here’s why the ideas in the recent New York Times piece “Beyond the Bitcoin Bubble” by Steven Johnson are silly, dangerous, and show that even the smartest people thinking about bitcoin and blockchain don’t have the right perspective.

The core argument of Johnson’s piece is that blockchain will revolutionize digital society and undercut tech oligopolies by powering a business model to reward a democratic and distributed organization of data and power. Data will no longer be stored by a single corporation like Facebook, Google, or Amazon. In the piece:

“Let’s say you’re trying to build an open Twitter,” Dixon explained while sitting in a conference room at the New York offices of Andreessen Horowitz, where he is a general partner. “I’m @cdixon at Twitter. Where do you store that? You need a database.” A closed architecture like Facebook’s or Twitter’s puts all the information about its users — their handles, their likes and photos, the map of connections they have to other individuals on the network — into a private database that is maintained by the company.

Google and Facebook owning the majority of the data produced by users online allows them to profit handsomely while its users are beholden to these corporate giants for digital search, news, and social interaction.

Instead crypto-optimists imagine data will be held by a distributed network of participants who all store a copy of the data stored on the network (the blockchain) and are compensated for keeping their node in the network alive with cryptocurrency (mining bitcoin). This will incentivize technologists and developers to invent new protocols (or contracts) for modeling and sharing data, like a persona-protocol that could replace Facebook. Additionally, all conflicts in the data or protocol can be democratically resolved by a vote of currency-holders.

Sounds great, until you start actually asking questions. For example, how much are the cryptocurrencies that creators are compensated worth — what can I actually buy with a bitcoin? Does the value of cryptocurrency mined entirely compensate for the cost of running the computers that are supposed to do the mining, including energy, cooling, and storage? How many blockchain networks will we create? Is there any effective or theoretical limit? Does the number of networks devalue individual currencies or prevent adoption? Does blockchain network latency impede using bitcoin as true currency of commerce (payments generally take 30 minutes to clear so that rules out paying for a morning cup of coffee with bitcoin)? What about large banks who own more and more of the intellectual property and patents around blockchain? And what about the elephant in the room, that a blockchain networks still operates over the internet which is is maintained by a handful of large, wealthy, powerful, and entrenched telecommunications companies? If internet service providers start blocking IPs, which they can do now in the United States because of the repeal of net neutrality, doesn’t that imperil the whole blockchain experiment?

Taking these doubts en masse, there seems to be no way for blockchain to make good on the potential it’s adherents promise. We’ve already seen advocates make concessions. Look no further than “Beyond the Bitcoin Bubble,” which quotes Chris Dixon, a partner at Andreessen Horowitz as saying, “[W]e’re not trying to replace the U.S. government. It’s not meant to be a real currency; it’s meant to be a pseudo-currency inside this world.” Similarly, Dan Finlay, a creator of MetaMask said, “To me, what’s interesting about this is that we get to program new value systems… They don’t have to resemble money.”

So if we’ve already given up on the dream of cryptocurrencies being a true means of commerce, and instead have relegated these digital tokens to being a simple store of value that bitcoin miners need to redeem for actual currency to complete financial transactions, then there is even more doubt about the stability of their prices and the integrity of the belief supporting their values.

It seems bitcoins and other cryptocurrencies are less like U.S. dollars and more of a commodity like gold, platinum, crude oil, or frozen pork bellies — all of whose prices are strictly determined by supply, demand, and the spirit of the market. Though craze, frenzy, and speculation may drive prices up during bouts, because cryptocurrencies as a simple store of value lack a utilitarian purpose, they also lack of sustained demand during troughs to support the price (i.e. the only reason to want a bitcoin is because it is valuable). And if the price of crypto-tokens crumbles, crypto-miners will lack an incentive to act as participants in a distributed ledger. It takes real money to pay for the servers that need to keep up the network. It’s easy to see how a self-reinforcing death spiral ensues, leading to further crypto-token debasement, miners dropping from the network and a decrease in the faith cryptocurrencies as an item of value. As the blockchain implodes, so does the value of the cryptocurrency, because of a diminished faith in the ability of miners to keep up the blockchain. It’s hard not to be fatalistic about a commodity that has no inherent utility and takes billions of dollars a year to maintain. Not even tulips make such meager claims.

Contrary to the Johnson’s piece, there’s nothing beyond this bubble. Crypto-enthusiasts claim to have developed a new revenue model for financing digital-era communitarianism that relies on a decentralized ledger instead of a corporate monolith to host data and drive reconciliation. But the viability of the financing model is inherently tied to the health and value of the currency traded on its network. If we can’t pay participants to keep up the network then there is no network. In essence we haven’t transcended the old model of oligarchic digital capitalism.

Instead, Johnson conveniently ignores the way out.

Beyond the Bitcoin Bubble claims that we have examples of such distributed protocols and that the blockchain offers the same promise. For example, with GPS, he writes:

Originally developed by the United States military, the Global Positioning System was first made available for civilian use during the Reagan administration. For about a decade, it was largely used by the aviation industry, until individual consumers began to use it in car navigation systems. And now we have smartphones that can pick up a signal from GPS satellites orbiting above us, and we use that extraordinary power to do everything from locating nearby restaurants to playing Pokémon Go to coordinating disaster-relief efforts.

But what Johnson clumsily ignores is that GPS maintains its independence because it is entirely financed, regulated, and maintained by American taxpayers and the federal government. It’s not just short sighted by also dangerously deceptive of him to try and draw parallels that do not exist between GPS and blockchain.

Instead what’s more clear from reading beyond Johnson’s piece is that escaping the monopolistic control of digital capitalism is hard, requires hard work, commitment to a civic and democratic process and institutions (… like the U.S. Government…), and hours and hours of volunteer work. Early internet protocols that Johnson quotes like SMTP for email, FTP for sending files, HTTPS for securely browsing the web were developed by a generations of hard working, talented, idealistic engineers who believed that despite being paid nothing they ought to contribute to an early internet for the greater good.

In the current moment, bitcoin’s bubble is slowly popping, and there’s writing on the wall for the future of blockchain, too. When companies like Eastman Kodak can double their share price by simply telling investors they’re going to work on blockchain, it’s clear that the technology is more marketing than substance. The pop-hysteria around blockchain’s promises have started to dim and the media echo chamber has already started to consume the “next thing.”

The individuals who Johnson quotes in Beyond the Bitcoin Bubble are ostensibly the smartest people thinking about blockchain and its ability to answer how society is organized, value is created, and who reaps the rewards. But their idea that the blockchain might be able to provide natural incentives for actors to self organize in the most communitarian of ways seems more and more unlikely. It’s a mistake made by so many technologists; not every problem problem has a technology solution. In this case, there’s not an app for everything.

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