Introduction
In
the industrialized world, as modern democracies, we have come to
appreciate the need for a minimum amount of basic government,
providing for national defense, law and order.
Many
people also recognize the limits of government, as government should
not take over functions that people and associations can do by
themselves.
For
example, the libertarian author Frederic Bastiat wrote in “The
Law”:
“The law is the organization of
the natural right to lawful defense. It is the substitution of a
common force for individual forces. And this common force is to do
only what the individual forces have a natural and lawful right to
do: to protect persons, liberties and properties; to maintain the
right of each, and to cause justice to reign over us all.”
Most
democratic nations however, have leaned towards increasing
involuntary taxation to fund more centralized economic and social
programs.
The
history of almost every nation in the world shows that the tendency
towards higher centralization has lead to despotic governments and
nasty consequences.
More
government centralization and more programs for the common good draw
more human resources from those enterprises that generate economic
activity.
More
people become dependent on government, either directly employed, or
working on government contracts, or working on non-competitive
government projects, or not working
at all. This reduces the nation’s GDP. As a consequence, government revenues are reduced and the government’s ability to maintain social programs is curtailed.
at all. This reduces the nation’s GDP. As a consequence, government revenues are reduced and the government’s ability to maintain social programs is curtailed.
People
who understand basic economic laws, conclude that in a democracy we
can chose options ranging between the following extremes:
-
a limited government, with limited social programs, in a thriving economy, and
-
a large government, without enough revenue for social programs, in a stagnating economy.
The
trend, in industrialized democracies, has been towards large
governments borrowing from future generations and overtaxing
productive young people, promising them future benefits and pensions
paid with future fiat money.
In
addition, governments control the creation of new currency, generated
to counteract currency demand. This depreciates future fiat money.
Finally,
governments control the distribution of new currency through central
banks, since they do not have a method for distributing shares of new
currency directly to their citizens.
The
reaction to this trend, especially by some young entrepreneurs, has
been to escape to cyberspace by espousing innovative technologies
that allow them to participate in the profits derived from currency
demand, and possibly hide some of their economic activity from
government. This course of action though raises a number of ethical
questions.
Permissioned
or not?
The
new distributed ledger technology, or blockchain-based
crypto-networks, are classifiable in many ways. A previously
published technical classification is available at:
http://gorbyte.com/documents/Distributed%20Ledger%20Evolution.pdf
http://gorbyte.com/documents/Distributed%20Ledger%20Evolution.pdf
On
the one side, those financial institutions that have always promoted
“know your customer” policies are researching and developing
permissioned crypto-networks, where trusted intermediaries are
responsible for the verification and distribution of blocks for the
blockchain.
These
institutions are joined by large corporations that have traditionally
sold proprietary software and services.
On
the other side, there are many crypto-networks and projects under
development that are unpermissioned. These do not rely on trusted
authorities to verify end-to-end transactions, but rely on
cryptographic functions. Their network security is proved by opening
their source code to public scrutiny. A more dangerous approach,
perhaps, but tested on the line of fire.
Among
these unpermissioned crypto-networks are Bitcoin, Ethereum, and many
of Bitcoin’s modified clones.
Privacy,
anonymity and fungibility
The
concern for privacy, especially in light of the many recent leaks and
attacks to corporations, institutions and government, has grown
exponentially in public perception.
Most
people are aware of the danger of publicizing their ID or any
personal information whatsoever.
Unpermissioned
crypto-networks are specifically providing anonymity, while providing
the ability for peer-to-peer movement of money and contract
execution.
However,
anonymity does not hide transaction records. In most current
crypto-networks, transactions can openly be scrutinized and traced.
This can be considered as a positive feature, if some sort of
investigation needs to be done, for example after an attacker may
have hacked a contract or stolen money.
Other
researchers and developers see this openness as a vulnerability and
are actively working towards untraceable crypto-networks. They would
like crypto-network transactions not to provide any clue with regard
to the user (e.g.: Identification, location, address) or its
transaction (e.g.: transaction identification, transaction amount).
They
would like crypto-networks not only to provide user privacy (e.g.:
Identification, location, address), but also to provide no clue with
regard to its transactions (e.g.: transaction identification,
transaction amount).
Some
Bitcoin researchers are working to provide fungible currency. That
is, in their opinion, it does not matter where the currency comes
from, it should be treated equally.
More
recently, zero-knowledge techniques have been proposed. These are
aimed at completely hiding any indication of financial transaction
addresses and amounts. So far they have been implemented by the ZCASH
and ZenCash, and planned for roll-out by Ethereum.
Are
we going too far, simply because we can?
Can
we strike a balance between anonymity and traceable transactions?
I
can foresee two potential issues with making crypto-network
transactions absolutely untraceable. The first is an ethical problem,
the second is a more technical issue.
Possible
Ethical Problem
Because
technology often precedes the law, we need to ethically self-evaluate
any new technology. In particular, crypto-networks should not
encourage money laundering or any other criminal activity, and should
help law enforcement, as much as practically possible, to prosecute
individual cases of illegal activity.
There
is a difference between giving the government a portal for bypassing
the security of an iPhone (recent Apple case) and allowing everyone,
including the police, to inspect a public blockchain, so that
criminal behavior can be forensically analyzed.
As
a society, by majority opinion, we have agreed to pool our resources
for policing, both in our everyday life and in corporate
environments. We have agreed to prosecute those people that bypass
the laws of free market to make fast money, whether by stealing
property, insider trading, distributing dangerous narcotics, Ponzi
schemes, human trafficking, forced labor, etc.
In
a similar way, mature crypto-networks should conform to the will of
the majority in criminal matters as expressed by the laws of most
civilized nations.
In
a typical scenario, if an attacker stole currency, should anyone do
something about it, or should the thieves allowed to enjoy the fruits
of their illegal action? Recently some people criticized the Ethereum
Foundation decision to hard fork the network to avoid the damage
incurred when a contract involving a large sum of money was hacked.
However the majority of people agreed with their decision.
Now
the lead Ethereum developers are planning to change its encryption
mechanism to use a zero knowledge security protocol for handling
transactions. With current encryption techniques it is already
difficult to identify an attacker who has been able to steal
currency. With zero-knowledge encryption techniques, law enforcement
will be even more difficult. This does not seem to be a development
consistent with Ethereum’s recent decision to strongly react to
currency theft.
All
unpermissioned crypto-networks provide privacy for individuals.
However, within this class, we see some networks planning to make
their transactions untraceable while others may continue to maintain
their transactions visible to third parties. Visibility of
transactions allows law enforcement forensic scrutiny and is a
deterrent to criminal activities.
Why
would a network specifically hide financial transaction destination
address and amounts? Is this not an indication that the network may
tolerate money laundering and illegal activities?
Once
the law catches up with technology, what do you think the majority of
people and governments will decide?
Although
the law cannot stop a blockchain, it can make life difficult for its
users when they want to exchange their digital currency.
A More
Technical Issue
In
a previous article on user
addressability
in
crypto-networks
(“Where
are the Gapps in Bitcoin and Ethereum?”) we
have shown how new generation crypto-networks
will provide some form of user, device or node addressability for
selecting specific peers for distributed functions.
This
can be done while maintaining privacy and without requiring user
identification. However, addresses will need to be unique and
readable by anyone.
So,
if addresses need to be known for Contract applications (Dapps) and
for general distributed applications (Gapps), why would a
crypto-network hide the addresses of financial transactions?
One
argument is that a competitor could acquire information by analyzing
recurring transactions, for example between an investment firm and a
target corporation. Such information could reveal the plans of the
investment firm before public market indicators can be obtained.
This is not a
privacy argument, but a fair competition argument. Is there an
advantage in limiting competition?
Assuming the
answer is yes, in some cases, can these institutions not protect
themselves already by using a new address for every transaction? Or
using methods (such as TOR) to hide their transactions’ provenance?
Furthermore, if
an institution chooses to use a zero-knowledge network, it may create
suspicion in the eyes of the law. This is one of the reasons why
financial institutions stay away from public unpermissioned networks.
It seems to me that zero knowledge technology goes even further away
from addressing their requirements for public trust.
With
zero-knowledge technology a person may unintentionally engage in a
transaction with a criminal, or scammer, or accept laundered money.
He may not be able to avoid the consequences of his unintentional
action, such as lawyers’ fees and court appearances.
Zero-knowledge
technology is an interesting research development. However, its
practical implementations appear to cater to individuals who may want
to evade the law more than facilitating free exchange and business
interaction.
Unpermissioned
crypto-networks have made decisive progress in removing possible
interference from intermediaries and in maintaining users’ privacy.
New-generation
crypto-networks will need to advance in other areas that need to be
improved, such as providing addressability for general distributed
applications, efficiency in data replication, network scalability,
network governance and stable currency values.
Crypto economics: time to remove intermediaries
ReplyDeleteThere are mediators in any economic relations. There are so many of them that even laws treat mediation as a separate type of activity.
Thus, the Civil Code identifies five types of intermediaries:
• Commercial representatives: they receive instructions from entrepreneurs and fulfill them;
• Commission agents: try to sell goods produced by the manufacturer;
• Attorneys receive orders from entrepreneurs to sell goods and try to promote sales as much as possible;
• Agents: conclude contracts for sale of goods on behalf of entrepreneurs;
• Distributors: conduct wholesale trade in goods which are delivered to them by the producer.
Do we need the above mediators? Undoubtedly, in some cases they perform useful functions. For example, if the manufacturer is experiencing difficulties with sale of goods or it is difficult to deal with the nuances of the legislation, it chooses a good intermediary and pays it for high-quality services.
There is nothing wrong with the above example. However, the problem is that this does not always happen. Most often, intermediaries do not do anything, but want to get a percent (and rather big) of each transaction.
Apparently, what’s wrong with that? Many believe that if producers need intermediaries and are willing to pay them, then so be it. However, such an opinion is fundamentally wrong.
After all, the manufacturer lays down the cost of intermediary services in the value of the goods. Because of this, product prices are constantly rising, and buyers spend more and more money. In the short term, it is only consumers that suffer. But in the long run, economic growth and living standards are declining.
Crypto economy breaks artificial barriers between the producer and the end user of goods. They will be able to interact with each other through platforms that do not obey anyone.
Industrial decentralization is the future. Both buyers of goods and the companies that produce them will benefit from the crypto economy. Ultimately, this will make society healthier and fairer.
Middlemen will disappear from production with the advent of the Yodse platform. It is a unique space where producers and consumers find each other. Yodse assumes only direct interaction between users; there is no place for intermediaries here.
Explorer it! - http://yodse.io