Ulysses Pascal

Free Money, Free Money: Bitcoin and Ethereum


ISSUE 44 | FREE MONEY | SEP 2014

Digital currency rides the fine line between vision of a free money, a money without borders, middleman, spies or censorship and free money, a scheme for generating wealth out of seemly nothing. Bitcoin is not the only utopian vision of free money. At Silicon Valley Meetup, lead by patent attorney and programmer Tom Johnson, we get a sense of how seriously people in the tech community are taking a new technology called Ethereum. With charming determination, Johnson attempts to hash out Ethereum's legal implications in a lecture entitled “Ethereum Contracts as Legal Contracts.” Despite some pushback from attendees, Tom seems almost willfully ignorant of the utopian vision imagined by hardcore Ethereum adherents. Tom goes so far as to remark that “the Ethereum network and other similar technologies are going to allow people to do some stupid stuff, they are going to allow people to contract with people they don’t know, and they get the risks associated with that” (Johnson [42:00] 2014). While this may seem like a reasonable enough position to take, it goes against a major concept behind Ethereum.

Ethereum is an ambitious project devoted to realizing the idea of “smart contracts”—an idea first fleshed out by Nick Szabo. Nick Szabo, the tech media darling sometimes compared to Satoshi Nakamoto, inventor of Bitcoin, tweeted “Ethereum has the best ideas in block chain tech. Execution, not so much.” Self congratulatory negging aside, a smart contract is an agreement implemented in code in such a way that it is impossible for the contracting parties to breach the contract. One common metaphor used to illustrate the “smart contract” is the example of a computerized chess game. In traditional chess—board and pieces chess—the players are guided by a shared understanding of rules, but there is no mechanism that physically enforces the rules. Whether by accident or through malicious intent, a player can move pieces into illegal squares or ignore threats directed at the king, so long as her opponent is not paying full attention. When chess is implemented on a computer, however, the only moves the players are allowed to make are the legal ones. In board and pieces chess it is possible—even though it is against the rules—to castle through check, to push a pawn up a little too far or to let a piece slide to a square it never was meant to occupy. However, on the computer none of these transgressions are allowed. It is simply not possible. It goes against the code. The computer will reject any move that isn’t legal, making it impossible to act outside of the law. Smart contracts attempt to do the same, but in a much wider (and potentially lucrative) field. What the chess metaphor obscures is that the opposite of a “self-enforcing” contract is a government-enforced contract. Smart Contract adherents aren't in the business of making games, they imagine themselves making history, by challenging the age old notion that it requires an executive branch of a government to enforce contracts. In its highest idealization, smart contracts would allow for a world governed without government—a world where code between contracting parties is the only law.

There have been many technologies that have attempted to realize social and moral barriers as physical ones. Szabo and his followers often mention the soda machine as a primitive smart contract, along with digital property (think iTunes songs), and self-immobilizing vehicles. I would not be surprised if walls and locks are considered ‘steampunk’ smart contracts by some Silicon Valley technophiles. What all these technologies have in common is that they attempt to realize a social, economic relationship through some sort of physical mechanism, whether brick and mortar or circuit and code. The soda machine, for example, doesn’t allow you to steal. From a certain perspective it is a realization of the contract “if you give me a dollar, I’ll give you a soda of your choosing.” I always found it puzzling why Smart Contract proponents pick this example, as soda machines are notoriously undependable and easy to manipulate. If it weren’t for the all-seeing closed-circuit camera, would the soda machine’s “contract” really be all that “self-enforcing”? Leaving this worry aside, a true smart contract is not supposed to be as dumb as a box with fizzy sugar water in it.

When pushed to its logical conclusion, a smart contract is supposed to enable the development of decentralized autonomous organizations. An organization, according to the principal inventor of Ethereum, Vitalik Buterin, equals people plus resources plus rules. Or, in other terms, capital, labor and enforcement. In the classic 20th-century corporation, the boss (backed by police) is responsible for enforcement. Under Ethereum, enforcement is encoded such that labor is bound to the rules like a pawn in a game of computerized chess. In the eyes of the libertarian anarcho-capitalist, this is a liberatory moment! It drives down transaction costs! To be fair, Vitalik Buterin has said that he is wary of the possibility of decentralized autonomous organizations actually ever being truly autonomous, though in a recent Reddit AMA, Vitalik mentioned that he is becoming more convinced (Vitalik, et al 2014).

Science Nonfiction?

Ethereum makes Decentralized Autonomous Organizations less of a sci-fi fantasy and more of a potential reality by combining a number of technologies under one protocol. Vitalik Buterin, a 20-year-old developer who dropped out of University of Waterloo’s computer science program to work for Bitcoin startups, saw in the underlying technologies of Bitcoin the possibility of a more abstract, flexible system for cryptographic exchange. From his perspective, Bitcoin is a double experiment that tests two solutions to two problems in computer science: “one of those was this idea of a completely decentralized currency. This currency, this unit that exists only on the Internet but at the same time has this set of cryptographically enforced digital scarcity. The other experiment was this idea of using a block chain in order to secure distributed consensus” (Buterin and Danaylov 2014). The problem of digital scarcity, as you can imagine, is the problem of how to stop a digital entity from being copyable indefinitely. The problem of distributed consensus is how to get a bunch of nodes in a network to agree on something—for instance, that a given digital entity is a valid unit of currency—without having to rely on a trusted third party such as a bank. The solutions to digital scarcity and distributed consensus problems are entwined in what is called the timestamping problem. In a digital environment, a person might try to trick the system by sending one digital object twice, to two different people. If this is possible, it is easy to double your money by promising multiple people payment and sending them all copies of the same money. This problem is solved if there is a way of determining the order in which transactions take place, so that, in the case of duplicates, only the first one counts. Traditionally a third party such as a credit card processing agency or a bank determines the order of transactions and dismisses any duplicates. However, for those who distrust corporate and governmental third parties and wish to create a decentralized transaction system, the timestamping problem becomes a critical issue:

To accomplish this without a trusted party, transactions must be publicly announced, and we need a system for participants to agree on a single history of the order in which they were received. (Bitcoin white paper)

Bitcoin solves the timestamping problem with the blockchain. The blockchain is a protocol that provides security to transactions by making it very resource intensive to falsify. If any of the following steps weren't part of the protocol, an attacker could easily create a fake bitcoin, or duplicate one. A block in a block chain is a bundle of recent transactions waiting to be verified. To add a block to a blockchain, a node must round up a bunch of recent transactions, prove that it is doing work by solving a math problem, embed a link to the previous block in the chain, and announce that it did all of this to all of the other nodes in the network. The work required to solve the math problem is critical because it acts as a disincentive to trying to trick system. The other nodes check that none of the transactions in the new block were included in a previous block, that the solution to the math problem is correct, and that the link to the previous block is also correct. If a block passes these tests it is added to the chain of blocks. In principle it is possible for two blocks to be added to the chain at the same time, making a branch. However this issue is resolved when one branch becomes longer than the other. Every node works only on the largest chain, the chain that represents the most work done. In the long run there can be only one longest chain, and this longest chain is a complete record of all the transactions that have ever happened in a temporal order that the whole network agrees upon. For an attacker to spend the same money twice, not only would it have to create another branch in the block chain, but it would have to pour more resources into it than the rest of the network combined. The energy cost required to maintain a false branch against the rest of the network is so great it practically impossible for an attacker to game the system (Nakamoto, 2014).

The blockchain technology was originally conceived of as a method for creating digital currency without recourse to trusted third parties; this is how Bitcoin uses it. But the same basic technology can be used for any purpose that benefits from distributed consensus, such as decentralized voting, reputation systems and name registration. However, it is a considerable headache to retrofit Bitcoin’s implementation of the blockchain for purposes other than digital currency. Vitalik created Ethereum to take advantage of the concept of the blockchain without the limitations that come with Bitcoin itself. Ethereum is an abstract, generalized implementation of the blockchain that permits a wider variety of uses.

Vitalik points out a number of limitations in the Bitcoin framework. “A transaction in Bitcoin is either spent or it is unspent. You can’t have like a multistage financial contract that records its own database.” (Vitalik and Danaylov 2014). There is no way to govern how other agents can use a Bitcoin. Ethereum contracts add this functionality: they make it possible to decide who can access an account, how much they can withdraw, at what rate they can withdraw it, and which accounts the currency can be sent to. Another major difference is that Ethereum has its own programming language, Serpent, which is Turing-complete. Essentially this means the that Ethereum contracts allow for loops, which, as it turns out, kind of means the ability to code ‘anything’—but that is a whole other story. In programming, Turing completeness has one major drawback: runaway loops, loops which repeat indefinitely. Ethereum solves the problem by charging users transaction fees for computational steps. Basically you load your contract with some amount of “fuel” and the contract can run as long as there is enough fuel in the account. The “fuel” goes to Ethereum miners to marginally compensate them for running the blockchain on their servers. Even if there is a problem in the code, and a runaway loop occurs, it will not occur indefinitely, because the program will eventually run out of “fuel.” The developers of Ethereum have dubbed the fuel “ether”—a special sort of currency required to run Ethereum applications. Unlike Bitcoin, there is no ultimate limit on how much ether can exist, though its rate of growth is capped at something like %5, based on an infinite linear insurance model (Vitalik et al, 2014). Like Bitcoin this system instantiates a certain and inflexible monetary policy, though only time can tell if it will be able to sustain a healthy economy or if it will collapse, owing to hoarding and deflation. If the Ethereum economy grows faster than the capped rate, the “fuel” will be essentially deflationary, unable to keep up with the fire. But the developers stress that Ethereum is not a currency; rather, it is a platform for developing decentralized applications.

Vitalik elaborates on three potential applications that Ethereum is especially suited for:

  1. Kickstarter-like app. A purely financial application. The programmed contract would basically state that any user can deposit money into an account, but that only one user can withdraw money from the account, and only when the account has reached a certain threshold of donations.
  2. Dropbox-like app. A decentralized app that incentivizes storage of a file across a network. Multiple nodes would each hold a small portion of the file with some added redundancy, and would get paid a small fee for doing so. When the file owner wanted the file, the program would reconstruct the file from all the portions spread across the network. This would be a way to store files without requiring users to trust a single central agent like Dropbox. Thus it would be a trustless way to store files. With proper cryptographic protocols, the data would be secure.
  3. Mesh networks. Similar to Dropbox, but geared to data transfer rather than data storage. Ideally, such a network would replace the oligopoly of telecom giants: instead of a few giant companies charging for data transfer, a large number of small telecom companies would each manage a small portion of the telecommunications infrastructure. The network would essentially be a market where hosts would charge a fee to carry your message along their portion of the system. An algorithm would determine the shortest and cheapest routes, making it possible for small telecom providers to compete against larger ones.

According to Vitalik, one of the major benefits that Ethereum offers is that it makes coding these types of applications much easier and cheaper than ever before—he boasts that somebody created a version of the Kickstarter-like application in 30 lines of code (Vitalik and Danaylov, 2014) The only transaction costs in running an application like that on Ethereum would be the fees associated with performing computational steps, a much smaller sum than the percentage Amazon merchant accounts glean off of all Kickstarter funds.

Potential for what?

There is lot of potential in this idea, but the technology is only just emerging. If Vitalik sees Bitcoins as two experiments already, Ethereum is a pile of many more experiments. There are still many unanswered questions. Will the network become too bloated too quickly? How well will contracts respond to data from the outside world? How feasible will it be to update contracts once they are running on the blockchain? Is there even a market for decentralized autonomous organizations? Will the Ethereum platform really become the foundation for an economic system that exists outside of government?

Alternative economies are not new. Many begin with lofty utopian goals, attempting to create an economic system outside of the existing dominant one. Often these social experiments lose their utopian edge and come to complement, rather than oppose, the dominant system (Mauer, 2014). Ethereum provides a specific utopian vision in which government contract law can be replaced by the unambiguous logical dictates of the computer network. In one of the most intensified versions of this utopian vision, founder of Bitcoin Magazine and Ethereum blogger Mihai Alisie imagines Ethereum as “general-purpose block chain tech” with the power to transcend current financial and economic paradigms:

“Most of us are aware that the current planetary operating system is pushing us into extinction as a species. Finance seems to be the current paradigm humanity has to transcend on its path from a civilization type zero into a civilization type one. When a technology like Ethereum exists, I feel like we almost have a debt to ourselves and our fellow species to explore its potential in the search of solutions. We truly have at our fingertips the power to craft the future we desire through code and purposeful action – if you see something you don’t like, contribute with something you do like. We believe it is important, especially at this critical point in time, to follow our heart instead of meaningless extrinsic rewards. This is how, perhaps, we can open a portal toward our maximum potential, both on an individual and collective level.” (Mihai Alisie)

Mixed in with allusions to science fiction and almost New-Agey rhetoric, Ethereum comes across as an algorithmic messiah capable of delivering us to a radical new state of existence. While I admit that sometimes I am seduced by the delusion that technology itself can transform the world, a sober review of Ethereum’s potential should leave us asking what it is really capable of changing. After all, Ethereum can only really apply to financial and pseudo-financial objects. The bulk of the economy is the transformation of raw materials and the performance of services between human beings. No non-digital aspect of the economy will be touched by ‘general purpose block chain tech’ because these ‘contracts’ don’t have any hooks in the lived economy, beyond the energy required for circuits to operate. Ethereum really only has the chance of impacting finance and digital services—like distributed Dropbox. Moreover, it is hard to see who would rather contract with anonymous and potentially autonomous organizations than with aboveboard, legitimized businesses. Smart contracts promise a world where the government is not required to enforce laws, but is such a world even desirable?

I concede the point that in many instances third parties breach their trust by spying on consumers, or weaseling out of regulations. For the techno-anarcho-capitalist-libertarian the solution to this is to eliminate third parties, translating the democratic principle of ‘one person - one vote’ to the post-humanist “one cpu - one vote” (Nakamoto, 2014). But the distributed consensus model only constructs a procedure for agreeing on what happened in the past—it does not offer a route for agreeing on what to make of the future. My fear is that the attempt to offload management to the machinated market is that we lose the progress we have made in creating communities that ensure justice for parties without access to capital.

Despite Ethereum’s claim to realizing possibilities once only developed in science fiction, it’s vision for a financial future is not very imaginative. Ethereum’s full-time philosopher, Ethan Wilding, basically argues that what is wrong with capitalism is it isn’t capitalist enough. From his perspective, government collusion concentrates wealth within the financial class, and therefore limits competition and curbs innovation. The solution is to limit the government's ability to act in step with the interests the largest capital holders by side stepping the government all together. This vision, however, doesn’t provide any solution to arguably the most pressing financial problem of our time: that there are large capital holders, i.e. income inequality. What’s wrong with Wilding's prognoses is that it is unlikely that the development of a new platform for creating and enforcing contracts outside of 'the Government' will simply replace governmental and oligarchical actors. The more likely outcome is that Ethereum will hybridize with existing legal and economic frameworks. Without a mechanism for insuring that wealth doesn't pool in only a small handful of actors, Ethereum's gamification of liberal ideals is hardly anything but a new digital frontier for capital to colonize.

Vitalik claims he picked the name “ethereum” because of the fictional medium proposed to answer the question “if waves need a medium to propagate through, what medium does light propagate through?” In the Early 20th century we discovered that light does not require a medium to travel. Ether does not exist. But Ether retains its meaning as the lofty, invisible substance. Vitalik wishes that Ethereum will one day become a sort of ether for economic transactions—an invisible medium that supports contracts, currencies and distributed autonomous organizations. I hope that instead of becoming invisible and in the background, technologies like Ethereum bring the question of how our political economic system should be designed to the foreground.


References

Alisie, Mihai (2014) The Ethereum Project: Learning to Dream with Open Minds,

Johnson, Tom (2014) Ethereum contracts as Legal Contracts

Mauer, Bill (2014) Alternative Currency Pt 1

Nakamoto, Satoshi (2014) Bitcoin White Paper

Buterin, Vitalik and Nikola Danaylov (2014) Vitalik Buterin on Singularity 1 on 1: Ethereum is a Decentralized Consensus Platform

Buterin, Vitalik et al, (2014) Hi, we're the Ethereum Founding Team. Ask us anything!

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