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Sunday, January 19, 2020

A Blockchain is Not a Blockchain: The Tremendous Difference Between Decentralized and Decentralized Blockchains

When it comes to social impact of cryptocurrencies and blockchain, there are two schools of thought. One says that a blockchain is a great tool of decentralization and disruption in both tech and finance, and that decentralization specifically means more freedom. For example, Bitcoin users are very big on the fact that supply of Bitcoin is not controlled by central banks and cannot be inflated at will (they do have a point). However, there is a counterpoint that looks at the blockchain as a public ledger. As such, they argue, it is a great tool for international or global currencies and other systems that can centralize finance and possibly private data in one place to keep track of it. Where is the truth here? The answer is, actually, it depends. It really depends on the kind of the blockchain we use.

First, let’s dispense with one argument against blockchain. It goes like this. Satoshi Nakamoto, because he or they are anonymous, is not be trusted, otherwise he would make himself known. Maybe he is part of some rogue or not-so-rogue intelligence service? Whether true or not, it is not a key factor in deciding on the impact of this technology. It is possible Satoshi wanted to keep private, because he realized the type of pressure that will be applied oh him. But even if you do believe that Satoshi is a front for some well funded group of people or organization, it does not change anything. Let me remind you that internet was essentially built by US Military and the CIA. But it is used to both centralize the world (think Facebook/Instagram/Whatsapp), as well as to help people organize grass roots movements around the world. So, argument from mystery, as I would call it, proves nothing. In fact, there is some circumstantial evidence that Satoshi Nakomoto made it difficult for intelligence agencies like NSA to break Bitcoin’s cryptography. This is a bit technical, but briefly it goes like this. Bitcoin uses something called Elliptic Curve Cryptography. So does much of the internet.

However, there are different Elliptic Curves with different properties. Over 95% of websites on the internet use an elliptic curve called sec256r1. This curve belongs to a class of curves called pseudorandom curves. These curves heavily depend on the value of what is called a seed number. Usually, this number is chosen to be some well known number and not purely random to prove that there was ‘nothing up the sleeve’ of those who chose the number (randomness of a single number cannot really be proven). Amazingly, the most widely used curve in the world the sec256r1 had its seed value arbitrarily selected personally by the former head of elliptic curve research at…. NSA! No justification for the number was given, we only have NSA’s assurance that it is random

Nakamoto used a completely different curve in Bitcoin. It has a similar name sec256k1, but it is a curve that is completely different, does not use such a seed value and is virtually impossible to manipulate through choosing some random number to seed the curve. This makes it much more difficult to break. Of course, one could always come up with some explanation that appearance of rigor and independence by Satoshi in choice of curves is precisely the reason to be suspicious etc. etc. But there is no way to win this argument. Let’s instead focus on specifics of blockchains.

All decentralized blockchains are public in a very specific sense that pseudonymous keys and transactions are seen by everyone (with some exceptions, such as the Monero project where both entities and amounts are obscured through old school, but extremely cool cryptography). That is because in permission-less blockchains anyone can run a node and everything is verified publicly, out in the open. This is not bad ‘public’, this is good public, because not only everyone can see, but everyone that sees it is on equal footing. Privacy problems of Facebook are not with the data per say, but with the lack of disclosure and awareness, as well as non-equal power of Facebook vs regular participants. If participants really knew what is done with their data and everyone had equal access to it, this would not be a problem, as long as you can opt out.

If you care about privacy, there are two reasons that make Bitcoin much better, decentralized way of doing finance versus something like credit cards. One is that your key is pseudonymous. This means that there is no gatekeeper on entry and it is not tied to your identity. You can even create Bitcoin keys while you are offline and they will be perfectly valid. Number of possible addresses is virtually infinite (as far as finite humans are concerned).

There are 2 to the 160 power possible Bitcoin addresses. How large a number is that? Well, here it is for your viewing pleasure:


By comparison, number of grains of sand on the face of the earth is approximated to be only 2 to the power of 63, a relatively puny number.

Per person there are mind boggling 196,385,600,286,334,710,857,791,565,804,391,698,421 addresses in both Bitcoin. Here is more fun trivia on the number of addresses from this blog 

“Imagine that each grain of sand on Earth is another planet Earth, and that each of those planets has 7.442 billion people living on it. Now, if we divide up the number of Bitcoin addresses per person, each would get 3.5 billion for their lifetime. And if each of those people lives for exactly 100 years, they have 110 Bitcoin addresses to use every second starting from the second they’re born. ”

So, there is privacy in numbers, because you can switch ‘identities’ as often as necessary. Imagine being able to generate a new credit card not tied to your name for every transaction. So, as long as the blockchain is open and all addresses are valid, it can be good for privacy.

But there is another important point that makes Bitcoin decentralized, it is the fact that all of the nodes are equal. There are some blockchains out there where nodes are not equal or a gatekeeper exists for point of entry. An example of a centralized blockchain is Ripple. Nodes running Ripple blockchain are not equal, not everyone can actually verify transactions. So, it is not trustless and once there is trust in a central entity, it is centralized. So, blockchain and crypto are kind of like internet. Can be used for centralization, but can also be used for privacy and decentralization.

So, if you need to distinguish a blockchain that can be used to monopolize and centralized vs. the one that provides privacy and autonomy, look no further than these two criteria.

  1. Is there a gatekeeper algorithm that ensures matching private keys to the identity? Are all keys equally valid, as long as they are valid crypto keys for the system?
  2. Are all nodes running the system equal? Do all of them have access to all the information that is needed to verify every transaction?

And the third one would be: is the code completely open sourced without a corporate entity owning any piece of the puzzle?

So, now you know. Blockchain is not good or bad, it is a tool which can be used in very different ways depending on the design. Thank you, Satoshi.

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