“Don’t get me wrong, blockchain is cool tech,” Lito tells me, “but it’s not really good for anything.” Lito had read my recent article about how I was motivated to learn about the blockchain, and direct messaged me to provide a different perspective.
We met at Caffe Vita on Capitol Hill in Seattle, and Lito slid a notebook across the table to me. “This is my proposed agenda.” Lito’s a software engineer, an econ major, and a friend, and is interested in the blockchain from a perspective of economic and cryptographic history.
He first explained some of the history of the blockchain: how many of the ideas are decades old, starting with the development of the cryptographic hash. Blockchain is a system that allows anyone to track what transactions have happened over time, and to verify the identity of the people who carried out that transaction. This makes it useful for just one purpose: liquid currency where everyone needs to be anonymous, and without a single verifying authority. Take away any of these constraints – say, by being OK with having a central bank, or by not needing to your identity hidden – in that case, says Lito, there are simpler cryptographic solutions that achieve the same purpose.
Lito emphasizes that some good uses of money are not always legal, and so would be good uses for this system. Sending money to whistleblowers, for instance, or to family in countries that are under embargo by the country you live in.
But there are problems with using blockchain even for currency, says Lito. The first is energy. The amount of energy spent on verifying transactions on the blockchain is massive. Currently, Bitcoin – just one implementation of a currency based on a blockchain – is using more energy than Nigeria, about 30 terawatt hours per year, and increasing every month. The amount of computers in existence that exert their processing power on verifying the blockchain totals to a tremendous amount of waste. Furthermore, cryptocurrencies are slow to verify a transaction, meaning that it might take some time for a payment to go through. Right now, Bitcoin can verify about seven transactions per second, while on average the Visa network processes 2,000 transactions in a second.
Talking about currencies on the blockchain led Lito to his next topic – financial scams in cryptocurrency. Cryptocurrency uses blockchain to function so that people/computers can verify the history of their spending. However, cryptocurrencies are unregulated securities, which means that it is not yet illegal (and also easy) to commit fraud.
Lito shows me a list of the kinds of schemes, cons, and economic mistakes people have committed over the course of history, and tells me that, without a doubt, these things are all occurring in cryptocurrency. Getting caught in classic frauds like painting the tape, front-running, and Ponzi schemes is a well-known risk of using cryptocurrencies. And like any online asset, cryptocurrencies are commonly used for laundering money. With stocks, options, and debt, we or the SEC can file lawsuits against people who scam us. Since cryptocurrencies aren’t yet regulated, though, we have nowhere to go if we’re taken advantage of.
So, what does this mean for us? “The unfortunate truth of the matter is that companies can increase the value of their stock by 400% just by including the word ‘blockchain’ in their company name” says Lito. I laugh and tell him that’s part of the reason I got into blockchain as well, to increase my own credibility and marketability. We share an uncomfortable laugh. When I ask him if he is the only person thinking like this, he says no. “I would say that opinions on blockchain are polarized. There are a lot of people who think that blockchain is an important step in banking, and have put a lot of money in to that bet.”
We discussed how the incentive of money in cryptocurrency can lead to harassment, but in the end, Lito was fine being quoted on the subject. “Let’s talk about something else now,” he says, and we opened our notebooks and moved on to other matters.