I try in the title of this post to summarize the basic conclusions of a fascinating NYTimes article
by Siobhan Roberts. The article emphasizes the work of Alyussa Blackburn and others that has shown that Bitcoin activity, apart from using exorbitant amounts of electricity in generating its bitcoin token currency, has not in fact produced anonymous transactions, and its user community in fact contains a small elite group that actually wears the crown of being the arbiters of the network. (A more recent article by Yaffe-Bellany
points out that Ethereum, the other major crypto platform, has a similar elite.... posing the same issues as the banks and internet companies that are self-interested gate keepers in the current financial world.)
“...Blackburn developed hacks for the period of time that was of particular interest: from the cryptocurrency’s start to when Bitcoin achieved parity with the U.S. dollar in February 2011, which coincided with the establishment of the Silk Road, a Bitcoin-based black market...Drip-by-drip, information leakage erodes the once-impenetrable blocks, carving out a new landscape of socioeconomic data,” Ms. Blackburn and her collaborators report in their new paper...Aggregating multiple leakages, Ms. Blackburn consolidated many Bitcoin addresses, which might have seemed to represent many miners, into few. She pieced together a catalog of agents and concluded that, in those first two years, 64 key players — some of whom were the community’s “founders,” as the researchers called them — mined most of the Bitcoin that existed at the time.
Although the analysis showed that the big players numbered 64 over two years, at any given moment, according to the researchers’ modeling, the effective size of that population was only five or six. And on many occasions, just one or two people held most of the mining power...As Ms. Blackburn described it, there were very few people “wearing the crown,” functioning as arbiters of the network — “which is not the ethos of decentralized trustless crypto,”...
Once Ms. Blackburn had assembled the catalog of agents, she analyzed the income they had reaped from mining. She found that within a few months of the cryptocurrency’s introduction — and contrary to Bitcoin’s egalitarian promise — a classic distribution of income inequality emerged: A small fraction of the miners held most of the wealth and power. (Mining income demonstrated what is called a Pareto distribution, after Vilfredo Pareto, a 19th-century economist.)
On several occasions, individual miners wielded more than 50 percent of the computational power and, as a result, could have taken over like a tyrant using what’s called a “51 percent attack.” For instance, they could have cheated the system and repeatedly spent the same Bitcoins on different transactions...to add a twist, Ms. Blackburn found that while some miners had the power to execute 51 percent attacks, they repeatedly chose not to. Rather, they acted altruistically — preserving the cryptocurrency’s integrity, even though the decentralization-based fraud-prevention mechanism had been compromised...Although Bitcoin was designed to rely on a decentralized, trustless network of anonymous agents, its early success rested instead on cooperation among a small group of altruistic founders.
For Glen Weyl, an economist at Microsoft Research who was consulted on the research, this finding demonstrates how decentralization played a rhetorical rather than substantive role. “And that rhetorical role was very powerful — it bound together this community, much as other myths have bound together other communities, like nations,” Dr. Weyl said; he and Mr. Lanier wrote about this research for CoinDesk. But the myth and the promise, he said, were in tension with the reality that emerged. “It’s just fascinatingly ironic, and also predictable, repeating the historical patterns it aspires to erase.”
Mr. Lanier called it “decentralization theater.” Cryptocurrencies create an illusion: “‘Now we’re in utopia. Everything’s decentralized. Everybody’s equal.’ There’s this notion of democracy without annoyance.”...But, he said, these systems end up hiding a new elite, which is probably just an old elite in a new arena. And the technology cuts both ways. “Whatever you think you can achieve using new algorithms, or big data, or whatever, can also be used against you,” Mr. Lanier said. “The same algorithms can be used by scientists to interrogate and investigate these castles that are put up by the new elite.”
One moral of the story, Ms. Blackburn said, is simply: “You have to be careful.” There is a limited timeline for encryption, “a horizon beyond which it will no longer be useful. When you are encrypting private data and making it public, you cannot assume that it’ll be private forever.”