The many problems with Bitcoin

(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: lawrence@krubner.com, or follow me on Twitter.

Interesting:

I’m actually shocked that Mt. Gox did not lose money to a database screwup. There are so many flawed NoSQL databases out there that, if you adopt the technologies advertised as “hip” on techcrunch, you’ll most likely end up with a broken exchange (more on this in subsequent blog posts, because there are many funny examples that deserve their own discussion). It is quite easy for well-meaning developers to build an exchange on a database that loses transactions, or to restore their database from backups and find themselves in a state where the accounts don’t match up. It’s safe to guess that their losses were not due to their database, because if they had been, Mt. Gox would have played it up already.

As an aside, quite a few of the Bitcoin exchanges are, technologically speaking, one giant cluster-love-affair-without-feelings-involved. Coinbase and others tried to assure the public with a very nicely spun PR release, but the bottom line is that many of these exchanges have had recurrent problems. Historically, Wall Street has had a crisis every seven years, because the entire system is based on a broken premise. Again, objectively, Bitcoin exchanges have had a crisis every six months, because they use terrible databases whose code quality matches that of a masters project. I went to the Cornell dairy barn, I drank the fizzy milk drinks that the agriculture students designed for their masters projects. The code being peddled under the first-generation NoSQL rubric is analogous in its construction and quality. This broken-by-design technology is, amazingly, not yet implicated in Mt. Gox’s demise. If I had to guess, I’d venture that Mt. Gox is based on something like MySQL — strongly consistent and not broken by design, though perhaps slow and hard to scale…

Human history is full of people who were entrusted with valuables, who then absconded with them. Whenever anyone is in a position of trust, whenever the illegal gains to be obtained from breaking that trust exceed the value of one’s reputation, there will be a temptation to steal. Jail is not quite a deterrent in this case, where the jurisdiction is Japan and the technology is too new for the justice system. Chances are that this is a simple case of theft, involving at least one insider.

And it’s important to not get too carried away with reading the tea leaves in the blockchain when performing forensic analysis. For instance, some people believe that Mt. Gox transferred $75M three months after they were sued for $75M for breach of contract. Let me go on a limb and claim that in the long and fabled history of lawsuits, not a single one for $75M was settled within 3 months for $75M. That’s just not how the justice system works. You sue for X, with the expectation that you’ll get less than X, and the other side, even if they are completely wrong, has tons of legal tricks to slow down the process. The blockchain contains many transactions, and the laws of small worlds imply that one can always find a short path between a wallet and a transaction of the desired size. These connections are not always meaningful.

Overall, Bitcoin has been an ongoing massive online course on economics and distributed systems for the libertarian masses. It’s ironic that Mt. Gox turned into a chapter on fractional reserve banking.

….I could also repeat the party line which goes “do not trust your wallet to an exchange.” I won’t say this, either. The people who parrot this line know full well that a normal person is incapable of running their own wallet. And it’s not even good advice: your Macbook or Android phone is not a secure device. The Bitcoin demographic is 98% male, between the ages of 20-30. I base this on official online polls, confirmed by pictures of the Bitcoin Christmas party at Bitcoin HQ in NYC, which somehow managed to look more depressing than my high-school dances. This demographic uses their laptops for viewing highly questionable content and their phones for installing flapping bird software from Jimmy Bob’s Software Inc. These are the same people who have started but not yet finished reading The Fountainhead, the same people who grant permissions to make phone calls, activate cameras and send SMSs to phone apps whose sole function is to act as a flashlight. Running a wallet is the last thing they should be trusted with.

I wanted to end on a note of cautious optimism, similar to those visionary futurists from the 70s who were all full of hope for mankind, extrapolating from their experience after a decade of awesome parties. They expected a future filled with tech wonders, strawberries the size of watermelons, and carefree love with strangers. But it’s just not possible. Cryptocurrencies are here to stay, but future systems will look nothing like the currency systems we have today. Before Bitcoin, we had Karma, and before Karma, we had millicent, with plenty of others before and in between. There will be others.

What Nigerian scams are to your grandfather, Bitcoin exchanges are to the 20-30 semi-tech-savvy libertarian demographic. Even if the Bitcoin protocol were perfect, and it isn’t, our computing infrastructure is not up to the task of handling high-value transactions. The exchanges are built on the latest hyped technologies that have incredibly poor guarantees, and routinely run into technical problems. They require full trust for their operation and are open to attacks from insiders and out. In a world where secret agents are hopping across machines and networks, keeping coins safe in a computer is a losing battle. Even if you keep everything in cold storage, laptops and phones can be infected with malware that steals coins when they come out of cold storage.

Then there is the increasingly disconcerting social side. I’ve always steered my own life towards doing fun and interesting things with smart people in happy and positive communities. Bitcoin, at the moment, is in a slump, with a community that has become its own parody. While the underlying cryptocurrency is quite interesting and the wallet software is fairly good, the exchanges are based on layers upon layers of bad software, run by shady characters. The Bitcoin masses, judging by their behavior on forums, have no actual interest in science, technology or even objective reality when it interferes with their market position. They believe that holding a Bitcoin somehow makes them an active participant in a bold new future, even as they passively get fleeced in the bolder current present. And as if the world does not have enough schmucks with Macbooks who call themselves entrepreneurs, we have the term “Bitcoin entrepreneurs” used unironically by mainstream media. The community has designated a Nobel leaurate as its nemesis, solely because he asked some inevitable questions every thinking person in his profession ought to ask. As far as I’m concerned, the only winning move is to not play this game. Sure, you may make money, perhaps lots of it, on the inevitable ups and down that are sure to come, but you’ll be associating with the wrong kinds of people. If your life goals did not include some amount of pride and self-respect for you and your community, there were tons of other, easier ways of making money fast that you could have taken.

The only “positive” news about Mt. Gox is that money lost at Gox is apparently tax deductible. This is so wrong on so many different levels that I don’t know where to begin.

If one must pick a cryptocurrency, the lowly dogecoin, of all things, is doing everything right. It’s based on economic principles that provide the right incentives for a healthy economy. The community does not take itself seriously. Most importantly, no one pretends that Doge is an investment vehicle, a slayer of Wall Street, or the next Segway. No one would be stupid enough to store their life savings in Dogecoins. And people freely share the shiba goodness by tipping others with Doge. So, young people who are excited about cryptocurrencies and want to get involved: Dogecoin is where the action is at. Much community. So wow.

Post external references

  1. 1
    http://hackingdistributed.com/2014/03/01/what-did-not-happen-at-mtgox/
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