The blockchain: replacing trust with hope?

Central systems on the global internet are considered vulnerable and open to manipulation.

So in the last decades of the second millennium, computer scientists tried to develop decentralised structures for digital payment systems which, through maximum redundancy (storing all transaction data on a great many nodes of a network), were meant to make manipulation and hacker attacks impossible.

In addition, these security methods were meant to replace trust in human business partners with trust in anonymous identifiers and programmed algorithms. The first globally usable digital currency based on the so-called blockchain was Bitcoin. The blockchain itself is a chain of digital, encrypted number codes representing transactions and the means of payment used in them. In principle, however, the blockchain architecture can also be used for the distributed, secure storage of other relevant values (e.g. a digital land register, or the certification of digital documents such as shipping papers).

The advocates of this technology want to replace trust – which can only ever exist between people, or sentient beings with a known intention to act – with “trust” in digital algorithms, namely cryptographic encryption systems. But since algorithms are dead artefacts and not beings with motivations and value systems, “trust” is not possible here; at best there is the hope that these systems cannot be manipulated after all, or misused at other, unencrypted points. So far, however, these hopes have proved deceptive in every respect.

1. Protection against hackers

In January 2018 the cryptocurrency exchange Coincheck announced the loss of digital currencies worth 400 million dollars. Back in 2014 the Bitcoin exchange Mt. Gox ultimately went under after losing a large number of bitcoins. The “electronic purses” (wallets) are not secure either and can be plundered by cybercriminals, especially when the security keys are generated online. Finally, the exchange rates themselves are repeatedly manipulated, with methods very similar to those used for share prices or commodity prices. So it turns out that when classic (exchange) values are represented by digital methods, this does not increase their security; only the manipulation strategies change, and the manipulations themselves are simply carried over from the analogue world.

2. Inefficiency of the database

At the beginning of 2018 the size of the Bitcoin blockchain reached about 200 GB. Because this volume of data is stored on many nodes of the network, only about 350,000 transactions are possible per day, whereas the VISA network, with a traditional database architecture, handles about 150 million transactions a day. A single transaction can take 30 minutes or longer, which is why real-time applications are not possible with it.

3. Waste of resources

Creating new entries in the blockchain (“mining”) currently requires, for the Bitcoin network alone, as much energy as Slovenia uses, and it is estimated that by the end of 2020 it will reach the energy consumption of Denmark. The cheapest (and therefore most profitable) mining servers are currently located in China, where old coal-fired power stations can still be used for this purpose.

4. Pure speculation

Currencies always have an internal and an external value. While the internal value denotes purchasing power within the currency area, the external value is measured by an exchange rate. As long as bitcoins and other cryptocurrencies are not yet accepted in supermarkets, private users are forced to exchange them into euros or other currencies, and thus to accept unfavourable exchange rates – whose exorbitant fluctuations are precisely what makes them attractive to speculators – and to realise losses.

Conclusion

At the moment, cryptocurrencies are boosting the business models of PC hardware manufacturers (for mining servers) and of energy suppliers. The expectations placed in alternative means of payment, on the other hand, have been disappointed in every respect. Perhaps only the switch from a means of exchange to a means of cooperation such as information money will make a lasting positive change possible here.

WEBSITE ON INFORMATION MONEY (German)

In the field of economics and finance, GAIA pursues the same goal as I do. So in December 2017 we decided to use GAIA as an information platform and to contribute a series of articles. I look forward to interacting actively with readers and interested people through GAIA and its network.