Why blockchains and cryptocurrencies like Bitcoin are bullshit

Cryptocurrencies like Bitcoin are constantly in the news, as is the blockchain technology behind them.

If, like me, you don’t really understand these things, it’s hard to know what to make of it all. Is Bitcoin, and other cryptocurrencies, the future or will this experiment gradually fade away like a historical footnote? Are cryptocurrencies actually decentralized or are they controlled by small groups of people? Are they fraud-proof or can they be manipulated by insiders?

To get some answers, I reached out to Nicholas Weaver, a researcher at the International Computer Science Institute at UC Berkeley. Weaver teaches a course on blockchains and seems to think the technology is at best misleading and, at worst, a fraud. So I asked him to state his case in the simplest possible terms.

A lightly edited transcript of our conversation follows.

I don’t really understand Bitcoin or blockchains, and my sense is that I’m not alone. So let’s start with a basic question: What is a blockchain?

It depends on what you mean. There are private blockchains, which are a 20-year-old technology that somehow causes idiots to throw money at it, and then you have public blockchains, which are supposed to be a decentralized record-keeping structure, but in reality are both centralized and terribly inefficient. The use of private blockchains is quite varied because there is nothing new and it is an old idea. The use of public blockchains is basically limited to cryptocurrencies.

You say that cryptocurrencies like Bitcoin are not decentralized, and yet people are in love with these currencies precisely because they believe they are decentralized. What are they missing?

None of the cryptocurrencies are truly decentralized. They are actually centrally controlled by the miners, who can basically rewrite history at will.

I’m not sure we can understand who the miners are unless we understand how Bitcoin works. Can you guide me through this?

Imagine we had a public square that wrote down everyone’s bank balance, and if I want to send you some money, I basically write you a check and post it in the town square. The miners collect all these unconfirmed checks and carve them into stone tablets which then go to the public square.

So if I sent you a check and you want to see that it’s good, you just look at the stone tablets and confirm that it’s good. Think of the miners as the record keepers who manage it all. They validate the checks, create them in a batch (called a block), and then they are paid for their role in the process. These miners are the de facto central authority in cryptocurrency exchanges.

There are many who see cryptocurrencies, however flawed, as a step in the right direction because they at least take power away from governing authorities and give individuals more freedom. But you seem to think it’s bullshit. Why?

Well, there are several arguments. These systems require an obscene amount of energy to function. And the blockchains are not decentralized and they are not efficient, so that undermines the two main points in their favor. But the cryptocurrencies don’t work either because they don’t actually work as currencies.

What do you mean they don’t work as currencies?

The rationale for these things is that there is no central authority, meaning no one can block or undo a transaction. And so far at least it is true that transactions are not blocked. But why do you need such a system? Because you’re doing a transaction that a central authority would otherwise block, like paying off an assassin or buying drugs.

If that’s what you need money for, the cryptocurrencies are the only game in town. But if you don’t need to buy drugs or hitmen, the cryptocurrencies are much less efficient. I mean, look at the volatility of Bitcoin and other digital currencies – they’re all over the place. So if you go to one of the few legitimate merchants that take Bitcoins, they don’t actually take Bitcoins. They use a service that allows them to price in dollars, and that service immediately sells the Bitcoins and deposits the dollars with the merchants. So there is a mandatory conversion step.

Also, if I want to buy something with Bitcoin, I don’t like the price bouncing up and down. So I have to convert my dollars into Bitcoins and then do the transaction, and it’s a remarkably expensive process. This is not a system that works in my opinion.

It seems that Bitcoin’s main achievement is that it allows people to buy things in secret, just in an absurdly inefficient way.

Correct. But if you want to buy something you don’t want people to know about, you can just use a prepaid credit card. There is still no need for Bitcoin.

You also say that all cryptocurrencies are plagued by fraud that was banned in the 1930s. can you explain

Cryptocurrency exchanges are not like regular stock exchanges. In a stock market exchange, shares are all tied together so the prices are very close. These Bitcoin exchanges are unregulated entities that allow all sorts of things that are outright fraud. For example, in a regular stock exchange you are not allowed to trade with yourself because this is price manipulation. But this is a regular occurrence on these cryptocurrency exchanges.

Some of these cryptocurrency exchanges are also accused of front-running, meaning that the people who run them use their access to see what customers want to trade and then trade ahead of them to gain an advantage. There are also credible claims about insider trading in various cryptocurrency exchanges. I could go on, but you get the point.

Do you see a cryptocurrency emerging in the future that is more viable than what we’ve seen so far?

Well, to make a cryptocurrency work, you need stability. The value must hold. So what you need is an entity that will take, say, dollars and give you cryptodollars one-for-one and vice versa. But we know what these institutions are; they are called banks and they use banknotes. And when you build a cryptocurrency this way, you have one of three choices.

One, you act like a regulated financial entity like PayPal or Venmo and don’t allow the criminality. So where is the novelty there? Two, you become like a wildcat bank from the 1800s and issue unbacked banknotes, but then you risk a bank run and your value goes to zero. So what’s the point? Or you have a cryptocurrency that is actually banked by money, and doesn’t allow criminal activity, but it’s been tried before; it was called Liberty Reserve, and it was shut down by the US government in 2013 for money laundering.

Is yours a minority opinion in the world of cryptocurrency?

Yes, because there is a self-selection bias. Most people who think it’s fake simply walk away. Those who are believers are believers. Very few people have followed it like I have for five years and still find it ridiculous, but that’s because I’m an academic and I have the space to do it and I find parts of it, especially the criminality, interesting. But the arguments in defense of this stuff are becoming more and more lousy.