Assuming you are a crypto hodler unaffected by the mysterious undoing of the Vancouver-based crypto exchange, it is surely one of those stories that make you feel more alive and plain thankful for not being part of. More so, if like the author of this article you have used extensively in the past. Not a week seems to go by without users of an exchange getting hacked in one way or another. Meanwhile, markets struggle to show any sign of life in the sour aftermath of the global euphoria from 2017.
Without a doubt the facts paint a rather bleak picture of a market that lost over of 80% of its value since it peaked in December 2017. With all this in mind, I thought I’d go back to 101 as to refresh my fundamental understanding of the reasons why I think the and its most popular app aka “crypto currency” still have a great (if somewhat distant) future ahead.
So, why does money have value in the first place? According to the Bank of England: “The reason money works when you pay for things is because people trust in its value. Historically, you could exchange banknotes issued by us for gold. But the link between notes and gold was broken a long time ago, so nowadays it makes more sense to think of money as a kind of IOU (I owe you).” While this very definition is enough material for a Post Doc thesis on it’s own I’d like to focus on its fundamental claim: the presence of trust.
The reason the US Dollar is still the world’s default currency for global trade comes from the trust we share in the institutions backing it. There’s a number of elements at play: a stable, democratic political system, an independent judiciary, a sound monetary policy, robust economy, but also the world’s greatest military at its guard. As the last century’s most notorious dictators (and some unfortunate others) have learned the heard way, standing in its way can be rather dangerous to your health. However, if you play along nicely you can be relatively certain (differences in the degree of certainty between issuers of legal tender are somewhat theoretically captured by the ) that your money is secure and if it is stolen the legal system will do its best to return it to its rightful owners.
Now, for crypto currency to be equally valuable and accepted as a medium of economic exchange there must be a mechanism to emulate this perceived security through immutable code. Let’s face it, for all that has been said about the paradigm-shifting “trust-less” nature of powered Web 3.0, crypto assets have proven to be anything, but trustworthy. Data from Ledger’s CEO, suggest that up to USD 1 Billion worth of crypto assets were lifted from exchanges in 2018 alone. That is triple the amount from 2017. Add the well-known fact that alongside the notorious volatility of this asset class and it is clear to say that we are light years away from having a trustful marketplace that is even comparable to fiat. But, hold on: wasn’t the grand vision to be orders of magnitude better and more advanced than the centuries’ old world of fiat currencies?
So, how can we change the status quo? Is there a miracle cure? I believe there is one obvious lever that no one seems to want to touch, which could indeed enable Web 3.0 to build a better world and unequivocally prove its value in the process: digital enforcement of ownership. The one fundamental characteristic of the that is enabled through its unique record-keeping protocol shared among all nodes in the system is traceability. Consequently, as opposed to the fiat banking system, we can actually locate all stolen crypto funds at the click of a button (assuming timely action before it has been converted into fiat on an exchange). So, why aren’t we using this unique characteristic to trace back the rightful owners of stolen crypto funds, thus eliminating theft all together on Web 3.0? Now, if you are a crypto zealot of the purest form this is probably when you start plotting a cyber attack on my social media accounts, but let me explain.
The most common arguments against it are: 1) The code is the law and since such a forceful return of funds would require rolling back the chain aka “hard forking” it undermines the universal validity of the , thus destroying its value as an immutable 2) Establishing the rightful owner of funds is far too complex a task for any binary code or even virtual governance body to handle and best left to the real-world legal system. 3) Accidents (), hacks and other mishaps must have their consequences to incentivize progress. 4) It goes against the libertarian spirit of crypto currencies and opens doors to censorship.
Moreover, as the now infamous (a widely contested proposal that would potentially enable a process for such cases to be reviewed on ) case has shown a large part of the community is passionately standing against such ideas and their potential implications:
“Making this change will ensure that we continue to revisit requests like this on a regular basis. That will continue to distract us from efforts to improve the technology for everyone. Becoming a project which constantly debates fund restoration EIPs will make a “not much fun” open source project to contribute to, thus deterring new contributors.”
Another user at the time:
“I’m against 867 because accepting/rejecting ERPs ( Recovery Proposals) is a governance issue, and I don’t think devs should be burdened with making those decisions.”
While I understand the logic and agree that developers should not be operating as courts of law I am puzzled as to the community’s disinterest in exploring alternative solutions. This is such a screaming opportunity. After all, a potential solution could be as simple as a contra account layer that would reverse stolen funds to the wallets of their origin without resorting to forking. That way in case a court of law deems a reversal to be unlawful for any reason, such actions could be easily unwound. Such reversals would also stop short of trying to establish a rightful owner of the private key to the in question leaving that instead to the judicial system. This may appear incomplete, but even so it would easily remedy over 90% of theft cases by value. In addition, when exchanges are hacked we are usually in collective agreement about what happened and who is at loss, which could be further independently confirmed by the distributed nodes. Such a protocol could also impose penalty transaction fees on exchanges with a poor security track record and/or lax KYC / AML as to make them less competitive, thus incentivizing due diligence on their part. With such a system in place we might have prevented the QuadrigaCX fallout from ever happening in the first place — latest allegations question whether the exchange ever had actual off-line “cold wallets” and even if it did they clearly never were .
It is clear that the price of ignoring this opportunity far outweighs the theoretical risk of collateral damage related to a potential solution. For crypto currency to challenge fiat as a universal means of exchange of value it has to be a better featured product across the board. The lack of a better security system in my view is a number one impediment to future growth.
Published at Wed, 06 Feb 2019 00:14:32 +0000
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