Bitcoin's Broken Promise
Updated: Jan 9, 2019
Cypherpunks once saw the crypto-currency as a victory for freedom and decentralization. Instead, bitcoin has become a playground for the already powerful, creating new forms of control.
It was 1992. Every day, from his home in Oakland, California, Eric Hughes waded through a stream of emails from “The List,” an electronic mailing list he had helped set up to bring together a small group of fellow travellers. Hughes was a mathematician, and on The List were academics, computer scientists, technologists and hackers. Sometimes gossip landed in his inbox, and political schemes, or fantasies and code. He and the others were gripped by a question they thought the greatest of the age: who would win the digital revolution?
Would the spread of technology usher forth a new world of autonomy and freedom? Or would it bring in an age of surveillance? Would the new nether-space of the Internet allow individuals to become truly free? Or would it be captured by the world of states, hierarchies and corporations? The digital revolution, as they saw it, was poised on a knife-edge: the old world pitted against the new, old concentrations of power against new ways of dispersing it.
While they didn’t agree on everything, Hughes and the others knew that the future wouldn’t be decided in a courtroom or at the ballot box, but rather by technology itself. In the early 90s, The List was fast becoming the online home of a fractious, pugnacious, confrontational new movement focused on developing and applying a technology that members thought would be the clincher in the battle. It was called cryptography: the art and science of keeping secrets and identities safe. Those on The List called themselves cypherpunks, and in 1993 Hughes sat down to write something that looked like their manifesto:
Cypherpunks don’t care if you don’t like the software they write. Cypherpunks know that software can’t be destroyed. Cypherpunks know that a widely dispersed system can’t be shut down.
For almost a decade, The List was the centre of the crypto world. Hundreds of people joined, drawn to its strange mix of ciphers and radical politics — part technical to-and-fro and informal peer review, part learning guide, part rhetorical sand pit. It shut down in 2001, but new versions quickly appeared. The most notable was called the Cryptography List, and was where many of the original cypherpunks migrated.
In 2008, a new poster sent a message to the list. “I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party,” it began. It briefly laid out how the idea worked and linked to a longer technical paper. The poster called himself Satoshi Nakamoto.
The cypherpunks had long tried to create a system of ‘e-cash’ (that was also what Nakamoto called it). ‘Bit gold’ was an earlier variation, as were RPOW and b-money. But none of these attempts had ever quite been successful. In the eyes of many of the cypherpunks, money was a key battleground in the broader struggle for freedom. Old money suffered from a fatal flaw: it was, they said, ‘fiat’ — money-by-decree. Governments and banks issued the currency — by fiat — and so had control over it. They could enrich themselves by manipulating it, and could spy on people using it. To the cypherpunks, banks and states weren’t the guardians of the financial system — they were the corruptors of it. Old money was one of the ways that these old concentrations of power controlled reality. “We are defending our privacy with cryptography, with anonymous mail forwarding systems, with digital signatures,” Hughes wrote in 1993, “and with electronic money.”
The reception to Nakamoto’s post was icy at first. One of the first to reply said they didn’t think the system would work at scale. Another said that the system would get hijacked. But it didn’t take long for the community to warm to the idea. It was striking because it seemed to create a currency without the need for central control. Nakamoto presented a system where the network of people using bitcoin could play the role of states and banks, making sure transactions were legitimate. You could have rules and enforce them without having to create a central authority that could abuse its power.
The watchword of the new idea was decentralization. Old currencies were hostage to centralized, capricious bureaucracies full of scheming, ambitious humans. This new currency would be enforced by the cold, hard impartiality of protocols, without centre or core. The cypherpunks argued decentralized systems were less likely to fail accidentally, pointing out that these systems were more expensive and difficult to attack, destroy and manipulate, because they had no vulnerable central points that someone could target to seize control of the much wider system.
But for the cypherpunks, the desire for decentralization went deeper than this. It was about changing the way economies were organized. The political ideologies that flourished on The List were various and often radical, but members could all find something to like about decentralization. For the communitarians, it meant a world with hierarchy. For Libertarians, a world without authority. For the radical left, a world without bankers and banks. For the radical right, a world without states.
As The List began to buzz with interest and excitement about Nakamoto’s idea — ‘bitcoin’ — Nakamoto posted another message: “We can win a major battle in the arms race and gain a new territory of freedom for several years.”
It is always fraught to claim the true intentions of those who created bitcoin, but within the tradition of the cypherpunks, decentralization was all about the struggle for liberation in the digital age. The arms race that Nakamoto referred to was between the technologies of control and of liberation. Freedom from the abuses of conventional life could only be won if dominant concentrations of power were broken up. Bitcoin, then, was part of a wider war with a deeper aim.
“If Satoshi [Nakamoto] reveals his true identity, his bucket is on us,” tweeted fast-food chain KFC Canada in early January. Shortly after Nakamoto shared his idea for bitcoin, the poster disappeared into the shadows, and never surfaced again. True to the cypherpunks’ credo, his identity was never revealed. (Nakamoto’s gender is also not certain — nothing about his identity is. Most commentaries use a masculine pronoun, however.
Almost a decade since its inception, bitcoin is now considered a fairytale story. Its price has surged and surged — the subject of fascination for commentators around the world. KFC has also launched the #BitcoinBucket: a live-stream of a bucket full of chicken, available for a rampantly fluctuating amount of bitcoin (0.0011204 bitcoin at one moment, 0.0011319 the next). This bank-destroying cypherpunk dream is now being used to sell (and buy) fried chicken. Bitcoin has gone mainstream.
With bitcoin now a household name, it is time to ask the same question as the cypherpunks. Who is the digital world for? What are the new forms of control and liberation? Most of all, can technology make people more free? As power transforms and reforms in a changing world, who does bitcoin really put in control?
Developers: the new politicians
Bitcoin has become a new kind of social institution, of sorts. Nakamoto’s great breakthrough was to make it an institution that could enforce its rules without any governing body, president or board of directors at its heart. But what these rules are is at least as important as how they are enforced. As bitcoin rose in influence, a group of people emerged that had tremendous power over setting the rules: the Bitcoin Core developers.
Back in 2008, Nakamoto released the initial code that set out how bitcoin should work. But like any piece of software let loose into the world, it had to be a living, breathing thing. New challenges and new problems emerged, and the rules of bitcoin had to evolve.
Bitcoin’s code is what software developers call ‘open-source’ — anyone can download the code for free and see exactly what the code is. And like any popular open-source project, lots of people have worked on it over the years, suggesting improvements that are tested and discussed. Ideas are written up as Bitcoin Improvement Proposals, and they’re combed over by other developers — ruthlessly — before they’re incorporated into live version. Among those in the technical community who actually understand bitcoin’s code, reaching consensus is an important part of open-source culture. There is a loosely meritocratic process, where being active and helpful in improving the code leads to more influence in building a consensus, or breaking it.
However, although the project is open, power over its direction doesn’t rest equally. Changes to Bitcoin’s rules can ultimately only be made to one source, and only approved by a tiny number of sacred custodians, known as the Bitcoin Core developers. Only 12 people have ever held something called ‘commit access’ — the ability to turn a suggestion into reality. They define, really, what bitcoin is, and ultimately decide when someone is given this power, or indeed when it is taken away. (One of them — Gavin Andresen — once had his commit access revoked because of a disagreement over who Nakamoto really was.)
Perhaps it was because of bitcoin’s anarchist roots. Or perhaps because Nakamoto’s founding document didn’t mention it. In any case, throughout bitcoin’s life, there has never been any kind of formal process for how its basic code, and thus the rules that code enforces, can be changed, or how its developers should make decisions. In the absence of any kind of formal rules for its governance, ‘Bitcoin Core’ (as the main branch of bitcoin is now called, to distinguish it from its many variants) can be governed by Bitcoin Core developers in whatever way they want. They might be benign and consensus-seeking — each has certainly made huge sacrifices in bitcoin’s name. But those who can actually make changes to bitcoin’s code hold a great and overlooked kind of power.
The Bitcoin Core developers are not all-powerful, however. When they change the rules, it’s up to other parts of the bitcoin network to implement the changes. Without a formal political system, there is no way of officially resolving arguments when others disagree. Disagreement might lead to something called a ‘fork,’ when the source code is copied and taken in another direction, creating a distinct and parallel piece of software — a completely new currency. Forks have created Bitcoin Classic, Bitcoin Cash, Bitcoin Unlimited, Bitcoin XT, and Bitcoin ABC, all competing with Bitcoin Core.
“Developers are like politicians,” Wong Joon Ian, a crypto-currency journalist at Quartz, said in an interview. Developers can change the rules, he explained, but they have to bring people along with them. They have to convince and cajole, and try to attain consensus. There is lobbying, there are factions, bitter infighting and bickering. There are different interests, visions and ideologies that would take bitcoin one way or another. The cypherpunks might have hated political systems, but there was no way for bitcoin to escape politics. And in this system, developers are not the only ones with control. There are two other new centres of power that really matter: miners and elite users.
‘Miners’ — the new banks?
SanShiangLiang industrial park sits on the flat grassy planes of inner Mongolia. Nestled among abandoned, half-built coal mines, eight long, narrow hangars sit in a row. Each has a gently sloping roof, and the corrugated metal walls are painted blue and white. On the end of each hangar is the name of their owner: Bitmain.
In Nakamoto’s original post, he gave his fellow cypherpunks some instructions explaining bitcoin. “You can get coins by getting someone to send you some,” he wrote, adding that, using the software that he had created, an option called ‘Generate Coins’ could be turned on.
Nakamoto was asking people to earn bitcoin by doing something that became known as mining. Miners are bitcoin's auditors, doing the work of verifying bitcoin transactions. As new transactions are made, miners check back through all the previous transactions to make sure they are legitimate. Miners verify blocks of transactions at a time, and, when they are done, add them to a chain of previous and verified blocks. This is called a blockchain — a ledger of all of bitcoin’s transactions, visible to everyone and immutable.
Nakamoto designed the whole process to consist of a mathematical puzzle every 10 minutes. For each block, miners raced against each other to find the solution. The first one that did so received a bounty of newly minted bitcoins. It was a complex, elegant and brilliant idea that gave miners incentives for throwing computing power at tasks needed by the whole network.
At first, mining was easy. “A typical PC will be able to generate coins in just a few hours,” Nakamoto wrote. But the puzzles that miners had to solve were programmed to become more difficult over time. Soon, people couldn’t mine just on their laptops. The community that had formed around bitcoin started firing off pictures of their own mining rigs: homemade wooden racks in sheds, computer cards crammed into rows amid a tangle of wires, fans on stools blasting them with cold air.
Home-brewed sets then gave way to large bitcoin mining companies like Bitmain. Fifty staff work and often live at its sprawling complex. There is a dormitory, a canteen and a repair centre. Inside the hangars are rack after rack of winking, blinking machines — 25,000 in total — all built for only one purpose: mining crypto-currencies. At the end of each aisle, huge fans with blades over a foot long wash the machines with cooling air.
Probably 10 or 15 companies now have the vast majority of what is called ‘hash power,’ the raw computational resources used to solve Nakamoto’s puzzles in order to verify all of bitcoin’s transactions and claim the rewards. Those companies have conglomerated even further, although more loosely, into mining pools: collections of miners that pool hash power for a share of the rewards. Bitmain is run by young Chinese financial analyst Jihan Wu, who also set up one of the largest mining pools, called AntPool. The balance constantly changes (miners change pools often) but the three biggest pools account for half of the hash power that keeps the blockchain going. Miners also cluster in countries with cheap electricity; China is home to four of the five largest pools. Naturally enough, the tiny concentration of people at the top of bitcoin’s mining pyramid know each other. In 2015, 90 percent of bitcoin’s mining power was under one roof at the same conference.
The people who control mining companies like Bitmain are enormously powerful. From second to second, they turn transactions into reality. If enough miners together decide to take their hash power away from bitcoin, it might set off a death chain spiral: transactions wouldn’t be mined, they wouldn’t be added to the blockchain, nothing would work. Bitcoin would become paralyzed.
Sort of like… banks. Okay, not completely. But what today’s bitcoin mining has in common with banks is that there are a small number of powerful institutions that have invested the fortunes required for the vast infrastructure needed to make financial systems work. They are the financial lubricant that allows people to exchange value and make trades. Both miners and bankers have conferences, and you can fit the key decision makers of both kinds of institutions, if you wanted to, under one roof.
Corporates are… the new corporates
The third branch in bitcoin’s triad of power are the people using bitcoin, buying it, thinking it has some value: the users. For it is really on their shoulders that bitcoin itself lives or falls.
The challenge to power that bitcoin presented was as a currency — a way to buy and sell things outside of the economic arena mastered by banks and states. But an increase in value has since changed the nature of bitcoin from a currency to an asset. The price of bitcoin increased slowly at first, from a few cents per bitcoin in early 2011 to hundreds of dollars by 2016. And then, around the beginning of 2017, the bitcoin frenzy really took off: a thousand dollars per bitcoin in January, $2,000 by May, $4,000 by August, $14,000 by the end of the year. Soaring value has become a source of bemused fascination for the mainstream. Many bitcoiners believe bitcoin’s increase in value is inevitable, and that what we’ve already seen is just the beginning.
As the value shot up, many of the practical uses of bitcoin that had only begun to materialize vanished. Vendors, from gaming websites to the dark net drug markets, have stopped taking bitcoin as payment. Even the North American Bitcoin Conference stopped taking bitcoin, saying transaction fees were too high and the price was fluctuating too violently.
Bitcoin has become a sort of digital gold: valuable, generally useless and hoarded. HODL, people call it: “holding on for dear life.” But not all HODLers are equal. The actual ownership of bitcoin — and thus the power to speculate and move markets — is vastly unequal.
It is estimated that around 1,000 holders of bitcoin — known as ‘whales’ — own about 40 percent of the total amount. As far as we know, the crypto-currency’s main owners are billionaire venture capitalists. Alongside them, 120 hedge funds are focused on crypto-currencies, holding billions in assets. Nine early movers in bitcoin trading scored over 1,000 percent returns.
Libertarians, certainly, have no problem with inequalities of wealth. But the problem is that, outside of any kind of rules governing the market, that concentration of wealth could become a concentration of power, and that concentration of power can be abused. Whales can move the market as they wish. “Pump and dumps” have seen anonymous actors placing huge buy and sell orders to cause the price of bitcoin to bump upwards or slip lower. Whales, much like the top miners, know each other. Many were early adopters who stuck with bitcoin through thick and thin. Asked whether large holders could move in concert, Roger Ver, a well-known early bitcoin investor, told Bloomberg in an email in late 2017: “I suspect that is likely true, and people should be able to do whatever they want with their own money.”
Large actors who throw around their weight to control the market to their advantage? A bit like… the most ruthless kind of corporation. But without any rules to govern bitcoin markets, manipulation and insider trading is technically legal. The power of large, rich actors has become greater, not diminished.
So where does that leave the normal person? The people the cypherpunks were fighting for? Bitcoin was a brilliant idea in service of a grand vision. But in its promise to liberate normal users from concentrations of power, it did the opposite. As bitcoin challenged one system of power, it created a parallel system. And this new system has its own concentrations of power, dominated by developers with arcane technical know-how, companies with massive amounts of computing power, and billionaire investors.
Bitcoin has become a playground for the already powerful, precisely because there are no rules. To the cypherpunks, the rules and laws of everyday life were themselves abuses of power. But they are also the tools that democratic institutions use to control power, to civilize it, to leaven its influence.
What is dangerous about bitcoin is that it has transformed power into weirder, less familiar forms: A political system where the politicians don’t have to play by any rules. A banking system that is even more concentrated. Or markets unprotected from the weight and muscle of large, rich players. Outside of the rules, power has become more raw, less constrained, and likely more abusive.
Bitcoin is only the beginning. There are now countless other crypto-currencies to choose from, and the underlying technology, blockchain, is being used to build all kinds of new, decentralized services. But the lesson here is a general one for everyone thinking about power and control in the digital age. You cannot engineer away power, because you can’t engineer away humans. As people pursue liberation-through-technology in its many forms, we also need to know when we’re building new cages for ourselves.