By Alex Badila
The technology of blockchain continues to gain in popularity. It’s been advertised as disruptive, even revolutionary. Proponents believe it will change the world economy for the better, making it a more fair and equitable place. From the rooftops they shout, “Decentralization! Immutability!”
But is the hype all it’s cracked up to be? Is this a fad destined to fizzle? Or, even worse, is the blockchain push just a smokescreen for something much more sinister?
This article tries to answer these questions and more. But to truly understand the impact of blockchain and cryptocurrency, we must first understand their technological nature. Only after that, can we judge whether they’re worth pursuing. I argue they’re not.
Because of this, this article is broken down into three parts: the first gets you up to speed on the technical background, the second addresses the criticisms of this technology, and the third mentions what we can do about it.
Part I – Technical Background
What is a Blockchain?
Blockchain technology allows for data to be stored in a decentralized manner. Normally, a database stores all its information on a centralized server. A blockchain, in contrast, stores a copy of all its information on different nodes, a fancy word for computers. Therefore, there is no real center of operations that’s in charge of everything. (1)
Data is stored on a blockchain in chunks called blocks. Each block is connected to its previous block through a cryptographic hash (more on this later), and every new block is appended to the end of the blockchain. (1)
It’s important to note that each block is immutable, meaning that, once appended to the blockchain, the data cannot be changed. To make sure this is the case, each block gets a cryptographic hash. A hash takes some information (for example, the location of the block in the chain and the data inside it) and transforms it into a string of numbers and letters. The main property of this hash is that if you change even a small part of the information, it creates a completely different hash. This means that everybody on the network can see if a certain block has been tampered with. Not only that, but each block contains the hash of the block before it to connect them together, so if the hash changes on any block, the connection is broken. This makes it practically impossible to modify the blockchain. (1)
Since it’s decentralized, the blockchain needs a certain protocol to figure out if a new block added is legitimate – there is no central authority or organization to vet this. The most popular method, used for Bitcoin and Ethereum, is Proof of Work (PoW). This is how it works – the block in a blockchain also includes a number called a nonce. This is what each node that wants to add the new block to the blockchain is racing to guess. To check if it’s correct, the nonce is taken with all the other information in the block and put through the hashing algorithm. Once the hash is created, the program then checks to see if the hash falls within a certain small range. The range is picked in such a way that it is highly improbable for a randomly guesses hash to fall into it. It’s important to note that the hash is still a number, although in hexadecimal format, so it also contains some letters. This hash is very hard to get, but very easy to verify, since hashing the information is relatively trivial and instantaneous. This process of PoW is called “mining”. (1)
What is Cryptocurrency?
Now what kind of data can you store in each block? Anything you want, theoretically. The most common data stored is financial transactions made between users. This is the basis for cryptocurrencies like Bitcoin. The financial transactions themselves are made in the same cryptocurrency whose blocks are used to store them. For example, Bitcoin blocks only include transactions made in Bitcoin. Mining the blocks gives the miners some cryptocurrency when successful to incentivize this process. A cryptocurrency can be used just like regular currency, although it has no physical basis for its existence, meaning that its value in actual currency is highly volatile. (1)
What are Smart Contracts?
Computer code that runs under certain conditions can also be deposited on a blockchain. These are called smart contracts. (2)
What are NFTs?
Ethereum, a popular blockchain, allows for smart contracts, which are used to build the cryptocurrency Ether on top of it. But the Ethereum blockchain allows users to build their own smart contracts over it, as well. In this way, anyone can create their own cryptocurrency based in Ethereum. (2)
Cryptocurrency is also a type of crypto-token. Cryptocurrency itself is “fungible”- meaning that each crypto-token is not unique – you only care about how much you have, just like regular currency. (2)
Enter non-fungible tokens (NFTs)! Each token is unique, so it matters which one you have. An NFT links to and identifies an individual object. For example, an NFT can contain a web address pointing to some digital art, which is the most popular usage. An NFT token can be sold and traded. It’s important to note, though, that owning an NFT does not mean you own the actual item. It’s like a Certificate of Authenticity for a digital product. (3)
What are DAOs?
A decentralized autonomous organization (DAO) is an organization run by smart contracts. Imagine a company where all the pesky managerial work is replaced by computer programs. That is what a DAO essentially is. (2)
Part II – The Criticisms
The Environmental Impact
Blockchain technology is terrible for the environment. Proof of Work (PoW), which, as mentioned earlier, is the most popular consensus protocol for blockchain, is inefficient by design, and therefore requires a lot of computational power. Ethereum currently uses as much electricity for PoW as the Netherlands. Blockchain miners actually purchase and fire up decommissioned coal plants to fuel their efforts. This will only exacerbate the effects of climate change. This reason alone should be enough for us to stop using blockchain completely. (2)
They are Inefficient and Slow
But wait, there’s more! The consensus algorithm is not only hastening climate collapse, but it’s also incredibly slow. Bitcoin can currently do 4.5 transactions per second and Ethereum can do 30. As a point of comparison, the VISA network used to process credit cards can do up to 24,000 transactions per second, an upper limit it is nowhere close to reaching. The low transaction rate of these cryptocurrencies works for now, because there is only a small group of users, but it cannot scale. They are just too inefficient to run even a small portion of the transactions being made in the world, not to mention all of them. (2)
NFTs are Used to Scam Artists
Let’s get back to NFTs. You’re probably wondering, just like me, “What does owning an NFT actually give me?” That’s a very good question! The answer is: the key to a crypto-token. That’s it! As stated before, you don’t own the item it’s pointing to, and therefore have no rights over that object, such as copyright or usage rights. (3)
You’re probably now wondering, “So what is the point of an NFT, anyway?” Another great question! You’re on a roll! In practice, the answer is conning artists out of their hard-earned money. Artists pay these crypto grifters money to “mint” their artwork as an NFT and then, that’s it! The only way an artist makes any money, let alone recoups their costs, is by selling this useless asset to someone else. By exploiting struggling artists, especially those that produce digital art, early adopters of NFTs benefit from a get-rich-quick scheme while most investors lose money. (3)
They Don’t Do What They Claim to Do
Let’s explore in more detail the claims of decentralization and immutability that frequently get touted by blockchain and crypto supporters. Apparently, these features will democratize the world economy! In theory, the blockchain technology is decentralized and immutable. In practice? Not so much.
For starters, even though the data storage is decentralized, blockchain usage is actually very centralized. To exchange currencies, users must use services controlled by centralized organizations such as Binance and Coinbase. OpenSea, another private and centralized exchange, controls 95% of the NFT market share as of late 2021. Decentralization of data storage is a gimmick used to pump up the perceived value of crypto-tokens controlled by a handful of wealthy people. If you thought wealth inequality was bad enough already, fewer people own a greater percentage of Bitcoin than traditional forms of wealth. (4)
Now let’s take a look at immutability, which means that blocks cannot be changed when added to a blockchain. Therefore, all transactions are final, and the only way to undo a transaction is to make another transaction of the same amount that goes the other way. Except that, in special cases, they can be changed through what’s called a “hard fork”. This happened with the first DAO in 2016, when a hacker exploited a vulnerability in the code and ended up stealing 3.6 million Ether ($50 million back then) of the entire project’s 11.5 million Ether ($160 million) (4). This “hard fork” was done to undo the money stolen by the hacker. However, this caused a split in the Ethereum cryptocurrency, which “hard forks” usually do, because not everyone agreed with this decision. This split created the cryptocurrency Ethereum Classic, which let the hacker keep the stolen assets. When the price of Ethereum skyrocketed in 2017 from $12 to $341.19 a token, Ethereum Classic increased only to $18.71 (5). A lot of investors lost a lot of money because of this.
Even If They Did, It Would Still Suck
The claim that blockchain technology allows for decentralized and immutable currency or contracts or tokens is bogus, but even if it wasn’t, how useful would it really be? The answer is not much. Decentralization does not equal fairness and equality, no matter how many people shout it from the rooftops. Blockchain technology started being used in response to the 2008 financial crisis and banks being “too big to fail.” It posits a solution for this by taking away the centralization, but that does not actually solve the problem, given that this system has no way to stop this centralization and corruption from happening again. (2)
Also, immutability means that fraudulent transactions stay in place, and funds cannot be returned to their rightful owners. Even if someone steals your NFT, the best you can do is badger OpenSea (which is, again, a centralized authority) to delist it and therefore make it significantly harder for the thief to make a profit. You still don’t get your valuable NFT back. It’s lost forever. (4)
It’s All a Scam, Actually
This was mentioned before, but it’s important stress again – the whole cryptoasset market works just like a pyramid scheme. You first get suckered into buying crypto off of someone, and then, to actually cash in the money if its value rises, you have to find another sucker to pay you for your cryptoasset. Your entire business model is selling smoke to a “bigger fool”. This will not solve social problems like income inequality. It will actually exacerbate them, much like how traditional lotteries serve as a “tax on the poor” desperate for a better life. (2)
DAOs are a Dystopian Nightmare
The instant I learned about DAOs, a chill ran up my spine. People actually think this is a good idea? Who will be held accountable when something fails? And yes, it will fail, because, despite the whole “code is law” ethic around DAOs, there is a simple misconception that these people do not see: the code is never perfect. Humans write code, and humans are not perfect. The code will fail, as it did in the example with the first DAO, mentioned earlier. So how do you keep a piece of code accountable? Are we just going to be slaves to computer programs now? Have none of these people read a single cyberpunk book? Hell, maybe they did and they missed the point.
Part III – What Can Be Done
What is Being Done
Honestly? Not much. The closest thing I’ve been able to find to an anti-blockchain movement is the subreddit Buttcoin (yes, you read that right!), where people mock and poke fun at blockchain and cryptocurrency (5). No organizing a movement, no direct action. Just memes about how cringe crypto is.
What We Can Do
Oh, we can do so much more than this! As socialists, we’re all about organizing around the needs of the majority from the bottom up, and the appetite is there. We just need to organize it! Take it to the streets! Demand that companies stop investing in and using blockchain technology! Pressure the governments of the world to ban the use of this technology! Spread awareness to everyone we meet that this is a bad idea – not only will blockchain technology further income inequality, but it will also destroy our planet! Organize around demands that actually address the root of wealth inequality in society. Demand the nationalization and democratization of big banks. Financial capitalism cannot be confronted by a technology based on speculation. The issues of society are not one of resource scarcity but of resource hoarding. Now is the time for action!
- What Is a Blockchain?; Adam Hayes; Feb. 16, 2022; https://www.investopedia.com/terms/b/blockchain.asp
- The Third Web, Version 1.1; tante; Dec. 29, 2021; https://tante.cc/2021/12/17/the-third-web/
- NFTs: crypto grifters try to scam artists, again; David Gerard; Mar. 11, 2021; https://davidgerard.co.uk/blockchain/2021/03/11/nfts-crypto-grifters-try-to-scam-artists-again/
- Blockchain-based systems are not what they say they are; Molly White; Jan. 9, 2022; https://blog.mollywhite.net/blockchains-are-not-what-they-say/
- The Ether Thief; Matthew Leising; Jun. 13, 2017; https://www.bloomberg.com/features/2017-the-ether-thief/
- Inside The Reddit Forum That Wants To See Bitcoin Die; Abram Brown; Jun. 26, 2021; https://www.forbes.com/sites/abrambrown/2021/06/26/reddit-cryptocurrency-bitcoin-social-media/?sh=5095bdb3621f