Why 2017 Will Prove 'Blockchain' Was a Bad Idea

Despite the hype around enterprise blockchain technologies, achievements in the bitcoin community have been greater, argues Ferdinando Ametrano.

AccessTimeIconJan 4, 2017 at 3:00 p.m. UTC
Updated Dec 11, 2022 at 7:27 p.m. UTC
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Ferdinando Ametrano teaches Bitcoin and Blockchain Technologies at Politecnico di Milano and Milano Bicocca University. He was chairman of Scaling Bitcoin 2016 and is also former Head of Blockchain and Virtual Currencies at Intesa Sanpaolo bank.

In this CoinDesk 2016 in Review special feature, Ametrano argues that, despite the hype around enterprise blockchain technologies, achievements in the bitcoin community have been greater.


Another year goes by, another intense chapter in the history of the bitcoin and blockchain ecosystem.

There has been no shortage of folklore and drama: 2016 started with the "whiny ragequit" of Bitcoin Core developer Mike Hearn, who shortly after joining banking consortium R3CEV declared bitcoin a failure and sold all his coins.

It's worth noting the price of bitcoin has now ended 2016 near a three-year high.

Elsewhere, the con artist Craig Wright claimed to be Satoshi Nakamoto, providing laughable cryptographic proofs to bamboozle and discredit reputable people. The unmissable yearly exchange heist this time hit Bitfinex, its $66m theft becoming notable also for the lengths it went to to avoid bankruptcy.

Major consortia competed for the membership of financial institutions and technological players, with Hyperledger beating R3 100 to 70 – numbers implausible for any kind of sensible action plan but representative of the overblown blockchain hype and the widespread fear of missing out.

People have been advocating blockchain as a magic wand to solve many global problems (like securing nuclear weapons and managing the power grid); I have been compelled to humbly add that its potential at scrambling eggs should not be underestimated.

In with DLT

Actually, as knowledgeable people are fully aware, blockchain has not been really cool in 2016. The 2014 champion, bitcoin was dethroned by blockchain in 2015, but this year the debate has crowned distributed ledger technology (DLT) as the relevant topic.

Instead of pondering why blockchain without bitcoin (or another native token) made no sense (and admitting that blockchain was just abused as a snake-oil marketing buzzword), many of the projects originally touted to "bring blockchain to finance" flippantly shifted to DLT.

Nobody has really figured out what this DLT chimera is about or which problem it should solve. (Yet, we have been told it could reduce banks' infrastructural costs by $20bn). Even the European Securities Market Authorities (ESMA) wonders about its applicability.

The ESMA consultation paper issued in June posed many sensible specific questions: unfortunately most of the answers received were generic rhetoric exercises. Adding insult to injury, even when it comes to derivatives trading and clearing (where ESMA is confident DLT cannot be applied), unfunded claims about interest rate swaps as smart contracts on DLT obfuscate the debate.

Last but not least, no DLT proposal has really delved into how to implement cash-on-the-ledger for effective delivery vs payment or, even more crucially, how to reach decentralized consensus.

Bitcoin and blockchain is more a cultural paradigm shift than just a technology. It is all about decentralization, so the attempt of intermediaries to repurpose it appears quite ludicrous.

As pointed out by Mainelli and Milne:

"Current interest in mutual distributed ledgers has established significant momentum, but there is a danger of building unrealistic expectations [...] Understanding of the technology lags well behind the hype [...] ‘Blockchain’ technology seems to promise major change for capital markets and other financial services, but few can say exactly how or why."

Given that bitcoin and blockchain is at the crossroads of game theory, cryptography, data networking, and monetary theory, a proper understanding of the subject is in fact quite rare.

One can consider the blockchain as the auditable immutable log of database updates: it can be used to reach the current database consensus state starting from an empty state (the UTXO database in the bitcoin case).

But how to make this log at least tamper-evident in a distributed network has often been neglected, and sometimes stultified, as with the proposal to make the blockchain rewritable. Decentralized consensus seems so far very hard to reach without the economic incentives provided by a blockchain native digital asset like bitcoin.

Partial solutions have been proposed in some special configurations of DLT – eg: by Digital Asset for the Australian Stock Exchange post-trade system.

Here a shared ledger registering the log of (the hash values of) all trades is generated, updated and cryptographically signed by a central counterparty in a distributed, but by no means decentralized, environment. The notary service of the central counterparty can hardly be generalized to a decentralized framework, unless ironically resorting to the bitcoin blockchain (the most secure one, since the effort and cost for its manipulation is prohibitive) as notary.

All hail notarization

We are back now to the most notable application of blockchain beyond bitcoin: timestamping, anchoring and notarization.

A generic data set (a file, a database, the status of a transaction network) can be hashed to produce a short unique identifier. Such a digital fingerprint can be associated to a bitcoin transaction and hence registered on the blockchain. The blockchain immutability then provides robust non-repudiable timestamping that can always prove, without doubt, the existence of that data set in that specific status at that precise moment in time.

This generic processhttps://eternitywall.it/notarize is even undergoing some standardization to achieve third-party auditable verification. This is what could be called databases on crypto-steroids: in the disruptive bitcoin nuclear explosion, applied cryptography will be the radioactive fallout driving database evolution. Or even better "what jewelry is for gold, timestamping and notarization could be for bitcoin: not essential, but effective at leveraging its beauty".

We are touching the crucial point here: How can so many miss the point about the importance of bitcoin as digital gold?

For the first time, we have a scarce digital asset which can be transmitted, but not duplicated (ie: spent, not double-spent): this is the groundbreaking achievement by Satoshi Nakamoto. Bitcoin could prove to be digital gold: as relevant as physical gold has been in human history and in the development of trade, money and finance.

It has already realized a resilient permissionless transaction network and has appreciated more than 900x in less than six years.

How can people possibly care more for the sub-par append-only sequential data structure known as blockchain instead?

To the rescue

This year, central bankers at least have been better at recognizing bitcoin's relevance.

Mario Draghi, president of the European Central Bank (ECB), wrotehttps://www.ecb.europa.eu/ecb/legal/pdf/en_con_2016_49_f_sign.pdf to the EU Parliament:
"The reliance of economic actors on virtual currency units could in principle affect the central banks' control the supply of money with potential risks to price stability [...] Thus [... EU legislative bodies....] should not seek to promote a wider use of virtual currencies."

Sheng Songcheng, member of the National People's Congress and Director of the Investigation and Statistics Department of the People’s Bank of China, recently issued similar remarks.

Songcheng said:

"With the expansion of the use of private digital money, sovereign money use will gradually decline, which will reduce the monetary authority of the sovereign currency control. At the same time, the influence of monetary policy control on the supply and circulation of fiat money will also decline and become unstable, which will weaken the effectiveness of monetary policy and distort the transmission mechanism."

It seems like they are scared by the likelihood of the scenario where private money competes with fiat money; the dream illustrated by Nobel laureate Friedrich von Hayek in "Denationalisation of Money" finally becomes true, breaking the millenary government monopoly of money.

Through market competition, better money will eventually prevail, but the Emperor is mad at the idea of money without his stamp of approval.

Bitcoin's brilliance

In 2016, private cryptocurrencies have been vying for the top spot, with ethereum establishing itself as the most plausible bitcoin alternative.

This Hayekian scenario is to be loved, and indeed a lot has been learned by this fierce competition. Yet, I believe the only conclusion is that bitcoin has come out on top.

The frequent ethereum network outages (provoked by DDoS attacks) have proved how brilliant the bitcoin development team has been in managing its network for eight years without similar problems.

Further, the disagreement between alternative ethereum implementations has forked the ethereum blockchain, proving how essential it is for a cryptocurrency to have just one reference implementation. The DAO hack proved how Turing completeness is excessive hubris and how wise it was for bitcoin to be conservative when it comes to its scripting language.

In my view, the subsequent split between ethereum (ETH) and ethereum classic (ETC) weakened ETH and proved how dangerous it is to have a contentious hard fork, and how healthy it is for bitcoin development not to be driven by any “benevolent dictator”.

The ethereum failures have contributed in some fashion to lessen the bitcoin debate about a hard fork for bigger block size.

While still supported by a significant vocal minority, the issue is not as rampant as it was at the end of 2015. Especially now that Segregated Witness (SegWit, the soft-fork aimed at fixing the malleability problem and providing many other improvements) could be activated, allowing also for an effective block size increase.

is crucial for many possible future developments and its adoption would mark a turning point in the bitcoin history.

Nonetheless, even if the bigger-block minority will stop it, some celebration should be in order because bitcoin is proving once again how resilient it is to manipulation attempts, even one advocated by a core development team with a brilliant track record.

But... fungibility

That's not to say bitcoin doesn't have big issues ahead.

As noted during the 2016 developer conference in Milan, this year has been mostly about two issues: the off-chain scaling approach proposed by Lightning Network and the fungibility and privacy issue.

avoids the extreme security of having all nodes validating all transactions: it secures off-chain transactions with a cryptographic smart contract that relies on the main blockchain for dispute resolution.

Fungibility is the requirement for all bitcoin to be equal: an atom of physical gold is indistinguishable from any other gold atom, whatever its history. Unfortunately this is not really true for bitcoin, allowing for bitcoin of different value and legitimacy depending on their pedigree.

While often underappreciated, this is probably the most relevant limit in the current bitcoin implementation, but it can be mitigated through mixing techniques (in my view Joinmarket and TumbleBit are promising approaches that might lead to effective improvement).

It is evident here that the obfuscation needed for transaction privacy would ensure fungibility and vice versa.

It is again the Hayekian scenario of competing currencies, this time the rise of Monero and ZCash (and of the MimbleWimble idea), that has proven how relevant the demand for fungibility and privacy is. Indeed, how crucial the privacy debate has been represented by the FBI and Apple's encryption dispute, the Yahoo mass surveillance incident, the UK Investigatory Powers Act, the IRS's Coinbase data request, etc.

This mass surveillance approach is really despicable: on one hand, it is ineffective because criminals will be able to patch cryptographic backdoors adopting a second-layer robust encryption; on the other hand, it will put at risks everybody’s privacy, allowing criminals to use the backdoor to spy on the honest people.

Bitcoin will now have to prove its ability to grant financial privacy.

Last straw

Yet, all in all, 2017 might be the final year in the pump-and-dump scheme of blockchain-without-bitcoin , the last-ditch effort to prove the marginal utility of databases on crypto-steroids.

Probably some smart contract hype will clutter the debate, thanks to the smartest ones among the fools trying to outsmart even the smart contract inventor.

But most of this fuss will finally leave center stage, allowing for the 2018 return of (a hopefully more fungible) bitcoin.

Digital gold effective in the defence of privacy and at freeing money from state and central banks monopoly, bitcoin might bootstrap new monetary systems: it might be surpassed by more advanced forms of money, as happened to physical gold, without becoming obsolete. And it will ignite new economic and trade systems: for the first time really global, borderless, and inclusive.

In the meantime, please fasten your seatbelt for another rollercoaster of a year. To the moon!

Missing the target image via Shutterstock


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