A Critic of Cryptocurrencies Says Bitcoin Needs To Be Burnt With Fire

hardcore true believers. Yes, and we've discussed this before, but our timing on this has been absolutely terrible because we basically waited until the bubble had burst for us to get a bunch of bitcoin people on. But you know, at least we didn't contribute to the bubble, because I don't think like we did a single cryptopisode in all of as far as I know, and so at least when everyone was like, you know, losing their heads or going crazy, at least we didn't at least we didn't

amplify the hype. This is very true. But I think in the interest of fairness, at this point, we need to get a sort of anti crypto person on and in my search for this ultimate anti crypto person, I think I came upon the most sort of vociferous um argument against cryptocurrencies and also the underlying blockchain technology that I have ever seen. Wait, are we gonna are we talking to Jamie Diamond today? No, it's not Jamie. Jamie Diamond was not that convincing, because you know, he came

to that conference said bitcoin was a fraud. But we know that JP Morgan at the same time that it says bitcoin as a fraud, claims to be experimenting with blockchain technology. So no, no, I mean, there's a there's a really interesting there's a really good point here, and it's something that I've always foundrustrating in the debate Whisha is that there's no shortage of bitcoin skeptics and Bitcoin critics and people call it a fraud in the Ponzi

scheme in a bubble. What there is a shortage of, however, are people who are who call bitcoin of fraud or their skeptical of it, who have actually done the research and have the technical chops to understand it and understand what they're talking about. So you get all these people on stage or they say bitcoin is a scam, it's like okay, but when they usually don't have is anything interesting to say after that? And so that is what

I'm absolutely what I'm hoping that maybe we can accomplish today. Absolutely, And what you often hear from the crypto proponents is, oh, well, you don't understand the technology, or you don't understand the technology is potential, and so it's not worth talking to you, okay. So I'm very pleased to say that we have found not only a tech expert, but someone who is sort of the ultimate anti crypto person who gave a presentation at the Enigma Use and Next conference in California just

about a month ago. The title of this conference was Cryptocurrencies and blockchain burn it with fire. You can't get stronger than that, can you. So I'm very excited to say that our guest for this episode is Nick Weaver. He is a researcher at the International Computer Science Institute and a lecturer at UC Berkeley. Nick, thanks so much for coming on, Thanks for hosting me. Uh So, Nick, I gotta say cryptocurrencies burn it with fire. You know

you're you're clearly not mincing your words here. You have strong feelings about the crypto sphere, yes, and that's because I've actually been able to watch it for uh three quarters of a decade now. So what happened when the cryptocurrencies first came out in in and is most people who looked at it with technical understanding went, oh, this is bovine excrement and walked away. But I have a

monetization model. I can watch the cryptocurrency space and turn it into both academic papers and non academic papers, and so I've been able to basically mind comedy gold from the field for uh several years now. And that means I've been aware from the beginning from Saga's such as ten percent of all bitcoin being invested in a ponzi scheme run by a guy called Pirate at forty so uh.

In your presentation and in your talks and tweeting your critical of both sort of public block chains which is what we call cryptocurrency, uh, and also corporate block chains. I'm a little less interested in the corporate side because I feel like there are very few defenders of them anymore.

And so you'll find a lot of agreement even among cryptocurrency enthusiasts when you look at cryptocurrent these however, and this idea of like bitcoin as this sort of permission list kind of anonymous payment system, decentralized, what is, in your view, the sort of fatal flaw that makes it not live up to the hype of its advocates, the

big fatal flaws. It doesn't actually work as currency if you can't use it as a competitor to all the other actual digital currency systems we have, like oh, PayPal, Impassa's, l Asa. All of these payment systems are vastly more efficient than the cryptocurrencies, unless you're interested in criminal activity. So walk us through the technical aspects of why you think bitcoin doesn't work as a currency or as a

payment system. Okay, so let's start with the three things you need to be able to do with the currency. Need to be will acquire it, you need to be able to hold onto it, and you need to be able to spend it. Now, actually acquiring cryptocurrency is a hard problem because cryptocurrency the one property it has that the other payment systems don't is it's designed to be irreversible. There's no go back or undo button, which means in order to buy cryptocurrency, you have to do one of

three things. You either have to bring cash, so the bitcoin a t m S don't take your ATAM card, they take cash. Or you have to be given credit by the seller of the cryptocurrency, so you transfer your money electronically and are given credit. Or you have to wait, so you transfer your money your to the exchange. The

exchange then sits on it for several days. Anyone who doesn't follow these three rules when selling you cryptocurrency is able to be defrauded because the rest of the financial system is all designed with an undue button to mitigate fraud, and so for example, one of the early bitcoin exchanges used a PayPal clow that promise no chargebacks, and then

there were chargebacks and they went out of business. Likewise, Steve Wozniaks sold seventy thousand dollars worth of bitcoin to somebody who paid with PayPal, only to find out that it was a fraudulent transaction. The PayPal was reversed and he was out the bitcoin. Fortunately, I think the laws can afford the loss. So they're hard to buy, they're

harder to hold onto. So if you store your cryptocurrency on a third party exchange, you are on the hook if they are hacked, and that has been billions of dollars of notional value lost for the years as the exchanges are hacked, and apparently North Korea is now one of the big hackers on this. So you store your cryptocurrency on your own computer, Well you can't do that either, because if your computer is hacked, your cryptocurrency gets stolen.

And in fact, we used this one time to detect a break in when the stole the monitored bitcoin from a wallet that had a copy on a graduate student's account.

So you use a dedicated device, say like an iPhone is a really strong device an iPhone, however, you're dependent on the cryptocurrency software, and that cryptocurrency software may be dependent on open source modules on GitHub that can be bought by somebody else, taken over and include stealing code, and this happened, so they're really hard to hold onto.

And finally you can't actually spend them because the dirty little secret is the merchants who say they accept cryptocurrency, Well, first of all, the volume hasn't increased in five years, but they aren't actually accepting cryptocurrency because the cryptocurrency prices bounced up and down. They use a service like bit pay, which allows them to price in dollars and it immediately

converts the cryptocurrency into actual money. Even over Stock up until a year ago, basically did not hold any cryptocurrency.

They just converted it all right away. Um well, they held a teen amount um And so in order for the system to balance, as somebody buying something with cryptocurrency, because of that volatility risk the price bouncing up down, you want to immediately transfer your dollars into cryptocurrency then spend it, which means a real world cryptocurrency transaction costs vastly more than the alternatives when you include those two currency conversion steps, and one of which buying the cryptocurrency

is inherently expensive. So the only people who can avoid that expensive buying cryptocurrency is the people who have been holding onto it a long time because they're a believer. Now, if you don't believe in cryptocurrency, there's no point. If you do believe in cryptocurrencies, the one rule of them is never actually spend them, because these are designed on

a gold standard type model. And as we remember our economic history from the Great Depression, the only thing worse than inflation is deflation that is the notion that your currency is going to be worth more to borrow then today.

And these cryptocurrencies are supposed to be deflationary, which means if you say, buy a pizza back in two thousand eleven, um, you end up dining on regret when it looks like a massive ten million a hundred million dollar pile of money in So, if you don't believe in it, they don't work for payments, and if you do believe it, they don't work for payments. All right, So everything you say makes a lot of sense in terms of Bitcoin or any other cryptocurrencies not being not making any sense

whatsoever for what we would call conventional commerce. And um, obviously the pro bitcoin rhetoric has changed a lot over time. But something that strikes me listening to you and watching your presentations and also talking to bitcoin believers is there is a point of convergence. So they would say, yeah, bitcoin isn't for buying, Bitcoin isn't for coffee, Bitcoin is for uh, mostly for holding onto I would never spend

my bitcoin. The point of convergence, which you say in your own presentation, the Tracy reference, is this idea of okay, there is one thing that bitcoin is good for that

is censorship free transactions. So even with all the costs that you describe the cost of acquiring, the risk of losing your bitcoin, which is a calculable cost in theory, and then the volatility cost that for a certain class of transactions, um some of them outright crimes, some of them gray areas, some of them more privacy related, that cost might still be worth it. Yes, the one thing that cryptocurrencies do that all the other payment systems don't

is by having no supposed central authority. We'll get to why that's false. But they're designed to be censorship resisted. There's nobody as a third party who is willing to say no, you can't do forbidden activity. The problem is, and this is why I've gotten much more sour over the past five years, is I've come to the conclusion that that is actually a bad thing. Bitcoin actually has

committed a crime against me. It has made me believe in the need for rigorous enforcement of money laundering laws. And I've got I'm a Silicon Valley quasi libertarian, and I believe in the jack boot of justice on money laundry. So what has happened with the cryptocurrencies, well, they get used for drug deals yonn. But more importantly, they get used for extortion. So give us cryptocurrency or your data get Give us cryptocurrency, or we're going to keep sending

bomb threats. Um, how long before an airport is blackmailed with give us cryptocurrency or you're going to get drones flying over Um. It just ends up reaching out and touching people in a very bad way. Then there's the theft, that billions of dollars worth of theft, and then there's the environment of what's left is pure speculation based on somebody else being willing to pay more. But those markets

are so blatantly manipulated and fraudulent. So I consider every I c O that was open to non accredited investors. It is securities fraud. And that's just what we have left is just basically um civil fraud, criminal fraud, and rampant speculation and market manipulation. Yeah. So I want to uh just pin down and uh not move on from something that you said. You know, you say, Okay, the only thing that it's really good for things like drug deals, and it's given rise to a new model of extortion.

It only works because in theory the censorship resistance and the decentralization so that no one can say this transaction isn't allowed. But you threw in there and said we're going to get back to it. But even that is a false promise. And I really think this is the sort of central question of do you think the censorship resistant slash decentralization case for bitcoin? Why is that also

not actually live up to the hype. So it lives up to the hype on censorship resistance, it does provide that, but the notion of the centralization, So decentralization the idea is, let's make it so that you don't have to trust any individual or small group of entities, but only the system as a whole. Now, the benefits of decentralization, apart from censorship resistance, are never clearly articulated. It's basically an article of beliefs. But assuming that that is good for something,

the results has been dismal. They cost a huge amount to run, but they don't end up being decentralized. So cryptocurrency mining for bitcoin is controlled by basically four entities. Four entities can conspire together and completely control what transactions get approved or not likewise, so there's no actual decentralization, there's just a veneer of decentralization. Likewise, the code developers themselves are central authorities as well. So take Etherium for example.

Ethereum is all code is law and no central authorities. But when seven percent of all Ethereum got invested in basically a self creating ponzi scheme that had a bug in it that allowed the money to get stolen, the developers went, oh, you know that whole code is law business. Um, Yeah, that's a lie. We're changing the code, undo the theft

because it was our money you stole. Yeah. I've wondered about this at various times, especially with the forks that we've seen in well, notably in in bitcoin, where we do seem to have the overall direction of bitcoin being determined by consensus and by users. So like, how how much of a problem are those forks? Well, they are

and they aren't. They are if you actually believe that decentralization is supposed to mean something, because these forks are not some large community thing but just a few individuals, the the cartels on the mining and or the coders. Um. So if you actually believe that decentralization is important somehow these forks are problematic. Otherwise for the rest of us,

it's just basically popcorn. It's entertaining to watch the interesting conflicts between various camps and the big block versus small block. It's like big Indian versus little endian Um. And so it's entertainment, but it's not anything really fundamental from a systemic viewpoint, because they're all just only worth something because somebody else will pay for it. So well, it's a good example that the notion of limited supply is. It's true because you can just create more of these out

of the air, but other than that, it's just amusement value. So, Nick, I wanted to go back to something you were saying earlier about the regulatory response, and this is something that I've I've wondered at various times myself, probably on Twitter at some point, But if regulators are sort of missing a trick because they're going to get a bunch of burned investors, either via crypto investments or I c O s,

why aren't they acting and why? The other thing that I often wonder is if if you think that crypto is going to be a legitimate currency sometime in the future, then surely that would undermine you know, various regulators and monetary authorities as well, so they should be acting. So like, either way, either it's a fraud or either it's going to be six tessful, you would think there should be

some sort of regulatory response. I would have hoped so, But I think what it comes down to is regulators these days are afraid of being claimed to stifle innovation. And the cryptocurrency believers have talked a very good story about how they're being innovative and new um even if in reality they're basically speed running five years of economic

failures over and over and over again. But so the result is the regulators have in the past been very hands off, so like you had all these I c O s and it just you just look at it and it fails. The how he tests that, the test for is this a security? And what I think has happened is now that things are collapsing, the regulators are finally starting to pay attention, and so the regulators are reactive.

They are not proactive, and so as a consequence that they sat back during the boom did nothing, and now that it's a bus they're going to go and probably drop a lot of lawsuits and probably invite some people because now that the tide is rushing out, you're seeing that everyone is naked. Um, they're actually doing something, and I think it really is. Regulators are afraid of regulating

new or old wine in new bottles. They think it's new, they don't know what to do yet, and so as a consequence, they just basically did nothing during the and well, now they get the joys of picking up the pieces. I wanna go back to where you say this whole cryptocurrency uh phase has sort of damaged your natural libertarian instincts because now you have this appreciation for this money

laundering regulation. I'm like struck on this point that in this sense, your your view on cryptocurrencies is not all that different from a lot of believers, which is that it really comes down to censorship resistance. You point out that that's mostly used for drug dealers and all kinds

of things that are awful. They would say, yes, that is a byproduct of what happens when you have freedom, and that you know there are good things that can come out of censorship resistance, that there are people in areas of the world, or people in lines of work for whatever reason they don't want their bank to know, or maybe their bank cracks down on their line of work if their say a sex work or something like that.

And they would say that, yes, there's money laundering and crime, but that is the price that you pay for also having this freedom. And they would also say say that, um, this debate has happened before in cryptography and the sort of export of you know, a strong cryptography where people say, oh, if cryptography exists, and that's going to be good only for terrorists, but that also is what enabled the web to work. So how much is this really like a

technical fight versus essentially a values fight? I think at this point it is a values fight. And I really don't like that cryptography analogy because cryptography we've always seen good uses for it right from the start. But with the cryptocurrencies, the problem is is people can't point to legit payment system. So what has censorship resistance allowed you to do that? Um, that the others happen. Well, okay, if you need censorship resistance, you always still have cash.

It's just that cash has both the need for physical proximity and significant mass. So scaling cash. Moving a thousand bucks is easy, moving a million bucks is hard. So cryptocurrencies want to um enable that moving large quantities. And the other thing is is I've just seen the damage that is done. So people point to cryptocurrency being used in two good situations to get around censorship. The first

was payments to Wiki leaks. So Wiki leaks was cut off from the banking system back around when Assange first fled to the embassy to avoid the sex assault charges. So when that happened, um, you could use cryptocurrency if you wanted to support Wiki weeks, and that's all fine and good, but Wiki Leaks decided that it's actually better just to arrange with a US nonprofit to act as an intermediary and basically launder contributions. And then we had Backpage.

So Backpage was a Craigslist clone that did a lot of support for sex workers, and I actually think, yeah, that probably was good overall, or at least been less damaging than the alternatives. But they were cut off from the banking system, and so to pay with them, you'd either have to pay with cryptocurrency or you send them a check in the mail. UM, and I suspect most

of their payments became checks in the mail. Now the problem is is, let's face it, Backpage turned out to be a criminal conspiracy, and so we're left with very you non criminal usages because it is so expensive. So it's actually a lot more expensive than the other anonymous electronic payments you want. So if you want to buy your porn anonymously, you go into Target, pay a hundred and four dollars for a Visa gift card, and now you can use that Visa gift card to buy your porn.

So the cost of privacy on electronic transactions is actually a lot less than the cryptocurrencies offer because you you have this huge problem of you can't hold onto the cryptocurrencies you can hold onto a Visa gift card. Never say odd lots doesn't bring us a useful day to

day information and life tips um nick. On a serious note, if this is all about differences and values or value systems, and given that cryptocurrency supporters seemed to be so invested in the belief system around crypto and everything that comes with it, what ultimately is going to be the thing that destroys cryptocurrencies. As you put it in your presentation, that ends up burning them with fire in some way. There's two things that can really burn the system with fire.

The first is the federal government UM getting their act together and going after this cryptocurrency called tether. So tether is effectively a digital banknote. It's supposedly tied one to one with the dollar, but it's not. It's a basically it's reinventing eighteenth century banking combined with Liberty Reserve, which was a criminal enterprise the Feds shut down a few years back, and so it's a rife target for disruption. But if the uh tether is removed, that actually destroys

almost the entire bitcoin exchange ecology. So eight of the cryptocurrency volume on the exchanges are on exchanges that are already cut off from the banking system because they're viewed by the banks. Is basically too high risk fraudulent enterprises with a huge amount of wash trading and painting the tape and such blatant market manipulation that the price graphs

look like Bart Simpson's haircuts. UM. So if you remove tether basically removed the entire exchange ecology except for a few and so that alone would have a huge negative impact, and tether is such latently a crime under money laundering laws that it's surprising they haven't been prosecuted yet. So that's one. Number two is all these proof of work coins. So the idea behind proof of work, which is what predicts Bitcoin, ethereum and most of the other major cryptocurrencies,

is basically better described as burning money. So the system burns x thousands of dollars an hour under the assumption that an attacker to attack the system would have to burn more than that. The problem is, in order to defend the system, you have to be burning x dollars an hour continuously, but an attacker might only have to burn x dollars for a limited period of time, an

hour or two. And so what has happened is the cryptocurrency systems that only cost five thousand dollars an hour to run, the so called alt coins um, there's less polite turns to them as well. Those have actually become regularly attacked by people who burn six thousand dollars for an hour and use it to conduct fraudulent transactions targeting

cryptocurrency exchanges. So if you're inefficient, or if you're efficient, you're vulnerable but if you're burning bitcoin level of money, uh, thousands of dollars or so, like bitcoin is what about five million dollars a day right now? Um, if you're burning five million dollars a day, yes, you are secure against an attacker, but you are so dependent on the price that you need five million dollars a day of new money coming in just to keep the lights on.

So if the cryptocurrency drops in price, it actually creates a death spiral situation where you've got a lot of mind new equipment that we'll get turned off because it's not profitable to protect the network, but it may be profitable to turn on for an hour or two to attack the network. And so as long as the price

stays high and growing, the system is secure. But in order for that to happen, they keep needing five million dollars a day plus of new suckers coming in wanting to buy the cryptocurrency, and that's net inflow of new money. And if that ever stops, the price starts to drop, and then we get into these death spiral situations where they lose all their security. All right, Well, Nick Weaver, it was great having you on. Thanks so much for walking us through all the the tech arguments underlying the

antique crypto case. Thank you, thank you very much for having Joe. I thought that conversation was absolutely fantastic, really great to get an actual, you know, computer scientist view of cryptocurrencies and how blockchain technology is working, but also to have someone sort of put it in that comical

language is just fantastic. Yeah, I agree, and I do think it was interesting to me though that like at its core, there isn't this area of overlap that in a sense, the blockchain or the bitcoin blockchain kind of does what it's supposed to do, like it works. It's just that it works in a very narrow case, and you have to make the case that that narrow u that narrow use case actually has some benefit and is

worth all the cost, which you don't really hear. You're even most of these sort of like crypto bitcoin blockchain enthusiasts articulating what that point is. So I find it very helpful that I feel like we're sort of getting to the nub of the issue, which is that is this sort of narrow use case actually a benefit, uh that societal benefit or not or a project worth pursuing. Well,

I think that's a good way to frame it. And I think there's probably an obvious reason why crypto proponents don't talk about the narrow base case, which is essentially criminality and money laundring and blackmail. And I say that as someone who recently got a blackmail email on the Bloomberg system requesting ten thousand dollars worth of bitcoin, which they helpfully translated. I think it was to two point five or two point six bitcoin immediately deposited into their wallet. Um,

so that does definitely happen. No, I didn't. Apparently there's a pending CIA investigation against me, so if I disappeared tomorrow, you know why. But I will say I actually I disagree on the point that it does have an especially good use for criminal activities. I still think at its heart the technology is unwieldy and inefficient for reasons of either energy consumption or the notion that the blockchain can

be edited. It's not immutable, and you're trying to create trust amongst entities that don't trust each other anyway, and if they did trust each other, they would come up with some other sort of contract system. Well, the point that Nicholas made at the end that there is. You know, there are frailties. I mean, people would there's debate about this, but this death spiral, like, ultimately, if there are a lot of the value currently in cryptocurrencies is premised on

the idea that they have. Oh there's all kinds of machine internet of things and machine machine transactions, all this stuff. If a lot of the value are still people believing in that at then it's easy to imagine a big drop in value from here that the death spiral, and

then the whole thing breaks up. And if the trades actions were to ever get unwound or edited in some way in an attack, then that really would strike to the heart of the entire Oh, this is immutable, and this is censorship resistant, So it feels like even on the core use, the jury is still out about whether that will work. Yeah, and on the plus side, I guess as the price of bitcoin dips lower, we will get to see whether or not the death spiral will

actually happen. So that's something to look forward to. This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway, and I'm Joe. Why is it though you can follow me on Twitter at the Stalwart, and you should follow our guest today, Nicholas Weaver. He is at nc Weaver and don't forget to follow our producer, although he was out this week. He's at for Hest as well as the Bloomberg Head of podcast for Cesca Levi at Francesca Today.

Thanks for listening.