Bitcoin’s broken promise – Open Canada

It was 1992. Every day, from his home in
Oakland, California, Eric Hughes waded through a stream of emails from “
The List,” an electronic mailing list he
had helped set up to bring together a small group of fellow travellers.
Hughes was a mathematician, and on The List were academics,
computer scientists, technologists and hackers. Sometimes g
ossip landed in
his inbox, and political schemes, or fantasies and code. He and the others were
gripped by a question they thought the greatest of the age: who would win the
digital revolution?

Would the spread of technology usher forth a new world of
autonomy and freedom? Or would it bring in an age of surveillance? Would the
new nether-space of the Internet allow individuals to become truly free? Or
would it be captured by the world of states, hierarchies and corporations? The
digital revolution, as they saw it, was poised on a knife-edge: the old world
pitted against the new, old concentrations of power against new ways of
dispersing it.

While they didn’t agree on everything, Hughes and the others
knew that the future wouldn’t be decided in
courtroom or at the ballot box, but rather by technology itself. In the early
90s, The List was fast becoming the online home of a fractious, pugnacious,
confrontational new movement focused on developing and applying a technology
that members thought would be the clincher in the battle. It was called
cryptography: the art and science of keeping secrets and identities safe. Those
on The List called themselves cypherpunks, and in 1993 Hughes sat down to write
something that looked like their

Cypherpunks don’t
care if you don’t like the software they write.
Cypherpunks know
that software can’t be destroyed.
Cypherpunks know
that a widely dispersed system can’t be shut down.

For almost a
decade, The List was the centre of the crypto world. Hundreds of people joined,
drawn to its strange mix of ciphers and radical politics — part technical
to-and-fro and informal peer review, part learning guide, part rhetorical sand
pit. It shut down in 2001, but new versions quickly appeared. The most notable
was called the Cryptography List, and was where many of the original
cypherpunks migrated.

In 2008, a new
poster sent a message to the list. “I’ve been working on a new electronic cash
system that’s fully peer-to-peer, with no trusted third party,” it began. It
briefly laid out how the idea worked and linked to a longer technical paper.
The poster called himself Satoshi Nakamoto. 

The cypherpunks had
long tried to create a system of ‘e-cash’ (that was also what Nakamoto called
it). ‘Bit gold’ was an earlier variation, as were RPOW and b-money. But none of
these attempts had ever quite been successful. In the eyes of many of the
cypherpunks, money was a key battleground in the broader struggle for freedom.
Old money suffered from a fatal flaw: it was, they said, ‘fiat’ —
money-by-decree. Governments and banks issued the currency — by fiat — and so
had control over it. They could enrich themselves by manipulating it, and could
spy on people using it. To the cypherpunks, banks and states weren’t the
guardians of the financial system — they were the corruptors of it. Old money
was one of the ways that these old concentrations of power controlled reality.
“We are defending our privacy with cryptography, with anonymous mail forwarding
systems, with digital signatures,” Hughes wrote in 1993, “and with electronic

The reception to
Nakamoto’s post was icy at first. One of the first to reply said they didn’t
think the system would work at scale. Another said that the system would get
hijacked. But it didn’t take long for the community to warm to the idea. It was
striking because it seemed to create a currency without the need for central
control. Nakamoto presented a system where the network of people using bitcoin
could play the role of states and banks, making sure transactions were
legitimate. You could have rules and enforce them without having to create a
central authority that could abuse its power.

The watchword of
the new idea was decentralization. Old currencies were hostage to centralized,
bureaucracies full of scheming, ambitious humans. This new currency
would be enforced by the cold, hard impartiality of protocols, without centre
or core. The cypherpunks argued decentralized systems were less likely to fail
accidentally, pointing out that these systems were more expensive and difficult
to attack, destroy and manipulate, because they had no vulnerable central points
that someone could target to seize control of the much wider system.

But for the
cypherpunks, the desire for decentralization went deeper than this. It was
about changing the way economies were organized. The political ideologies that
flourished on The List were various and often radical, but members could all
find something to like about decentralization. For the communitarians, it meant
a world with hierarchy.
For Libertarians, a world without authority. For the
radical left, a world without bankers and banks. For the radical right, a world
without states.

As The List began
to buzz with interest and excitement about Nakamoto’s idea — ‘bitcoin’ —
Nakamoto posted another message: “We can win a major battle in the arms race
and gain a new territory of freedom for several years.”

It is always
fraught to claim the true intentions of those who created bitcoin, but within
the tradition of the cypherpunks, decentralization was all about the struggle
for liberation in the digital age. The arms race that Nakamoto referred to was
between the technologies of control and of liberation. Freedom from the abuses
of conventional life could only be won if dominant concentrations of power were
broken up. Bitcoin, then, was part of a wider war with a deeper aim. 

“If Satoshi
[Nakamoto] reveals his true identity, his bucket is on us,” tweeted fast-food
chain KFC Canada in early January. Shortly after Nakamoto shared his idea for
bitcoin, the poster disappeared into the shadows, and never surfaced again. True
to the cypherpunks’ credo, his identity was never revealed. (Nakamoto’s gender
is also not certain — nothing about his identity is. Most commentaries use a
masculine pronoun, however.

Almost a decade
since its inception, bitcoin is now considered a fairytale story. Its price has
surged and surged — the subject of fascination for commentators around the
KFC has also launched the #BitcoinBucket: a live-stream of a bucket full
of chicken, available for a rampantly fluctuating amount of bitcoin (0.0011204
bitcoin at one moment, 0.0011319 the next). This bank-destroying cypherpunk
dream is now being used to sell (and buy) fried chicken. Bitcoin has gone

With bitcoin now a
household name, it is time to ask the same question as the cypherpunks. Who is
the digital world for? What are the new forms of control and liberation? Most
of all, can technology make people more free? As power transforms and reforms
in a changing world, who does bitcoin really put in control? 

A man walks past a bitcoin ATM in Vilnius, Lithuania, on December 6, 2017. REUTERS/Ints Kalnins

Developers: the new politicians

Bitcoin has become
a new kind of social institution, of sorts. Nakamoto’s great breakthrough was
to make it an institution that could enforce its rules without any governing
body, president or board of directors at its heart. But what these rules are is
at least as important as how they are enforced. As bitcoin rose in influence, a
group of people emerged that had tremendous power over setting the rules: the
Bitcoin Core developers.

Back in 2008,
Nakamoto released the initial code that set out how bitcoin should work. But
like any piece of software let loose into the world, it had to be a living,
breathing thing. New challenges and new problems emerged, and the rules of
bitcoin had to evolve.

Bitcoin’s code is
what software developers call ‘open-source’ — anyone can download the code for
free and see exactly what the code is. And like any popular open-source
project, lots of people have worked on it over the years, suggesting
improvements that are tested and discussed. Ideas are written up as Bitcoin
Improvement Proposals, and they’re combed over by other developers — ruthlessly
— before they’re incorporated into live version. Among those in the technical
community who actually understand bitcoin’s code, reaching consensus is an
important part of open-source culture. There is a loosely meritocratic process,
where being active and helpful in improving the code leads to more influence in
building a consensus, or breaking it.

However, although
the project is open, power over its direction doesn’t rest equally. Changes to
Bitcoin’s rules can ultimately only be made to
one source, and only approved by a tiny number of
sacred custodians, known as the Bitcoin Core developers. Only 12
have ever held something called ‘commit access’ — the ability to turn a
suggestion into reality. They define, really, what bitcoin is, and ultimately
decide when someone is given this power, or indeed when it is taken away. (One
of them — Gavin Andresen — once had his commit access
revoked because of a disagreement over who Nakamoto really was.)

Those who can actually make changes to bitcoin’s code hold a great and overlooked kind of power.

Perhaps it was because of bitcoin’s anarchist roots. Or perhaps because Nakamoto’s founding document didn’t mention it. In any case, throughout bitcoin’s life, there has never been any kind of formal process for how its basic code, and thus the rules that code enforces, can be changed, or how its developers should make decisions. In the absence of any kind of formal rules for its governance, ‘Bitcoin Core’ (as the main branch of bitcoin is now called, to distinguish it from its many variants) can be governed by Bitcoin Core developers in whatever way they want. They might be benign and consensus-seeking — each has certainly made huge sacrifices in bitcoin’s name. But those who can actually make changes to bitcoin’s code hold a great and overlooked kind of power.

The Bitcoin Core developers are not all-powerful, however. When they change the rules, it’s up to other parts of the bitcoin network to implement the changes. Without a formal political system, there is no way of officially resolving arguments when others disagree. Disagreement might lead to something called a ‘fork,’ when the source code is copied and taken in another direction, creating a distinct and parallel piece of software — a completely new currency. Forks have created Bitcoin Classic, Bitcoin Cash, Bitcoin Unlimited, Bitcoin XT, and Bitcoin ABC, all competing with Bitcoin Core.

“Developers are like politicians,” Wong Joon Ian, a crypto-currency journalist at Quartz, said in an interview. Developers can change the rules, he explained, but they have to bring people along with them. They have to convince and cajole, and try to attain consensus. There is lobbying, there are factions, bitter infighting and bickering. There are different interests, visions and ideologies that would take bitcoin one way or another. The cypherpunks might have hated political systems, but there was no way for bitcoin to escape politics. And in this system, developers are not the only ones with control. There are two other new centres of power that really matter: miners and elite users.

‘Miners’ — the new banks?

SanShiangLiang industrial park sits on the flat grassy planes of
inner Mongolia. Nestled among abandoned, half-built coal mines, eight long,
narrow hangars sit in a row. Each has a gently sloping roof, and the corrugated
metal walls are painted blue and white. On the end of each hangar is the name
of their owner: Bitmain.

In Nakamoto’s original post,
he gave his fellow cypherpunks some instructions explaining bitcoin. “You can
get coins by getting someone to send you some,” he wrote, adding that, using
the software that he had created, an option called
‘Generate Coins’ could be turned

was asking people to earn bitcoin by doing something that became known as
mining. Miners are bitcoin’s auditors, doing the work of verifying bitcoin
transactions. As new transactions are made, miners check back through all the
previous transactions to make sure they are legitimate. Miners verify blocks of
transactions at a time, and, when they are done, add them to a chain of
previous and verified blocks. This is called a blockchain — a ledger of all of
bitcoin’s transactions, visible to everyone and immutable.

Nakamoto designed the whole process to consist of a mathematical
puzzle every 10 minutes. For each block, miners raced against each other to
find the solution. The first one that did so received a bounty of newly minted
bitcoins. It was a complex, elegant and brilliant idea that gave miners
incentives for throwing computing power at tasks needed by the whole network.

At first, mining was easy. A typical PC will be able to generate coins in just a few hours,”
Nakamoto wrote. But the puzzles that miners had to solve were programmed to
become more difficult over time. Soon, people couldn’t mine just on their
laptops. The community that had formed around bitcoin started firing off
pictures of their own mining rigs: homemade wooden racks in sheds, computer
cards crammed into rows amid a tangle of wires, fans on stools blasting them
with cold air.

Home-brewed sets then gave way to large bitcoin mining companies
like Bitmain. Fifty staff work and often live at its sprawling complex. There
is a dormitory, a canteen and a repair centre. Inside the hangars are rack
after rack of winking, blinking machines — 25,000 in total — all built for only
one purpose: mining crypto-currencies. At the end of each aisle, huge fans with
blades over a foot long wash the machines with cooling air.

Bitcoin mining

Bitcoin mining computers and particle filters in Bitfury’s mining farm near Keflavik, Iceland, June 7, 2016. REUTERS/Jemima Kelly

Probably 10 or 15 companies now have the vast majority of what
is called ‘hash power,’ the raw computational resources used to solve
Nakamoto’s puzzles in order to verify all of bitcoin’s transactions and claim
the rewards. Those companies have conglomerated even further, although more
loosely, into mining pools: collections of miners that pool hash power for a
share of the rewards. Bitmain is run by young Chinese financial analyst Jihan
Wu, who also set up one of the largest mining pools, called AntPool. The
balance constantly changes (miners change pools often) but the three biggest
pools account for half of the hash power that keeps the
blockchain going. Miners also cluster in countries with cheap electricity;
China is home to four of the five largest pools. Naturally enough, the tiny
concentration of people at the top of bitcoin’s mining pyramid know each other.
In 2015, 90 percent of bitcoin’s mining power was under one roof at the same conference.

The people who control mining companies like Bitmain are
enormously powerful. From second to second, they turn transactions into
reality. If enough miners together decide to take their hash power away from
bitcoin, it might set off a death chain spiral: transactions wouldn’t be mined,
they wouldn’t be added to the blockchain, nothing would work. Bitcoin would
become paralyzed.

Sort of like… banks. Okay, not completely. But what today’s bitcoin
mining has in common with banks is that there are a small number of powerful
institutions that have invested the fortunes required for the vast infrastructure
needed to make financial systems work. They are the financial lubricant that
allows people to exchange value and make trades. Both miners and bankers have
conferences, and you can fit the key decision makers of both kinds of
institutions, if you wanted to, under one roof.

Corporates are… the new corporates

The third branch in bitcoin’s triad of power are the people
using bitcoin, buying it, thinking it has some value: the users. For it is
really on their shoulders that bitcoin itself lives or falls.

The challenge to power that bitcoin presented was as a currency
— a way to buy and sell things outside of the economic arena mastered by banks
and states. But an increase in value has since changed the nature of bitcoin
from a currency to an asset. The price of bitcoin increased slowly at first,
from a few cents per bitcoin in early 2011 to hundreds of dollars by 2016. And
then, around the beginning of 2017, the bitcoin frenzy really took off: a
thousand dollars per bitcoin in January, $2,000 by May, $4,000 by August,
$14,000 by the end of the year. Soaring value has become a source of bemused
fascination for the mainstream. Many bitcoiners believe bitcoin’s increase in
value is inevitable, and that what we’ve already seen is just the beginning.

The problem is… that concentration of wealth could become a concentration of power.

As the value shot up, many of the practical uses of bitcoin that had only begun to materialize vanished. Vendors, from gaming websites to the dark net drug markets, have stopped taking bitcoin as payment. Even the North American Bitcoin Conference stopped taking bitcoin, saying transaction fees were too high and the price was fluctuating too violently.

Bitcoin has become a sort of digital gold: valuable, generally useless and hoarded. HODL, people call it: “holding on for dear life.” But not all HODLers are equal. The actual ownership of bitcoin — and thus the power to speculate and move markets — is vastly unequal.

It is estimated that around 1,000 holders of bitcoin — known as ‘whales’ — own about 40 percent of the total amount. As far as we know, the crypto-currency’s main owners are billionaire venture capitalists. Alongside them, 120 hedge funds are focused on crypto-currencies, holding billions in assets. Nine early movers in bitcoin trading scored over 1,000 percent returns.

Libertarians, certainly, have no problem with inequalities of wealth. But the problem is that, outside of any kind of rules governing the market, that concentration of wealth could become a concentration of power, and that concentration of power can be abused. Whales can move the market as they wish. “Pump and dumps” have seen anonymous actors placing huge buy and sell orders to cause the price of bitcoin to bump upwards or slip lower. Whales, much like the top miners, know each other. Many were early adopters who stuck with bitcoin through thick and thin. Asked whether large holders could move in concert, Roger Ver, a well-known early bitcoin investor, told Bloomberg in an email in late 2017: I suspect that is likely true, and people should be able to do whatever they want with their own money.”

Large actors who throw around their weight to control the market to their advantage? A bit like… the most ruthless kind of corporation. But without any rules to govern bitcoin markets, manipulation and insider trading is technically legal. The power of large, rich actors has become greater, not diminished. 

So where does that
leave the normal person? The people the cypherpunks were fighting for? Bitcoin
was a brilliant idea in service of a grand vision. But in its promise to
liberate normal users from concentrations of power, it did the opposite. As
bitcoin challenged one system of power, it created a parallel system. And this
new system has its own concentrations of power, dominated by developers with
arcane technical know-how, companies with massive amounts of computing power,
and billionaire investors.

Bitcoin has become
a playground for the already powerful, precisely because there are no rules. To
the cypherpunks, the rules and laws of everyday life were themselves abuses of
power. But they are also the tools that democratic institutions use to control
power, to civilize it, to leaven its influence.

What is dangerous
about bitcoin is that it has transformed power into weirder, less familiar
forms: A political system where the politicians don’t have to play by any
rules. A banking system that is even more concentrated. Or markets unprotected
from the weight and muscle of large, rich players. Outside of the rules, power
has become more raw, less constrained, and likely more abusive.

Bitcoin is only the
beginning. There are now countless other crypto-currencies to choose from, and
the underlying technology, blockchain, is being used to build all kinds of new,
decentralized services. But the lesson here is a general one for everyone
thinking about power and control in the digital age. You cannot engineer away
power, because you can’t engineer away humans. As people pursue
liberation-through-technology in its many forms, we also need to know when
we’re building new cages for ourselves.

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