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There's a digital fool's gold rush in Carson City

David Colborne
David Colborne
Opinion
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The blockchain industry is a poor government’s idea of a rich technology industry. 

I understand why there’s a bipartisan consensus in Carson City to slap blockchains and digital tokens on any statute that moves. I understand why a parade of Republicans, demonstrating their consistently unflappable fealty to single-subject legislation, decided to inject a measure authorizing the use of blockchain-backed voting systems within the 88 pages of text in AB163, along with whatever else might be in the 105 other sections of the bill (it doesn’t matter — the bill is every bit as likely to become law as this column). 

I also understand why Treasurer Zach Conine introduced SB39, which explicitly authorizes state and local governments to accept digital tokens as a form of payment, even though he himself admits state and local governments are already allowed to accept stablecoins (a type of cryptocurrency which is supposed to remain fixed in value compared to whatever it’s ostensibly backed by) or other digital tokens.

I even understand why Governor Sisolak held a half-hour “Innovation Roundtable” explaining why we need to give Innovation Zones, which may or may not enable a blockchain company to innovatively build 15,000 homes in 75 years (a great and innovative and truly unprecedented pace of housing construction of 200 homes per year) in exchange for giving said company the ability to create its own county, a chance. I disagreed with it a few weeks ago and disagree with it now, but I get it.

Nevada’s economy has struggled to diversify since 1861. First it was overly dependent on mining, then ranching, and now gaming — and the writing’s been on the wall about gaming, especially outside of Las Vegas, for decades. Meanwhile, our neighbors to the west and east, supported in no small part by some early strategic investments from the Department of Defense, developed prosperous tech-focused economies — economies which consistently kept a greater percentage of their residents employed (and paying taxes) than ours since the start of the Great Recession

Naturally, we’d like to be a bit more like our neighbors — and why aren’t we? No, our universities aren’t as cutting edge or world renowned as the University of California, Stanford University, UCLA, or perhaps even the University of Utah (the first four nodes of what would eventually evolve into the internet), but they hold their own. There’s a reason companies like IGT and Scientific Gaming can program slot machines in Nevada — our universities reliably train the workforce who make that possible. Before you scoff, think about what a slot machine functionally is — it’s a video game console mated to an ATM. Computer games usually aren’t known for their airtight security and ATMs usually aren’t known for their interactivity. That Nevada’s programmers have capably put the two together for decades might help explain why the Nevada Gaming Control Board is tasked with auditing our voting machines

On the other hand, somebody has to pay for those slot machines. How’s gaming in Nevada doing again? Oh, right

Which brings us back to the perennial question haunting Nevada’s Legislature each and every biennium — how do we get our state’s economy to stop reminding people of They Might Be GiantsNumber Three every time there’s an economic downturn?

There’s only two songs in me and I just wrote the third

Don’t know where I got the inspiration or how I wrote the words

Spent my whole life just digging up my music’s shallow grave

For the two songs in me and the third one I just made…

Obviously it’s a few decades late to get in on the very beginnings of computer networking. Perhaps there’s another groundbreaking technology on the horizon that Nevadans could specialize in instead — one already making early entrepreneurs rich, like Bill Gates, Steve Jobs, or Jeff Bezos, almost seemingly at random.

What if blockchains are that groundbreaking technology? 

The ingredients are there as long as you don’t look too closely. Blockchains are hosted on computers (always a good start). They also made early adopters rich, seemingly at random. They do… something, though it doesn’t really matter what they do, honestly. Ask most people around in the 1980s what a “personal computer” was, or ask someone around in the 1990s what the “internet” was, and you’d frequently get some shrugs and maybe some regurgitated hype they overhead from a friend of television commercial. Who’s to say blockchains aren’t any different? 

***

Me. I’m who. 

I’m not going to spend 4,500 words explaining what blockchains are again, but I am going to revisit the basic principles of blockchains again, this time starting with what’s in statute. NRS 719.045 defines blockchains as:

1.  “Blockchain” means an electronic record of transactions or other data which is:

(a) Uniformly ordered;

(b) Processed using a decentralized method by which one or more computers or machines verify the recorded transactions or other data;

(c) Redundantly maintained by one or more computers or machines to guarantee the consistency or nonrepudiation of the recorded transactions or other data; and

(d) Validated by the use of cryptography.

2.  The term includes, without limitation, a public blockchain.

Let’s briefly (Yes, briefly! I promise! The editors know where I live!) break that down. 

An electronic record is exactly what it sounds like. What one is has been statutorily defined in NRS 719.090 since 2001 (for reference, the internet tech stock bubble popped in 2000). Put another way, children born when the Legislature finally got around to articulating to the Executive Branch what an email is are old enough to vote and will be old enough to drink in two years. 

Now, keeping data in order (alphabetical, numerical, or otherwise) has been something computers have routinely done for as long as there have been computers. The first spreadsheet software for personal computers, VisiCalc, was released in 1979, which means accountants and bookkeepers have been able to sort information by rows and columns for over 40 years now. Programmers, of course, have been able to sort information on their computers for a bit longer than that. 

Processing information using a decentralized method by which one or more computers or machines verify the recorded transactions of other data is also not new. Transmission Control Protocol (TCP), the networking protocol which delivers this column to your computer or phone, has been around since 1974 and its key feature is data verification. When two computers talk to each other using TCP, they not only verify each packet of information was sent between each other (and resending packets which weren’t successfully sent), they also verify the order of the packets sent so that, when a computer receives information from another computer, it can reassemble the received data as it was originally sent. That’s why you aren’t reading this sentence lkei htis.

Redundantly maintaining data across multiple computers, meanwhile, has also been around for decades. As for cryptography, that’s been around since, oh, roughly 4,000 years, give or take a century. Some of the first computers were built to crack coded messages during World War II. 

So, if the pieces have been around for decades, why weren’t they put together into a blockchain until Bitcoin was launched in 2008? 

Because there were other, better, faster, more efficient, and secure ways to store electronic records than blockchains — and there still are. 

Don’t take my word for it. Look at who got rich off of blockchains and how. Jeffrey Berns and Blockchains, LLC, for example, didn’t get rich by developing clever ways to use Ethereum, a cryptocurrency with smart contract functionality built in (computer security professionals spend years studying how to prevent computers from running arbitrary code, but I digress). They got rich by buying Ethereum early in its lifecycle and selling it for more than they bought it for later in its lifecycle. 

That’s fine. There’s nothing wrong with that. 

But think about gold for a second. Gold has well-defined uses. It’s a great conductor. It doesn’t rust, tarnish or corrode, which is why we use it on space probes. It’s also pretty and decorative. Though it’s impossible to separate the industrial value of gold from the financial value of gold (gold might, perhaps, be cheaper and consequently more common to use industrially if we didn’t keep buying bars of the stuff and storing them in vaults), it has value outside of its traditional role as a store of value.

What is blockchain technology used for other than financial speculation? 

***

It’s not used to make election systems — at least, not election systems election experts actually trust. Microsoft’s ElectionGuard, an open-source election software development kit, doesn’t use blockchain technology at all even though Microsoft will happily sell you a Microsoft-hosted blockchain

Why not? 

Blockchains, by their very nature, are optimized for total transparency — every blockchain host has all of the data contained within the blockchain without exception. That sounds great until you remember that, in the United States, ballots are supposed to be secret — you shouldn’t be able to trace the contents of an individual’s ballot back to the individual. 

Additionally, each and every transaction in a blockchain is supposed to be approved by consensus by every other computer hosting the blockchain. That requires each and every computer to be able to communicate with each other in real time. Applying this principle to voting systems, each and every ballot would have to be approved by every single voting machine hosting a copy of the blockchain. This would both be grossly inefficient (what value is there in a voting machine in Boulder City approving a vote in Indian Springs?) and incredibly insecure since it would grant a malicious actor with control over one election machine real-time access to election results.

That’s why blockchain-based election systems are considered cartoonishly laughable by most people already in the technology industry. They’re the wrong tool for the job.

***

What about stablecoins? 

When you buy something with Bitcoin, Ethereum, or Dogecoin, the value of your cryptocurrency might increase or decrease dramatically over even short periods of time. The idea behind a stablecoin, such as Tether, Basis, or NuBits, is to get around that problem by pegging the value of the cryptocurrency to something specific, like a dollar. This is done by purchasing a predetermined amount of the asset backing the cryptocurrency each time a predetermined amount of cryptocurrency is sold (for example, I might promise to buy one dollar each time you buy one IndyCoin from me). 

There’s just one small problem. The cryptofinance community is absolutely rife with scammers and frauds, and that includes the backers of stablecoins. 

Take Tether, for example, which was backed by Bitfinex, a cryptocurrency exchange, and is supposed to be tied to the dollar. Bitfinex originally developed Tether so its customers could transfer money from Bitfinex, based in the US Virgin Islands, to other cryptocurrency exchanges overseas (and vice-versa). Trouble was, as the New York Times reported over three years ago, Bitfinex couldn’t prove it was actually purchasing the dollars required to back the volume of Tether it was creating out of digital thin air. 

This grew more serious when Bitfinex and its financial auditor parted ways a year later, potentially threatening the value of other cryptocurrencies purchased with Tether. Finally, in 2019, Bitfinex admitted that it borrowed $851 million dollars from Tether’s dollar reserve fund to make itself whole after a Panamanian payment processor ran off with the company’s money.

Tether still maintains its peg on the dollar, even if it appears to be based more upon the wishful thinking of Tether’s customers than an auditable, verifiable reserve of dollars backing each and every tether. That’s something which can’t be said for NuBits, a competing stablecoin, which crashed in value in 2018, nor for Basis, which, despite being backed by Google, shut down entirely.

As a friend of mine put it, stablecoins are like stables — they stink and they’re full of crap.

***

That’s not to say there aren’t some proven uses for blockchain technology. Public blockchains are quite handy for verifying and authenticating unique digital goods, as the New York Times pointed out recently after the creator of Nyan Cat sold a one-of-a-kind version of his creation in a digital auction. This sentiment was seconded by Mark Cuban, owner of the Dallas Mavericks, in a blog post in late January. This makes sense since, given a unique digital good, you would want its uniqueness and chain of custody to be independently verifiable.

That said, blockchains, whether they’re public blockchains like Ethereum or private blockchains hosted internally within a corporate network, have a serious flaw. Blockchains, by default, accept any and all transactions processed against them, regardless of the contents of the transaction, and expressly refuse to provide a method to remove a transaction once written. Consequently, it’s easy for malicious actors to embed harmful data within a public blockchain and keep it embedded for the duration of the blockchain’s existence. 

For example, as Ars Technica reported, malware writers are already embedding command-and-control code in Bitcoin’s blockchain. Additionally, researches recently demonstrated the ability to run an entire command-and-control system within Ethereum by leveraging its built-in smart contract technology.

Like I parenthetically said earlier, the real trick for computer security professionals is preventing computers from running arbitrary code. By design, blockchain-based systems make that almost impossible by naïvely accepting all transactions and categorically prohibiting rollback of harmful transactions.

Outside of the serious security ramifications of this, however, imagine if I wrote this column without a delete or backspace key. That, in effect, is what it’s like to put data into a blockchain. You only get one shot — no second chances. 

How useful does that sound to you? Do you want to base your government’s financial transactions around technology which behaves like that? What about your county’s records? Or how about election results, which sometimes experience data entry errors?

***

There are cutting edge technologies Nevada could try to get on the forefront of, one way or another. Quantum computing, which uses quantum mechanics to perform certain calculations billions of times faster than the fastest digital computer, is quietly but steadily becoming increasingly practical and useful. Unlike blockchain technology, however, quantum computing isn’t being used to engage in digital financial speculation, which is why there’s less money in hyping the technology.

In other words, quantum computing might actually be legitimately useful.

As useful as it might be, however, neither quantum computing nor blockchains need to be encoded in our statutes. If our state government wants to send a message that it’s open for business for cutting-edge technology entrepreneurs, a good first step would be to stop trying to write every well-funded tech fad into law. 

David Colborne has been active in the Libertarian Party for two decades. During that time, he has blogged intermittently on his personal blog, as well as the Libertarian Party of Nevada blog, and ran for office twice as a Libertarian candidate. He serves on the Executive Committee for both his state and county Libertarian Party chapters. He is the father of two sons and an IT professional. You can follow him on Twitter @DavidColborne or email him at [email protected]

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