Science and Tech

Beyond the Bitcoin Bubble NYT 01-16-18

Source - NYT Magazine piece (PDF) January 16, 2018: "Beyond the Bitcoin Bubble: Long-term implications of blockchain"        

It begins with a "seed phrase" - a list of twelve random words taken from the dictionary. When typed in, the seed phrase generates a patternless string of 64 characters, the same 64 each time. The character output cannot be reverse-engineered to generate the original seed phrase. The seed phrase verifies your identity and allows your transaction to become part of the blockchain, a permanent transaction record shared by everyone and updated in real time. Blockchains require no intermediary. "No intermediary brokered the deal; no social-media network captured the data from my transaction to better target its advertising; no credit bureau tracked the activity to build a portrait of my financial trustworthiness." And no one owns the platform for blockchain, it is open source.

"The real promise of these new technologies, many of their evangelists believe, lies not in displacing our currencies but in replacing much of what we now think of as the internet, while at the same time returning the online world to a more decentralized and egalitarian system. If you believe the evangelists, the blockchain is the future. But it is also a way of getting back to the internet’s roots."

The internet needs to be fixed. Internet evangelists in the 90's are now becoming internet skeptics. Tim Berners-Lee, the inventor of the web itself, wrote a blog post voicing his concerns that the advertising-based model of social media and search engines creates a climate where “misinformation, or ‘fake news,’ which is surprising, shocking or designed to appeal to our biases, can spread like wildfire.”

From the article: "As Tim Wu argued in his 2010 book, “The Master Switch,” all the major information technologies of the 20th century adhered to a similar developmental pattern, starting out as the playthings of hobbyists and researchers motivated by curiosity and community, and ending up in the hands of multinational corporations fixated on maximizing shareholder value. Wu calls this pattern the Cycle, and on the surface at least, the internet has followed the Cycle with convincing fidelity. The internet began as a hodgepodge of government-funded academic research projects and side-hustle hobbies. But 20 years after the web first crested into the popular imagination, it has produced in Google, Facebook and Amazon — and indirectly, Apple — what may well be the most powerful and valuable corporations in the history of capitalism."

Think of the internet as two different kinds of systems stacked on top of each other. One layer is composed of the software protocols that were developed in the 1970s and 1980s and put into use in the 90s. (A protocol is the software version of a lingua franca, a way that multiple computers agree to communicate with one another. And then above them, a second layer of web-based services — Facebook, Google, Amazon, Twitter — that largely came to power in the following decade. The first layer — call it InternetOne — was founded on open protocols, which in turn were defined and maintained by academic researchers and international-standards bodies, owned by no one. Email is still based on the open protocols POP, SMTP and IMAP; websites are still served up using the open protocol HTTP; bits are still circulated via the original open protocols of the internet, TCP/IP.  The key characteristic they all share is that anyone can use them, free of charge. You don’t need to pay a licensing fee to some corporation that owns HTTP if you want to put up a web page; you don’t have to sell a part of your identity to advertisers if you want to send an email using SMTP. Along with Wikipedia, the open protocols of the internet constitute the most impressive example of commons-based production in human history. To fully appreciate the power of this - imagine if GPS was not a military application then shared freely with the public but instead a proprietary application owned by a large corporation. Imagine a single private corporation, tracking the movements of billions of people around the planet, building an advertising behemoth based on our shifting locations. 

The biggest problems that technologists tackled after 1995 —identity, community and payment mechanisms — were left to the private sector to solve. The inventors of the open protocols that shaped the internet failed to include some key elements that would later prove critical to the future of online culture. They did not create a secure open standard that established human identity on the network. Units of information could be defined — pages, links, messages — but people did not have their own protocol: no way to define and share your real name, your location, your interests or (perhaps most crucial) your relationships to other people online. This turns out to have been a major oversight, because identity is the sort of problem that benefits from one universally recognized solution. It’s “base-layer” infrastructure: things like language, roads and postal services, platforms where commerce and competition are actually assisted by having an underlying layer in the public domain. 

No private company owned the protocols that defined email or GPS or the open web. But one single corporation owns the data that define social identity for two billion people today and that company is Facebook. 

Why did the internet follow the path from open to closed? One part of the explanation lies in sins of omission: By the time a new generation of coders began to tackle the problems that InternetOne left unsolved, there were near-limitless sources of capital to invest in those efforts, so long as the coders kept their systems closed. The secret to the success of the open protocols of InternetOne is that they were developed in an age when most people didn’t care about online networks, so they were able to stealthily reach critical mass without having to contend with wealthy conglomerates and venture capitalists. Another reason is the high fixed costs associated with something like Facebook - the costs of all the servers maintaining the huge privately owned fb database can only be carried with the resources available to a large company. 

History is replete with stories of new technologies whose initial applications end up having little to do with their eventual use. All the focus on Bitcoin as a payment system may similarly prove to be a distraction. Nakamoto pitched Bitcoin as a “peer-to-peer electronic-cash system” in the initial manifesto, but at its heart, the innovation he (or she or they) was proposing had a more general structure, with two key features. First, Bitcoin offered a kind of proof that you could create a secure database — the blockchain — scattered across hundreds or thousands of computers, with no single authority controlling and verifying the authenticity of the data. Second, Nakamoto designed Bitcoin so that the work of maintaining that distributed ledger was itself rewarded with small, increasingly scarce Bitcoin payments. Nakamoto designed the system so that Bitcoins would grow increasingly difficult to earn over time, ensuring a certain amount of scarcity in the system. If you helped Bitcoin keep that database secure in the early days, you would earn more Bitcoin than later arrivals. This process has come to be called “mining.” What Nakamoto ushered into the world was a way of agreeing on the contents of a database without anyone being “in charge” of the database, and a way of compensating people for helping make that database more valuable, without those people being on an official payroll or owning shares in a corporate entity. Together, those two ideas solved the distributed-database problem and the funding problem. 

Imagine a new protocol that defines a simple request: "I am here and would like to go there". A distributed ledger might record all its users’ past trips, credit cards, favorite locations — all the metadata that services like Uber or Amazon use to encourage lock-in. Call it the Transit protocol. The standards for sending a Transit request out onto the internet would be entirely open; anyone who wanted to build an app to respond to that request would be free to do so. Early adopters of Transit would be rewarded with Transit tokens, which could themselves be used to purchase Transit services or be traded on exchanges for traditional currency. As in the Bitcoin model, tokens would be doled out less generously as Transit grew more popular. In the early days, a developer who built an iPhone app that uses Transit might see a windfall of tokens; Uber drivers who started using Transit as a second option for finding passengers could collect tokens as a reward for embracing the system; adventurous consumers would be rewarded with tokens for using Transit in its early days, when there are fewer drivers available. Token economies introduce a strange new set of elements that do not fit the traditional models: instead of creating value by owning something, as in the shareholder equity model, people create value by improving the underlying protocol, either by helping to maintain the ledger (as in Bitcoin mining), or by writing apps atop it, or simply by using the service. The lines between founders, investors and customers are far blurrier.

Today your digital identity is scattered across dozens of different sites: Amazon has your credit-card information and your purchase history; Facebook knows your friends and family; Equifax maintains your credit history. These different fragments of your identity don’t belong to you; they belong to Facebook and Amazon and Google, who are free to sell bits of that information about you to advertisers without consulting you. Your Facebook or Google identity isn’t portable. The blockchain evangelists think this entire approach is backward. You should own your digital identity — which could include everything from your date of birth to your friend networks to your purchasing history — and you should be free to lend parts of that identity out to services as you see fit. Given that identity was not baked into the original internet protocols, and given the difficulty of managing a distributed database in the days before Bitcoin, this form of “self-sovereign” identity — as the parlance has it — was a practical impossibility. Now it is an attainable goal.

Is blockchain safe? Yes  no one has hacked Bitcoin despite the potential of billions of dollars in profit. Also, the decentralized nature works in its favor. You'd need to hack a million computers separately to get a million credit card numbers. Far easier to seek out a proprietary "honey pot" like Equifax where a million credit card numbers are stored on one computer.