Attack of the 50 Foot Blockchain Bitcoin, Blockchain, Ethereum and Smart Contracts

Introduction Abstract: A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. – Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, 2008 1 An experimental new Internet-based form of money is created that anyone can generate at home. People build frightening firetrap computers full of video cards, putting out so much heat that one operator is hospitalized with heatstroke and brain damage. Someone known only as “Pirateat40” starts a “high yield investment program.” Just before its collapse as a Ponzi scheme, it holds 7% of all bitcoins at the time. Aggrieved investors eventually manage to convince the authorities not only that these Internet tokens are worth anything, but that they gave them to some guy on an Internet forum calling himself “Pirate” because he said he would double their money. A young physics student starts a revolutionary new marketplace based on the nonaggression principle, immune to State coercion. He ends up ordering hits on people because they might threaten his great experiment, and is jailed for life without parole. A legal cryptographer proposes fully automated contractual systems that run with minimal human interference, so that business and the law will work better and be more trusted. The contracts people actually write are automated Ponzi schemes, though they later progress to unregulated penny stock offerings whose fine print literally states that you are buying nothing of any value. The biggest crowdfunding in history attracts $150 million on the promise that it will embody “the steadfast iron will of unstoppable code.” Upon release it is immediately hacked, and $50 million is stolen. Bitcoin’s good name having been somewhat stained by drugs and criminals, its advocates try to sell the technology to business as “Blockchain.” $1.5 billion of venture capital gets back, so far, zero. The main visible product is consultant hours and press releases. How did we get here? Digital cash, without having to check in with a central authority, is obviously a useful idea. It turned out in practice to be a magnet for enthusiastic amateurs with stars in their eyes and con artists to prey upon them, with outcomes both hilarious and horrifying. Bitcoin and blockchains are not a technology story, but a psychology story: bubble economy thinking and the art of the steal. Despite the creators’ good intentions, the cryptocurrency field is replete with scams and scammers. The technology is used as an excuse to make outlandish near-magical claims. When phrases like “a whole new form of money” or “the old rules don’t apply any more” start going around, people get gullible and the ethically-challenged get creative. You can make money from Bitcoin! But it is vastly more likely that you will be the one that others make their money from. Remember: if it sounds too good to be true, it almost certainly is. In this book, I cover the origins and history of Bitcoin to the present day, with some of the important stories, the other cryptocurrencies it spawned – particularly Ethereum – and smart contracts and the attempts to apply blockchains to business. There’s also a case study on blockchains in the music industry. I go into technical detail where it’s relevant, though what’s more important are the implications. There are also extensive footnotes, with links in the digital edition to the sources for further reading, and a glossary.