Weak Links in the BlockChain, by Howard Chu

By Howard Chu CTO Symas Corp, Chief Architect OpenLDAP Project, Musician. Disclaimer I have recently begun contributing code to the Monero project, so I’m speaking from a biased viewpoint. But the reason I chose to contribute to the Monero project is because I read their whitepapers detailing the deficiencies in the Bitcoin protocol.

In ‘The Time of the BlockChain’   Dr. Paul O hAonghusa gave a brief introduction to the blockchain and suggested some potential uses for this technology. Interestingly enough, while Bitcoin’s blockchain may be used for a wide variety of applications leveraging its public ledger, it is totally unsuitable for its original purpose – digital currency. Bitcoin is significant for introducing the blockchain concept to the general public, but it’s important to be aware of the shortcomings of the Bitcoin technology.

A key aspect of the blockchain is that it is a decentralized, distributed database jointly maintained by computers all over the world, in peer-to-peer networking fashion. Participating in this network has substantial costs, in terms of compute resources and electricity. The incentive to participate is that occasionally one may get lucky and receive a reward for their effort – much like mining for gold, thus this participation is referred to as “mining.”

However, the decentralized aspect of the public ledger is itself not guaranteed; indeed currently a small handful of mining pools own more than 51% of the mining power on the Bitcoin network.  . The fact that a single entity controls a majority of the network not only weakens the network (by becoming a target and a single point of failure) but it can start a feedback loop that accelerates the centralization of resources: when a single entity controls a majority of the network they can directly control how the mining rewards are distributed, diverting profits to themselves, thus removing the incentive for other unaffiliated miners to participate.

Before the blockchain can fruitfully be used for other applications, this fundamental issue needs to be addressed: the network will only be robust and trustworthy if it remains decentralized, which requires broad participation. Participation has a cost, so there must be some type of reward to provide incentive to participate. Rewards must be distributed fairly; if a small minority is able to exert control over the rewards then the entire system breaks down.

Looking at Bitcoin itself, and not the underlying blockchain technology, there are other issues. For use as an actual digital equivalent to cash, Bitcoin falls far short in critical ways.

1) It’s not clear that Bitcoin is actually fungible. Since the ledger is public, anyone can trace the history of a coin and see if it was used for criminal purposes. If so, such a coin may be declared tainted/worthless or even be seized by arbitrary law enforcement bodies. A viable currency must be fungible – you must have an assurance that any coin you receive is worth its face value, no matter who used it before you received it. Bitcoin cannot offer this assurance.

2) Real currencies can be exchanged totally privately, without leaving an audit trail. If I give you a 50 cent coin and you toss it into your coin jar, no trace is left behind of that action. In particular, my act of giving you that coin doesn’t tell me how many coins you have in your coin jar. Nor does it tell you how many coins I have left in my wallet, and no one who can see your coin jar can tell that I gave you a coin, or which coin it was. With Bitcoin, all of this information is again wide open, out in the public. Anyone can see how much money you hold and everyone you have ever given money to. A couple examples of uncovering a trail in the blockchain include this
and this video (the Bitcoinica Theft of 40,000 btc in July 2012)

In short, Bitcoin’s design leaves it inherently incapable of providing privacy. While there are certainly many interesting uses for a wide open public ledger, application to digital currency definitely is not an appropriate one. Other systems like CryptoNote address these issues, allowing wallets and transactions to be completely private, untraceable, and unlinkable. As such, CryptoNote coins may actually be fungible – no one can associate any coins you hold with any of its previous spenders. There are a few different CryptoNote-based coins out there, but the Monero researchers have done the best work in documenting the issues and their solutions.

In its current state, Monero provides privacy using totally anonymous transactions – the Monero blockchain records that transactions have occurred but no one can identify the sender or the receiver. The nature of the transactions may still be observed, however, so an observer could determine the amounts used in particular transactions. A solution to provide totally confidential transactions has been developed, which would also hide the amounts in each transaction, and work is currently underway to integrate this solution in the Monero project.

The blockchain is definitely a fascinating technology with many potential uses, and Bitcoin is significant for being the first realistic attempt at implementing a digital currency. But while we recognize the significance of these innovations we must also recognize that they are merely first attempts, deeply flawed, and not suitable for real world use. In the software world it would be referred to as a Pilot System – the first version of a project that one then throws away. The_pilot_system Crypto-currencies like Monero address Bitcoin’s flaws but it remains to be seen whether they will become the digital currency standard or whether they too will be replaced by some other design.

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