February 25th 2018
For your Bits this weekend we are going to take a look at cryptocurrencies, the most prominent of which is Bitcoin, and the blockchain technology that allows them to exist. At its core, blockchain is a decentralized network that allows for peer-to-peer transactions without the use of an intermediary; in the example of financial transactions, the intermediary serves as a trustworthy third-party that validates the transaction. Blockchain is able to provide a trust mechanism to allow for safe trade with anonymous individuals that is ensured by cryptographic algorithms. To help you develop an understanding of what blockchain is and how it works, Wired asked a blockchain researcher, Bettina Warburg, to explain the technology at 5 different levels: to a child (starts at 0:36), teenager (1:38), college student (3:43), graduate student (6:28), and expert (9:50). At the more advanced levels, Warburg moves beyond the financial use case for blockchain technology (e.g. Bitcoin) and discusses how it can be used for other types of peer-to-peer exchanges between private companies (e.g. supply chains for fruits and vegetables) or to automatically manage electricity grids. While still an imperfect system, Warburg and expert Finn Brunton from New York University point that new technologies do not need be perfect to provide incremental improvements on existing systems.
~ 18 Minute Watch
“Finn Brunton: A technical definition of blockchain is that it is a persistent, transparent, public, append-only, ledger. So it is a system that you can add data to and not change previous data within it. It does this through a mechanism for creating consensus between scattered, or distributed, parties that do not need to trust each other, but just need to trust the mechanism by which their consensus is arrived at. In the case of blockchain, it relies on some form of challenge, such that, no one actor on the network is able to solve this challenge, consistently, more than everyone else on the network.
Bettina Warburg: So it randomizes.
Brunton: Yes, it randomizes the process and, in theory, ensures that no one can force the blockchain to accept a particular entry onto the ledger that others disagree with. One that relies on a mechanism for a peer-to-peer network that can maintain updates to the ledger and then verify those updates in such a way that is it impossible to defraud and impossible to alter after the fact.
Warburg: Do you see it as defining a new discipline of kinds or where are we going to see blockchain emerge in the real world first?
Brunton: As an example, one thing I think about a lot in terms of possible blockchain applications is electricity. The next generation of distributed smart grid technology, effectively.
Warburg: Sure, people are working on that already.
Brunton: Yeah, exactly, and it’s this very fruitful area of research and you can find yourself looking, like, 20 years out, where you have an enormous number of electric cars, you have all of these batteries; that is essentially a distributed peak load power grid. The cars are getting plugged in and unplugged at different times. If you have a mechanism that is able to automatically and autonomously be distributing power based on batteries that are scattered throughout the grid, that are being used for other purposes (their owners don’t even necessarily need to be aware), you begin to have something that looks like a much more viable society that still has a lot electricity needs, but is able to base that much more on renewables; [it] is able to make up the difference during peak load periods, or during differences in weather, that is able to have power much closer to where it is need rather than having to be distributed over great distances. That’s something that is an enormously difficult problem to solve, and it’s not that blockchain makes it easy, but that it makes it possible.
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Our next article takes a look at the history of the internet’s development and how blockchain technology provides one mechanism for creating open source online standards. Bitcoin is the first public effort to take advantage of blockchain technology; it introduced “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.” By solving these two problems, blockchain is able to create open source protocols for all kinds of information. Imagine a system where you could send a transportation request by providing your current location and some new location you where you would like to go. That request could also include your past trips, payment information, and favorite locations; however, instead of a company like Uber or Lyft owning all of that data about you and serving as a matchmaker with a transportation provider, this system could allow you to solicit an open source request where any vendor can compete for your business. These new types of open source systems remove the need for large corporations to manage the process and open the possibility for the next wave of technological breakthroughs.
~ 45 Minute Read
“To some students of modern technological history, the internet’s fall from grace follows an inevitable historical script. 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.
Blockchain advocates don’t accept the inevitability of the Cycle. The roots of the internet were in fact more radically open and decentralized than previous information technologies, they argue, and had we managed to stay true to those roots, it could have remained that way. The online world would not be dominated by a handful of information-age titans; our news platforms would be less vulnerable to manipulation and fraud; identity theft would be far less common; advertising dollars would be distributed across a wider range of media properties.
To understand why, it helps to think of the internet as two fundamentally different kinds of systems stacked on top of each other, like layers in an archaeological dig. One layer is composed of the software protocols that were developed in the 1970s and 1980s and hit critical mass, at least in terms of audience, in the 1990s. (A protocol is the software version of a lingua franca, a way that multiple computers agree to communicate with one another. There are protocols that govern the flow of the internet’s raw data, and protocols for sending email messages, and protocols that define the addresses of web pages.) 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. In fact, that original openness continues to be all around us, in ways we probably don’t appreciate enough. 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. You don’t need to understand anything about how these software conventions work on a technical level to enjoy their benefits. 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.”
“The open, decentralized web turns out to be alive and well on the InternetOne layer. But since we settled on the World Wide Web in the mid-’90s, we’ve adopted very few new open-standard protocols. The biggest problems that technologists tackled after 1995 — many of which revolved around identity, community and payment mechanisms — were left to the private sector to solve. This is what led, in the early 2000s, to a powerful new layer of internet services, which we might call InternetTwo.
For all their brilliance, 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. Perhaps most important, 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 what Vitalik Buterin, a founder of Ethereum, describes as “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. Offline, we don’t have an open market for physical passports or Social Security numbers; we have a few reputable authorities — most of them backed by the power of the state — that we use to confirm to others that we are who we say we are. But online, the private sector swooped in to fill that vacuum, and because identity had that characteristic of being a universal problem, the market was heavily incentivized to settle on one common standard for defining yourself and the people you know.
The self-reinforcing feedback loops that economists call “increasing returns” or “network effects” kicked in, and after a period of experimentation in which we dabbled in social-media start-ups like Myspace and Friendster, the market settled on what is essentially a proprietary standard for establishing who you are and whom you know. That standard is Facebook. With more than two billion users, Facebook is far larger than the entire internet at the peak of the dot-com bubble in the late 1990s. And that user growth has made it the world’s sixth-most-valuable corporation, just 14 years after it was founded. Facebook is the ultimate embodiment of the chasm that divides InternetOne and InternetTwo economies. 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 one single person, Mark Zuckerberg, holds the majority of the voting power in that corporation.
If you see the rise of the centralized web as an inevitable turn of the Cycle, and the open-protocol idealism of the early web as a kind of adolescent false consciousness, then there’s less reason to fret about all the ways we’ve abandoned the vision of InternetOne. Either we’re living in a fallen state today and there’s no way to get back to Eden, or Eden itself was a kind of fantasy that was always going to be corrupted by concentrated power. In either case, there’s no point in trying to restore the architecture of InternetOne; our only hope is to use the power of the state to rein in these corporate giants, through regulation and antitrust action. It’s a variation of the old Audre Lorde maxim: “The master’s tools will never dismantle the master’s house.” You can’t fix the problems technology has created for us by throwing more technological solutions at it. You need forces outside the domain of software and servers to break up cartels with this much power.
But the thing about the master’s house, in this analogy, is that it’s a duplex. The upper floor has indeed been built with tools that cannot be used to dismantle it. But the open protocols beneath them still have the potential to build something better.”
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Your last Bit of the weekend takes a look at some of the potential risks and downsides of blockchain. Technology CEO Kai Stinchcombe is skeptical about the disruptive potential of distributed ledgers because he feels that they fail to solve a significant problem and actually create problems that are currently solved by institutions. The argument is that the social benefit of distributed ownership does not outweigh the flexibility of human controlled institutions. For example, allowing banks to control financial transactions allows for risk mitigation in the form of fraud prevention and reimbursement for illicit activities. If someone steals from your bank account, the bank can be required to refund your money; when it comes to cryptocurrencies, if someone steals your password, hacks a cryptocurrency exchange, or scams a vulnerable person there is no recourse. The risk of unauthorized access to your information or property, whether it be your identity or bank account, undermines the ability of the system to inextricably link an online identity to a real world one and introduces a systematic risk that may not justify the benefits.
~ 17 Minute Read
“‘Smart’ contracts are contracts written as software, rather than written as legal text. Because you can encode them directly on the blockchain, they can involve the transfer of value based directly on the cryptographic consent of the parties involved — in other words, they are “self-executing.” And in theory, contracts written in software are cheaper to interpret — because their operation is literally mathematical and automatic, there are no two ways to interpret them, which means there’s no need for expensive legal battles.
And yet the real-world examples show the ways this is problematic. The most prominent and largest smart contract to date, an investment vehicle called the Distributed Autonomous Organization (DAO), enabled its members to invest directly using their private cryptographic keys to vote on what to invest in. No lawyers, no management fees, no opaque boardrooms, the DAO “removes the ability of directors and fund managers to misdirect and waste investor funds.” And yet, due to a software bug, the DAO “voted” to “invest” $50m, a third of its members’ money, into a vehicle controlled by very clever programmers who knew a lot about recursion issues during balance updates. Some said this was a hack or an exploit because the software had not functioned as intended, while others said that there was no such thing as a hack — the whole point was that the software made decisions autonomously and there were no two ways to interpret it, and if you didn’t understand how the software worked you shouldn’t have participated. In the end, everyone got together and voted to retroactively amend the software contract and move the money back to its original owners. What’s the takeaway? Even the most die-hard blockchain enthusiasts actually want a bunch of humans arguing about the underlying intention behind a contract, rather than letting the software self-execute. Maybe the “dumb” way is smart after all?
The DAO was an illustrative experiment, but what about for routine transactions at big companies? The investors and startups in the smart-contract space promise that the block chain will enable super-fast execution and payment — for example that in healthcare applications, “instead of waiting 90–180 days for a claim to be processed, or spending hours on the phone trying to get your bill paid, it can in theory be processed on the spot.” But that’s true for any software-enabled purchasing system. My company’s Amazon servers scale automatically based on website traffic and bill us for how much we use. The idea that smart contracts would change this is a fallacy — it conflates the legal arrangement being put into effect with software with the legal arrangement itself being coded as software. Amazon’s terms of service are not a smart contract, but the billing system that implements those terms is automated. To the extent that health insurance billing, for example, is not automated, the problem isn’t that existing software isn’t “smart” enough to handle submitting claims and paying them electronically, it’s that the insurance company is slow moving, either by accident or because they on-purpose prefer a human review.
In the end, everyone from blockchain enthusiasts to health insurers actually wants to argue out in human language what the business relationship is and interpret it on an ongoing basis, and then to write software that handles the fulfillment and payment. That already exists — it’s the status quo.”
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