Ben Wizner:
The Electronic Frontier Foundation recently joked that,
"the
amount of energy required to download tweets, articles, and
instant messages which describe what 'the blockchain' is and how
'decentralized' currencies are 'the future' will soon eclipse
the total amount of power used by the country of Denmark."
It's
true that there are a lot of "blockchain explainers" out there.
And yet I'm ashamed to admit I still don't really get it.
Edward Snowden: Are you asking for another math lesson?
I've been waiting for this day. You remember what a
cryptographic
hash function is, right?
BW: This is where I'm supposed to make a joke about
drugs. But no, I do not now nor will I ever remember that.
ES: Challenge accepted. Let's start simpler: what do you know
about these mythical
blockchains?
BW: That I could have been rich if I'd listened to you about
this four years ago? But really, I've heard a lot and understood
little. "Decentralized." "Ledgers." What the hell is a
blockchain?
ES: It's basically just a new kind of database.
Imagine updates
are always added to the end of it instead of messing with the
old, preexisting entries - just as you could add new links to an
old chain to make it longer - and you're on the right track.
Start with that concept, and we'll fill in the details as we go.
BW: Okay, but why? What is the question for which blockchain is
the answer?
ES: In a word:
trust.
Imagine an old database where any entry
can be changed just by typing over it and clicking save. Now
imagine that entry holds your bank balance.
If somebody can just
arbitrarily change your balance to zero, that kind of sucks,
right? Unless you've got student loans.
The point is that any time a system lets somebody change the
history with a keystroke, you have no choice but to trust a huge
number of people to be both perfectly good and competent, and
humanity doesn't have a great track record of that.
Blockchains
are an effort to create a history that can't be manipulated.
BW: A history of what?
ES: Transactions. In its oldest and best-known conception, we're
talking about
Bitcoin, a new form of money.
But in the last few
months, we've seen efforts to put together all kind of records
in these histories. Anything that needs to be memorialized and
immutable.
Health-care records, for example, but also deeds and
contracts.
When you think about it at its most basic technological level, a
blockchain is,
just a fancy way of time-stamping things in a
manner that you can prove to posterity hasn't been tampered with
after the fact.
The very first bitcoin ever created, the
"Genesis Block," famously has one of those "general
attestations" attached to it, which you can still view today.
It was a cypherpunk take on the old practice of taking a
selfie
with the day's newspaper, to prove this new bitcoin blockchain
hadn't secretly been created months or years earlier (which
would have let the creator give himself an unfair advantage in a
kind of lottery we'll discuss later).
BW: Blockchains are a history of transactions. That's such a
letdown.
Because I've heard some extravagant claims like:
blockchain is an answer to censorship. Blockchain is an answer
to online platform monopolies.
ES: Some of that is hype cycle.
Look, the reality is blockchains
can theoretically be applied in many ways, but it's important to
understand that mechanically, we're discussing a very, very
simple concept, and therefore the applications are all
variations on a single theme:
verifiable accounting.
Hot...
So, databases, remember? The concept is to bundle up little
packets of data, and that can be anything.
Transaction records,
if we're talking about money, but just as easily blog posts, cat
pictures, download links, or even moves in the world's most
over-engineered game of chess. Then, we stamp these records in a
complicated way that I'm happy to explain despite protest, but
if you're afraid of math, you can think of this as the high-tech
version of a public notary.
Finally, we distribute these freshly
notarized records to members of the network, who verify them and
update their independent copies of this new history.
The purpose
of this last step is basically to ensure no one person or small
group can fudge the numbers, because too many people have copies
of the original.
It's this decentralization that some hope can provide a new
lever to unseat today's status quo of censorship and entrenched
monopolies.
Imagine that instead of today's world, where
publicly important data is often held exclusively at Generic Corp
LLC, which can and does play God with it at the public's
expense, it's in a thousand places with a hundred jurisdictions.
There is no takedown mechanism or other "let's be evil" button,
and creating one requires a global consensus of, generally, at
least 51 percent of the network in support of changing the
rules.
mechanically, we're discussing a very, very simple concept, and
therefore the applications are all variations on a single theme:
verifiable accounting.
Hot...
BW: So even if Peter Thiel won his case and got a court order
that some article about his vampire diet had to be removed,
there would be no way to enforce it. Yes?
That is, if Blockchain
Magazine republished it.
ES: Right - so long as Blockchain Magazine is publishing to a
decentralized, public blockchain, they could have a judgment
ordering them to set their office on fire and it wouldn't make a
difference to the network.
BW: So… how does it work?
ES: Oh man, I was waiting for this. You're asking for the fun
stuff. Are you ready for some abstract math?
BW: As ready as I'll ever be.
ES: Let's pretend you're allergic to finance, and start with the
example of an imaginary blockchain of blog posts instead of
going to the normal Bitcoin examples.
The interesting
mathematical property of blockchains, as mentioned earlier, is
their general immutability a very short time past the point of
initial publication.
For simplicity's sake, think of each new article published as
representing a "block" extending this blockchain. Each time you
push out a new article, you are adding another link to the chain
itself.
Even if it's a correction or update to an old article,
it goes on the end of the chain, erasing nothing. If your chief
concerns were manipulation or censorship, this means once it's
up, it's up.
It is practically impossible to remove an earlier
block from the chain without also destroying every block that
was created after that point and convincing everyone else in the
network to agree that your alternate version of the history is
the correct one.
Let's take a second and get into the reasons for why that's
hard.
So, blockchains are record-keeping backed by fancy math.
Great.
But what does that mean?
What actually stops you from
adding a new block somewhere other than the end of the chain?
Or
changing one of the links that's already there?
We need to be able to crystallize the things we're trying to
account for:
typically a record, a timestamp, and some sort of
proof of authenticity.
So on the technical level, a blockchain works by taking the data
of the new block - the next link in the chain - stamping it with
the mathematic equivalent of a photograph of the block
immediately preceding it and a timestamp (to establish
chronological order of publication), then "hashing it all
together" in a way that proves the block qualifies for addition
to the chain.
BW: "Hashing" is a real verb?
ES: A cryptographic
hash function is basically just a math
problem that transforms any data you throw at it in a
predictable way.
Any time you feed a hash function a particular
cat picture, you will always, always get the same number as the
result. We call that result the "hash" of that picture, and
feeding the cat picture into that math problem "hashing" the
picture.
The key concept to understand is that if you give the
very same hash function a slightly different cat picture, or the
same cat picture with even the tiniest modification, you will
get a WILDLY different number ("hash") as the result.
BW: And you can throw any kind of data into a hash function? You
can hash a blog post or a financial transaction or Moby-Dick?
ES: Right. So we hash these different blocks, which, if you
recall, are just glorified database updates regarding financial
transactions, web links, medical records, or whatever.
Each new
block added to the chain is identified and validated by its
hash, which was produced from data that intentionally includes
the hash of the block before it.
This unbroken chain leads all
the way back to the very first block, which is what gives it the
name.
I'm sparing you some technical nuance here, but the important
concepts to understand are that blocks in the chain are meant to
be verifiable, strictly ordered by chronology, and immutable.
Each new block created, which in the case of Bitcoin happens
every ten minutes, effectively testifies about the precise
contents of all the ones that came before it, making older
blocks harder and harder to change without breaking the chain
completely.
So by the time our Peter Thiel catches wind of the story and
decides to kill it, the chain has already built a thousand links
of confirmable, published history.
Money is, of course, the best and most famous example of where
blockchains have been proven to make sense.
BW: And this is going to… save the internet?
Can you explain why
some people think blockchain is a way to get around or replace
huge tech platform monopolies? Like how could it weaken Amazon?
Or Google?
ES: I think the answer there is "wishful thinking." At least for
the foreseeable future.
We can't talk Amazon without getting
into currency, but I believe blockchains have a much better
chance of disrupting trade than they do publication, due to
their relative inefficiency.
Think about our first example of your bank balance in an old
database. That kind of setup is fast, cheap, and easy, but makes
you vulnerable to the failures or abuses of what engineers call
a "trusted authority."
Blockchains do away with the need for
trusted authorities at the expense of efficiency. Right now, the
old authorities like Visa and MasterCard can process tens of
thousands of transactions a second, while Bitcoin can only
handle about seven.
But methods of compensating for that
efficiency disadvantage are being worked on, and we'll see
transaction rates for blockchains improve in the next few years
to a point where they're no longer a core concern.
BW: I've been avoiding this, because I can't separate
cryptocurrency from the image of a bunch of tech bros living in
a palace in Puerto Rico as society crumbles.
But it's time for
you to explain how Bitcoin works.
ES: Well, I hate to be the bearer of bad news, but Zuckerberg is
already rich.
Money is, of course, the best and most famous example of where
blockchains have been proven to make sense.
BW: With money, what is the problem that blockchain solves?
ES: The same one it solves everywhere else:
trust.
Without
getting too abstract:
what is money today? A little cotton paper
at best, right? But most of the time, it's just that entry in a
database.
Some bank says you've got three hundred rupees today,
and you really hope they say the same or better tomorrow.
Now think about access to that reliable bank balance - that
magical number floating in the database - as something that
can't be taken for granted, but is instead transient.
You're one
of the world's unbanked people.
Maybe you don't meet the
requirements to have an account.
Maybe banks are unreliable
where you live, or, as happened in Cyprus not too long ago, they
decided to seize people's savings to bail themselves out.
Or
maybe the money itself is unsound, as in Venezuela or Zimbabwe,
and your balance from yesterday that could've bought a house
isn't worth a cup of coffee today.
Monetary systems fail...
BW: Hang on a minute. Why is a "bitcoin" worth anything? What
generates value? What backs the currency? When I own a bitcoin,
what do I really own?
ES: Good question.
What makes a little piece of green paper
worth anything? If you're not cynical enough to say "men with
guns," which are the reason legal tender is treated different
from Monopoly money, you're talking about scarcity and shared
belief in the usefulness of the currency as a store of value or
a means of exchange.
Let's step outside of paper currencies, which have no
fundamental value, to a more difficult case:
why is gold worth
so much more than its limited but real practical uses in
industry?
Because people generally agree it's worth more than
its practical value. That's really it...
The social belief that
it's expensive to dig out of the ground and put on a shelf,
along with the expectation that others are also likely to value
it, transforms a boring metal into the world's oldest store of
value.
Blockchain-based cryptocurrencies like Bitcoin have very limited
fundamental value:
at most, it's a token that lets you save data
into the blocks of their respective blockchains, forcing
everybody participating in that blockchain to keep a copy of it
for you.
But the scarcity of at least some cryptocurrencies is
very real:
as of today, no more than twenty-one million bitcoins
will ever be created, and seventeen million have already been
claimed.
Competition to "mine" the remaining few involves
hundreds of millions of dollars' worth of equipment and
electricity, which economists like to claim are what really
"backs" Bitcoin.
Yet the hard truth is that the only thing that gives
cryptocurrencies value is the belief of a large population in
their usefulness as a means of exchange.
That belief is how cryptocurrencies move enormous amounts of money across the world
electronically, without the involvement of banks, every single
day.
One day capital-B Bitcoin will be gone, but as long as
there are people out there who want to be able to move money
without banks, cryptocurrencies are likely to be valued.
BW: But what about you? What do you like about it?
ES: I like Bitcoin transactions in that they are impartial.
They
can't really be stopped or reversed, without the explicit,
voluntary participation by the people involved.
Let's say Bank
of America doesn't want to process a payment for someone like
me. In the old financial system, they've got an enormous amount
of clout, as do their peers, and can make that happen.
If a
teenager in Venezuela wants to get paid in a hard currency for a
web development gig they did for someone in Paris, something
prohibited by local currency controls, cryptocurrencies can make
it possible.
Bitcoin may not yet really be private money, but it
is the first "free" money.
Bitcoin has competitors as well. One project, called
Monero,
tries to make transactions harder to track by playing a little
shell game each time anybody spends money.
A newer one by
academics, called
Zcash, uses novel math to enable truly private
transactions. If we don't have private transactions by default
within five years, it'll be because of law, not technology.
As with all new technologies, there will be disruption and there
will be abuse.
The question is whether, on balance, the impact
is positive or negative.
BW: So if Trump tried to cut off your livelihood by blocking
banks from wiring your speaking fees, you could still get paid.
ES: And all he could do is tweet about it...
BW: The downside, I suppose, is that sometimes the ability of
governments to track and block transactions is a social good.
Taxes. Sanctions. Terrorist finance.
We want you to make a living. We also want sanctions against
corrupt oligarchs to work.
ES: If you worry the rich can't dodge their taxes without
Bitcoin, I'm afraid I have some bad news.
Kidding aside, this is
a good point, but I think most would agree we're far from the
low-water mark of governmental power in the world today.
And
remember, people will generally have to convert their magic
internet money into another currency in order to spend it on
high-ticket items, so the government's days of real worry are
far away.
BW: Explore that for me. Wouldn't the need to convert Bitcoin to
cash also affect your Venezuelan teen?
ES: The difference is scale.
When a Venezuelan teen wants to
trade a month's wages in cryptocurrency for her local currency,
she doesn't need an ID check and a bank for that. That's a level
of cash people barter with every day, particularly in developing
economies.
But when a corrupt oligarch wants to commission a
four hundred million-dollar pleasure yacht, well, yacht builders
don't have that kind of liquidity, and the existence of
invisible internet money doesn't mean cops won't ask how you
paid for it.
The off-ramp for one is a hard requirement, but the other can
opt for a footpath.
Similarly, it's easier for governments to work collectively
against "real" criminals - think bin Laden - than it is for them
to crack down on dissidents like
Ai Weiwei.
The French would
work hand in hand with the Chinese to track the activity of bin
Laden's Bitcoin wallet, but the same is hopefully not true of Ai
Weiwei.
BW: So basically you're saying that this won't really help
powerful bad actors all that much.
ES: It could actually hurt them, insofar as relying on
blockchains will require them to commit evidence of their bad
deeds onto computers, which, as we've learned in the last
decade, government investigators are remarkably skilled at
penetrating.
BW: How would you describe the downsides, if any?
ES: As with all new technologies, there will be disruption and
there will be abuse. The question is whether, on balance, the
impact is positive or negative.
The biggest downside is
inequality of opportunity:
these are new technologies that are
not that easy to use and still harder to understand.
They
presume access to a level of technology, infrastructure, and
education that is not universally available.
Think about the
disruptive effect globalization has had on national economies
all over the world. The winners have won by miles, not inches,
with the losers harmed by the same degree.
The first-mover
advantage for institutional blockchain mastery will be similar.
BW: And the internet economy has shown that a platform can be
decentralized while the money and power remain very centralized.
ES: Precisely.
There are also more technical criticisms to be
made here, beyond the scope of what we can reasonably get into.
Suffice it to say cryptocurrencies are normally implemented
today through one of two kinds of lottery systems, called "proof
of work" and "proof of stake," which are a sort of necessary
evil arising from how they secure their systems against attack.
Neither is great.
"Proof of work" rewards those who can afford
the most infrastructure and consume the most energy, which is
destructive and slants the game in favor of the rich.
"Proof of
stake" tries to cut out the environmental harm by just giving up
and handing the rich the reward directly, and hoping their
limitless, rent-seeking greed will keep the lights on.
Needless
to say, new models are needed.
BW: Say more about the environmental harms. Why does making
magical internet money use so much energy?
ES: Okay, imagine you decide to get into "mining" bitcoins.
You
know there are a limited number of them up for grabs, but
they're coming from somewhere, right? And it's true:
new bitcoins will still continue to be created every ten minutes for
the next couple years.
In an attempt to hand them out fairly,
the original creator of Bitcoin devised an extraordinarily
clever scheme:
a kind of global math contest.
The winner of each
roughly ten-minute round gets that round's reward:
a little
treasure chest of brand new, never-used bitcoins, created from
the answer you came up with to that round's math problem.
To
keep all the coins in the lottery from being won too quickly,
the difficulty of the next math problem is increased based on
how quickly the last few were solved.
This mechanism is the
explanation of how the rounds are always roughly ten minutes
long, no matter how many players enter the competition.
The flaw in all of this brilliance was the failure to account
for Bitcoin becoming too successful.
The reward for winning a
round, once worth mere pennies, is now around one hundred
thousand dollars, making it economically reasonable for people
to divert enormous amounts of energy, and data centers full of
computer equipment, toward the math - or "mining" - contest.
Town-sized Godzillas of computation are being poured into this
competition, ratcheting the difficulty of the problems beyond
comprehension.
This means the biggest winners are those who can dedicate tens
of millions of dollars to solving a never-ending series of
problems with no meaning beyond mining bitcoins and making its
blockchain harder to attack.
BW: "A never-ending series of problems with no meaning" sounds
like… nihilism. Let's talk about the bigger picture. I wanted to
understand blockchains because of the ceaseless hype.
Some
governments think that Bitcoin is an existential threat to the
world order, and some venture-capital types swear that
blockchains will usher in a golden age of transparency.
But
you're telling me it's basically a fancy database.
ES: The tech is the tech, and it's basic.
It's the applications
that matter. The real question is not "what is a blockchain,"
but "how can it be used?"
And that gets back to what we started
on:
trust.
We live in a world where everyone is lying about
everything, with even ordinary teens on Instagram agonizing over
how best to project a lifestyle they don't actually have.
People
get different search results for the same query. Everything
requires trust; at the same time nothing deserves it.
This is the one interesting thing about blockchains:
they might
be that one tiny gear that lets us create systems you don't have
to trust.
You've learned the only thing about blockchains that
matters: they're boring, inefficient, and wasteful, but, if well
designed, they're practically impossible to tamper with.
And in
a world full of shifty bullshit, being able to prove something
is true is a radical development.
Maybe it's the value of your
bank account, maybe it's the provenance of your pair of Nikes,
or maybe it's your for-real-this-time permanent record in the
principal's office, but records are going to transform into
chains we can't easily break, even if they're open for anyone in
the world to look at.
The hype is a world where everything can be tracked and
verified. The question is whether it's going to be voluntary.
BW: That got dark fast. Are you optimistic about how blockchains
are going to be used once we get out of the experimental phase?
ES: What do you think...?
