By Ari Juels and Eswar Prasad*
The vertiginous fall of Sam Bankman-Fried, the disgraced founder of the cryptocurrency exchange FTX who was recently convicted of fraud and money laundering in New York, has cast a harsh light on a largely unregulated market. For all the supposed wonders of the blockchain technology underpinning cryptocurrencies, the headline-grabbing events of the past few years indicate an industry in turmoil.
In addition to the criminal activity that led to the spectacular collapse of FTX in 2022 and Bankman-Fried’s guilty verdict in early November, US regulators have sued Binance, the world’s largest crypto exchange, for allegedly operating a “web of deception.” An industry-wide reckoning looms. Will crypto always be a magnet for fraud and malfeasance, or can it eventually transform and democratise finance?
An increasingly obvious paradox has emerged. Satoshi Nakamoto, the pseudonymous creator of Bitcoin, proposed the idea of a purely peer-to-peer version of electronic cash in the wake of the 2008 global financial crisis, when confidence in governments and central banks was at its nadir. Soon after the launch of Bitcoin in 2009, Nakamoto wrote that “the root problem with conventional currency is all the trust that’s required to make it work.” Today, the system that was supposed to eliminate the need for trust between people and in traditional financial institutions is experiencing a crisis of trust.
Cryptocurrencies such as Bitcoin and Ethereum rely on computer code and networks that are not controlled or managed by a central party. Remarkably, such decentralisation works. Transactions can be completed in a secure manner, without relying on a bank, credit-card company, or other institution. In principle, this should make financial systems less vulnerable to fraud and manipulation.
Unfortunately, grifters and unscrupulous companies have exploited customers and investors enamored with the new technology and, in the process, obscured crypto’s most compelling innovation: blockchain-enabled tools that can improve transparency and strengthen the trustworthiness of the financial sector. Maintained on computers around the world and publicly accessible by anyone with an internet connection, blockchains are digital ledgers that carry an immutable record of all transactions in a system. Their reliance on algorithms, rather than human interaction, creates a robust money trail that traditional financial infrastructure lacks.
So, how did we end up with a crypto industry that often contradicts its founding ethos? One answer is that any innovation inevitably attracts speculative mania and chicanery, especially in the early stages of its development. In the nineteenth century, banks deceived examiners by padding gold reserves with nails. More recently, the dot-com era gave us the likes of Enron, while a biotech boom brought us Elizabeth Holmes and Theranos.
Another problem is that the industry’s consumer-facing platforms have simply grafted old ways of doing business onto a technology designed specifically to do away with them. For example, while FTX was an “exchange” – a gateway to blockchain-powered cryptocurrencies – it did not make fundamental use of decentralised technologies. Ironically, most crypto holders today store their assets in exchanges that require high levels of trust and carry many of the risks of traditional financial institutions.
Behind the scenes, the crypto industry has started using technology to shift the balance back toward innovation. One example is the development of proof of reserves, a mathematically-based method that enables institutions to verify their crypto assets. Such tools could help prevent debacles like FTX, where the lack of transparency allowed Bankman-Fried to conceal financial fraud.
Importantly, proof of reserves and similar tools work best for cryptocurrencies, not for ordinary financial assets – including the US dollar. These technical advances have therefore prompted traditional financial institutions – the very ones Bitcoin sought to replace – to embrace crypto. JPMorgan, for example, has plans to move trillions of dollars of value on to the blockchain, while monetary authorities are exploring central bank digital currencies, which would involve using blockchain technology to issue digital versions of their fiat currencies.
To be sure, the crypto industry faces several daunting challenges: the large environmental footprint of Bitcoin mining, its use for illicit transactions, privacy shortcomings, and more. But, as proof of reserves suggests, the crypto community is innovating powerful new ways to harness the inherent transparency and trustworthiness of blockchain technology to create a more secure and flexible financial ecosystem.
As these innovations proceed, governments around the world are exploring ways to safeguard consumers from the crypto industry’s excesses. They would do well to look past the headlines and seek a balanced approach that enables this remarkable technology to thrive.
Ari Juels, a professor at Cornell Tech, is Co-Director of the Initiative for CryptoCurrencies and Contracts (IC3), Chief Scientist at Chainlink Labs, and the author of the forthcoming The Oracle (Talos Press, 2024). Eswar Prasad, Professor of Economics at Cornell University, is a senior fellow at the Brookings Institution and the author of The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance (Harvard University Press, 2021). Copyright: Project Syndicate, 2023, published here with permission.
41 Comments
large environmental footprint of Bitcoin mining
And it’s easier to sensationalize things for pageviews or political gain. For example, it’s commonly said that the Bitcoin network uses more energy than some countries. That’s true, but then so does Google, Youtube, Facebook, Amazon, the cruise industry, Christmas lights, household drying machines, private jets, the zinc industry, and basically any other sizable platform or industry. From that list, Bitcoin’s energy usage is the closest to that of the cruise industry’s energy usage, but bitcoins are used by more people, and the network scales far better. If people were 10% more efficient at shutting off their electronic devices when not using them, then that alone would save more energy than the global Bitcoin network uses.
Except of course Bitcoin isn't really an industry, and has a really simple function. And there's no real reason it should use much if any energy, outside of the arbitrary nature to have to "mine" something there's a finite amount of anyway.
Questionable too how much they're "used", so much as hoarded.
Bitcoin is a public distributed ledger with a series of private and public keys. As long as they have access to the internet (including satellite internet if need be), users can send bitcoins (including fractional bitcoins) to others by using their private keys. They can hold their private keys offline and can receive bitcoin when offline; they just need an internet connection to send them, confirm their balance, and those sorts of actions.
This ranks bitcoins among the most portable and hard-to-confiscate assets in the world. They can be sent internationally between different parties, can be memorized and brought anywhere in the world, and can be stored offline with no counterparty. Considering that they also have a supply cap, it’s not surprising that folks in many emerging markets have turned to them, rather than relying entirely on a local unsound currency that may be inflating at 10%, 20%, 50%, or 100%+ per year in some cases. Bitcoin is global money spread across a decentralized cloud.https://www.lynalden.com/bitcoin-energy/
They can hold their private keys offline and can receive bitcoin when offline; they just need an internet connection to send them, confirm their balance, and those sorts of actions.
My normie mate once asked me 'but what if they switch off the internet?'
To be honest, it's a fair comment in my opinion. Not because it's a likely outcome, but because it points out at a weakness of BTC compared to a physical means of exchange such as gold and silver coins.
There is, it's proof of work. It's so that there is a level of complexity, work and expense to mine.
If mining gold was as easy as anyone in their back yard, why wouldn't you.
Proof of work, requires proving you did the work, part of the work is heavy energy usage and overheads.
It secures the network from invalid activity. For someone to over power Bitcoin they'd need 51% or more of the networks computing power which at current hardware and energy costs, is impossible.
Proof of stake on the other hand which is touted as 99% better in terms of energy usage, requires some server hosting and huge capital to over power, far easier than putting in the hard yards work.
Decentralization comes at a cost, with BTC, that cost in energy.
It's interesting we treat energy as a scarce utility, when it mostly can't be stored and is infinite, with technological advances we can increase production. The sooner we stop pointing out Bitcoin as a "wastage" the better view we have on it. If at all, Bitcoin monetizes energy, incentizing more production and smarter ways of doing so.
It's only really an environmental concern dependant on the production of the energy it uses. Does it make any difference if my Tesla is charging on the same grid as my Bitcoin miner that is powered by burning coal.
No, no it shouldn't. Computing power is ever increasing, therefore it becomes easier and more affordable to use the same computing power to achieve the first mined coins (it was 50 per block).
You still don't grasp the concept. The issuance of coins is to fund the network security. Computing power requires electricity, a cost on top of the Computing hardware.
Over time, computing power becomes more cheaper, efficient and powerful, so the requirement to mine will continue to increase as the game to receive newly issued coins is made easier.
As more people join in mining, the competitive nature increases, so does the cryptographic difficulty of finding a block and being issued new coins.
Bitcoin is hardcapped to 21m coins. It doesn't need to be more difficult to mine bitcoin for scarcity purposes, it's for network security.
You do not understand Bitcoin.
Your argument goes in circles. If computing power keeps getting cheaper, there's no reason to need to keep increasing the cost (via energy demands) to generate each new coin to fund running the network; the network should actually get cheaper to run over time, not more.
Quick lesson for Pa1nter:
Every 10 minutes roughly a new Bitcoin block is mined. The time to mine is based off how quickly a miner can solve cryptographic equations to mine the block. As hardware and tech advances, computers are faster at doing this. So bitcoin has an algorithm that makes the equation more or less difficult if blocks on average are being mined faster or slower than 10 minutes. With your logic that it shouldn't change, how would that play out? There's financial incentive to mine therefore the mining participants increases.
As Bitcoin grows, it funds a higher network security budget (apart from halvings). You once again are missing the point here. Computing power needs to be high to prevent the network from being vulnerable to attacks.
As long as there's a value to Bitcoin there is an incentive market for people to secure it via mining.
Your argument against proof of stake is flawed. You say POS just requires capital - the same can be said about proof of work. If I have unlimited capital at my disposal, I can buy all the worlds ASICs and GPUs, park up next to a nuclear power plan and 'mine' to my hearts content AKA control the bitcoin network. Don't get me wrong - it's never going to happen. But to say POS falls flat because it just 'requires some hosting and huge capital to over power' isn't correct. There are plenty of arguments for why POS is more secure than POW, and as you have stated - 99% + more efficient in terms of energy usage. POW is old tech. Effective, but not the best solution we have available.
Lmao, show your lack of understanding, please, do it again.
You can't buy up enough ASIC hardware, there's only 2 manufacturers and that would a. Destroy their own business, b. Word would get out and the chain would shift to a different cryptographic algorithm, or c. If you achieve the impossible, bitcoin would be worthless so you'd spend billions for nothing.
Also POS is not decentralized. I own infrastructure and am a top node on a POS blockchain, telling you now, its not decentralized. Since the ETH move to POS, it's become over run with majority of nodes censoring certain transactions, it's ultimately failed. Check tornado cash story.
What do you mean your are a top node? If you're saying your run an Ethereum validator, then bravo to you. There aren't many of us in NZ.
I am familiar with the Tornado Cash story and the OFAC compliant MEV relayers. All that means is that, if one validator agrees to censor a certain transaction, then someone else who chooses not to censor will pick it up later. If 50% of all validators choose to censor, that transaction would take, on average, twice as long to be broadcast to the blockchain. If 90% choose to censor, it would take 10x as long. The transactions will still go through.
If you're talking about the Lido situation - that's another story, which I'm happy to discuss
Your comment re buying all ASIC leads to bitcoin being worthless, and billions spent for nothing. Can be said for buying up all the ETH and trying to attack the network. Spending billions, to attack a network, which would be worthless as a result of the attack. Same same, except my chain doesn't use enough energy to power a medium sized country.
How many pools control 90% of the hash rate on bitcoin?
Incorrect. Pa1nter, Bitcoin and the Bitcoin blockchain technicalities is black and white.
There's fact and then your understanding and opinion based off your understanding. I'm stating the facts which do not align with your small understanding.
Would love to sit down over coffee and explain this to you as you seem once again, over confident on a topic you've just proven for a third time, you know near nothing about.
I understand reasonably well the crux of it. I've been discussing this with people for near on 10 years, and the Bitcoin story has changed and morphed so much over time. 8-9 years ago, it was that Bitcoin was going to be the leading method of foreign remittances by now, and be used widely and at scale by people to buy things online.
Since then, it's really just become a digital gold equivalent, with some couple hundred million "early adopters" holding onto them, waiting for further billions to see the light so the early adopters can offload small portions of theirs at 100s of multiples of value increase.
The real test for Bitcoin will be how the value fares over the next 12-24 months. Either it'll become a safe haven as people ditch stocks and the like if the value of those plummets in a looming recession, or its own value will deteriorate as people need some liquidity just to hang on in their lives and ditch coins.
8-9 years ago, it was that Bitcoin was going to be the leading method of foreign remittances by now, and be used widely and at scale by people to buy things online.
Not sure who would have claimed that. BTC was never built to replace SWIFT or ecommerce. That was never the intention of BTC.
I suggest unlearning what you've been told at the neighborhood BBQs and all the reckons and do your own research. Starting with a skeptical mindset is not a bad thing. I think you'll find that most people do.
For 2 grand. Wonder what the payback time is.
And that's a device with computational power, not an introduced factor with no other purpose than to induce scarcity.
Effectively with Bitcoin, creation of coins is ultimately first come, first served (remembering the founder got a million coins just for kicks). Ramping up the mining difficulty just extends the time and energy required, for no rational purpose. Well, other than to maintain interest till they're all mined.
A decentralized data network doesn't have to be of any value. In fact that's deflationary technology, not the other way round. What's uTorrent worth?
Decentralized payment network can be of value, but that is yet to be determined. As we are finding out, the unregulated nature of it carries burdens that means the vast majority of global remittances will avoid it. Baywatch's refugee might find solace in it (most of them will still lean towards established major currencies), but large formal commercial entities require greater security and compliance.
The largest factor of value will continue to be perception based. Not that Bitcoin stands alone in that realm, plenty of stocks are oversubscribed using tall stories.
https://twitter.com/DSBatten/status/1726129757170130970?t=cI_rWXKDTfk_W…
Bitcoin is the best ESG asset on the planet :)
People have escaped countries like Sudan. I interviewed a guy from Sudan, which has a horrible inflation problem that their inflation is in the hundreds. They have an inflation rate of something like 150 or 200%. And he’s living in Europe and he’s sending the hardest money around back to his family in Khartoum. And they’re able to get by through that. We’re early here. Again, I think the estimate based on Coinbase numbers is that maybe 10% of Americans have interacted with Bitcoin or cryptocurrency. https://www.lynalden.com/bitcoin-energy/
Cryptocurrencies such as Bitcoin and Ethereum rely on computer code and networks that are not controlled or managed by a central party.
This comment is not really correct or should be expressed better. Ratty is not a centralized network, but 'ETH is more centralized than BTC.' So the definition should really be about 'extent of and exposure to centralization' across a spectrum. The more centralized, the more susceptible one is to fraud.
Remember that banks are fully centralized and are also the "creators" of money. The money supply is expanded through bank activities. Therefore banks are arguably more susceptible to fraud and attacks from 'bad actors' than say BTC. And re BTC, the most vulnerable are those who hold their assets outside their control; for example, with exchanges or with 3rd parties. With fiat currency, you don't really have the choice if you want to take sovereignty over your own money through a banking mechanism.
I’ve watched bitcoin since it’s inception neither a sceptic nor a disciple but my gut tells me it’s the way forward. After watching central bankers, out of fear, take interest rates negative over the last decade or so, a concept that was deemed so theoretically impossible that it was never in any of the University finance textbooks when I studied, makes me think I’d rather trust an algorithm over a small collection of irrational individuals when we hit the next crisis.
I also like the idea of blockchain technology giving people ownership of their image online.
Bitcoin is also making new all time highs in failing fiat currencies such as Nigarian Nira, Turkish Lira and the Argentinian Peso.
The author still doesn't understand Bitcoin and confused it with centralised entities and other shitcoin projects. He also conflates bad actors, which are just like people any where around the world an in all industries with crypto and Bitcoin.
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