In April 2023, I had been having another look at crypto currencies and I came across an article called “Crypto: My part in its downfall” by David Rosenthal, published on his blog. While I had come to the conclusion that crypto-currencies are untrustworthy and at the end of the day insecure and I last expressed my views on my blog in this article, [or on Medium] which was prompted by “ Learnings of Bitcoin “ on this blog, I was shocked at the litany of crime and fraud listed in Rosenthal’s article together with weaknesses in the fundamental design and implementation models. Here are the lessons I got from reading the blog and some of its supporting references, more than one of which is also from Rosenthal’s blog.
Proof of work and the absence of trust
Proof of work concepts were developed before bitcoin. They are designed to be expensive so as to inhibit people from pissing about. Bitcoin solves the cost by rewarding the miners but Rosenthal argues, citing Eric Budish, that “to be an effective Sybil defense, the cost imposed by Proof-of-Work had to be vastly higher than the cost of the functions it was defending.”.
Rosenthal also makes the point that while proof of work was designed to eliminate trust, the bitcoin/blockchain implementation failed in this goal; he cites this Darpa paper, “Are Blockchains Decentralized? Unintended Centralities in Distributed Ledgers”, which lists a shocking set of theoretical and real centralising tendencies.
Fatal side gates
Crypto-currency is useless unless you can convert it into real money. This introduces a further need to trust, if not the blockchain or its coders then the intermediaries. The first reason that these came to be, was the need for “miners” to pay for their computers and power in real money, dollars, euros, or yuan. The exchanges need banking services and so the deregulated nirvana world of bitcoin, welcomed both the banks with their Know-Your-Customer and anti-money laundering duties and their regulators. The exchanges were also a source of cyber-security vulnerability and yet became a source of bitcoin trading off-the-chain. In 2014, the largest exchange, Mt Gox, declared bankruptcy. In his article, Rosenthal catalogues a series of ‘innovations’ and failures; I note that these failures all seem to involve…