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The future of Bitcoin and other digital coins, as well as their expected value, seems to be based as much on reason as on faith, and there are strongly opposed views. In contrast, even among those who are skeptical about the different coins, many argue that the underlying blockchain technology will become pervasive and is sound. I’ll argue it is not.
The reasoning in favor boils down mostly to three premises: (1) that just as with the internet in its infancy, it’s easy to underestimate the future impact of blockchain technology; (2) on the soundness of the Satoshi Nakamoto algorithm (SNa); and (3) that it will result in vast benefits in many areas.
Blockchains are the foundational technology that underlies all cryptocurrencies, and they shared a common birth: A white paper that outlined a novel currency (“Bitcoin”) and a novel algorithm (“Blockchain”). Further developments of the blockchain algorithms enabled using blockchains for purposes well beyond just cryptocurrencies.
The following arguments against blockchains are completely unrelated to the ups or downs of cryptocurrencies, and are based instead on (a) the dynamics of networks of miners, and (b) that the further benefits attributed to blockchains are overstated.
1. Parallels with the Internet
The parallels with the internet is the weakest of the arguments, and not a serious one, so I’ll get it out of the way first: although the magnitude of the eventual impact of new technologies is rarely fathomed at their early stages – whether the internet, the web, computers, penicillin, etc. – most new technologies do not succeed in such a significant way. From promising new drugs that fail third-stage trials to novel materials, unbeatable startups, or clever algorithms that should revolutionize some area, most actually either fail altogether or end up having negligible impact. However, most failures are less spectacular, and certainly less glorious than triumphs. Hence, they tend to get less press. Failed experiments rarely get published in the academic journals, and in general, it’s success that gets echoed and amplified by the general press and the web.
For example, some of the hubris around Bitcoin, or its potential, depending on one’s perspective, continues to get amplified by companies and individuals who gain as long as others keep trading it, but do not necessarily own Bitcoin themselves.
Every new idea, naturally, has to go through infancy and teething, but being in such a stage is hardly a predictor of success. Making a parallel between the future of blockchain and the growth of the internet is unfounded: The only true parallels are that both deal with bits and that both had an infancy. But we could make equally unfounded parallels with any number of protocols that went by the wayside without leaving a trace, or in general with other technologies that looked incredibly promising at the outset, but ultimately failed. In conclusion, the success of the internet tells us little about the future of blockchain – one way or another.
2. On the soundness of SNa and Blockchains
So now let’s look at a harder issue: whether SNa is a solid foundation for a revolution or just the basis for another interesting, distributed database. I will not go into whether central banks or fiat currencies are good or bad, nor whether privacy, traceability, or security matter, because I will attempt to show that neither SNa nor its variants provide an advantage over ex-SNa technologies. If so, all these other economic and social issues can continue to be debated, but independently of SNa.
To further clarify what I consider as ex-SNa: all types of databases, including centralized, distributed, mirrored, etc.; backup systems, redundancy, and recovery systems and protocols; communication protocols, including consensus mechanisms and any other update and software or hardware-based commit mechanisms; encryption; tamper-detection mechanisms, including incremental hashes; and in general, every other technology, with the exception of SNa.
The key weakness is not in SNa itself. The algorithm is sound and works well. Moreover, some of its limitations in terms of speed, space, or energy are being addressed with clever variants. However, those variants use more or less obvious side channels, weaker protocols than SNa, or other ex-SNa mechanisms to funnel information. Hence, they leave the transactions as exposed as ex-SNa – at least for some periods of time. They are more obscure, and possibly harder to attack than, for example, leaving Bitcoins in a hot wallet, but still vulnerable. Some variants provide for “self-executing” and exceptionally safe contracts – certainly clever and useful. However, such use requires a…