History, nature and philosophy of cryptocurrency

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History, nature and philosophy of cryptocurrency

The alluring idea of a universal currency has certainly been around much longer than the euro, but it is only recently that we have witnessed the birth of a real prototype: Bitcoin. However, many questions arise. Can Bitcoin Be A Global Currency? What about other crypto-assets? On what criteria to judge crypto-currencies? Or, what will their future be?

To answer this, we will have to observe the birth of Bitcoin as well as its precursors, but also the development of the entire ecosystem of current crypto-assets. Then, we will study the nature and philosophy of crypto-currencies in general in order to reflect on the issues encountered in 2018.

The birth of Bitcoin

In 2007, a major financial crisis hit the world, from the most developed countries to those classified as “third world”. Several simultaneous events cause a sudden failure of much of the global financial system. The population then loses a large part of the confidence it had in institutions.

And the events of the following years did nothing to improve this state of affairs: we will cite in particular the example of the Cypriot people, who had their savings confiscated by the government and the International Monetary Fund, in part in order to reimburse debts accumulated by local bankers ...

All of these events left a lasting mark on the middle and lower classes of global society, and were very likely the catalyst for the emergence of cryptocurrencies, with the advent of Bitcoin in 2008.

Finally, the 1er November 2008, a date that will certainly go down in the annals, Satoshi Nakamoto publishes the White Bookof Bitcoin. This stranger, or group of strangers, whose true identity remains unknown to this day, then revolutionized one of the pillars of modern society: money.

Indeed, Bitcoin is quite simply the first currency with truly the potential of universality, and allowing to overcome the various problems encountered in recent years: forced withdrawals from savings accounts, disproportionate inflation ...

This spirit of contradiction is particularly found in the introduction to the white paper: it is explained there that bitcoin is "a purely peer-to-peer electronic money system", not needing to "pass through an institution. financial ”.

But does Bitcoin really represent an innovative concept from start to finish? After all, when we talk about all cryptoassets that are not Bitcoin, we are talking about altcoins, which implies that they are secondary, and that Bitcoin is objectively the center of the cryptocurrency world.

In truth, all of this has no basis: In addition to fictional elements such as the Star Wars “credits”, of which we find equivalents under various names and forms in other works, there are other cryptographic currencies which did indeed emerge before 2008.

What were they, and why did they fall into darkness?

The precursors of Bitcoin, barely buried digital fossils

With the advent of the Internet and the popularization of personal computers in the 1990s, a large number of projects were launched in order to set up electronic money systems. Obviously, they did not all correspond to the criteria that we set today when we mention cryptocurrencies; however, it is interesting to mention them in order to put Bitcoin in its place: that of a prototype a little more successful than the others, quite simply.

We can quote in particular, among the ancestors of Bitcoin who passed away without becoming famous:

• TheDigiCash, ecash or Cyber Bucks, imagined by David Chaum in 1983, and launched in 1995. The latter collaborated directly with American institutions in order to set up a reliable and legal network. However, the imagined network being centralized and expensive to use, it did not develop and the company went bankrupt.

• TheCyberCash/ CyberCoin, imagined in 1994 and launched shortly after. Yet another centralized system, it presumably suffered from security issues and the Y2K bug, resulting in large financial losses due to double spending. The company closed its doors in 2001 following these events.

• The NetCheque, the Danmont cards or the Mondex system, among others, were to serve as currency, not universal but electronic. They all disappeared with the adaptation of banks to the Internet world, which quickly stopped needing these intermediaries.

The most interesting of all the ancestors of Bitcoin, however, remains e-gold. It was an electronic money whose value was calculated from the price of gold, like many tokens in existence today, such as the PureGold Token. Founded in 1996, the company that distributed e-gold did not become successful until much later. It is therefore in 1999 that the Financial Times will describe e-gold as"The only electronic money to have reached critical mass on the web".

Between the years 2000 and 2004 approximately, e-gold was in part comparable to Bitcoin: it allowed instant micro-payments over the internet, it was relatively well known, and was notably linked to many platforms for the exchange of precious metals, which allowed its users to perform arbitration. However, it was a centralized system, which caused its downfall.

Indeed, criminals have seized e-gold just as they subsequently seized Bitcoin: scams, Ponzi schemes, bogus sales and hacking have proliferated. Quite naturally, the US government ordered the end of this system, so these problems would go away with it.

Today, nobody talks about e-gold and few remember it.That's a lesson to be learned for Bitcoin maximalists, who all too often give Bitcoin near-divine status.

As you have seen, Bitcoin is therefore not even the first to have offered a sufficiently secure and practical solution to become popular. So why has it been so successful? It is in fact very simple: it brings together all the appreciable characteristics of the previous networks, while adding a new one: decentralization. Because it is centralization which led to the fall of its ancestors, and in particular that of e-gold which disappeared following the decision of the American courts. Bitcoin, by its decentralized nature, will not be able to suffer the same fate.

The circumstances of the economic crisis have also favored its development. From 2008, a monetary system free from all conceivable banking and political manipulation was ideal for everyone, and immediately knew how to build a good user base.

Today, many successors, cousins and clones of Bitcoin have emerged, some more useful than others. We are therefore going to study the main crypto-currencies existing in 2018, as well as some others that have already disappeared in the meanders of the Web.

Cryptoassets in 2018

After the publication of Satoshi Nakamoto's white paper, many new crypto-currencies have emerged.

The first of these was Namecoin: its objective is not the decentralization of currency, but that of internet domain names. Indeed, the latter are essentially regulated by American authorities, a decentralized alternative would allow the advent of a freer Internet. Today, although Namecoin still exists, its network seems deserted, as evidenced by this study dated June 2015, in which it is notably explained that of the 120,000 Namecoin domain names, only 28 are actually used by their holders ...

Then came the Litecoin and the Ripple, two alternative currency systems to Bitcoin.

Litecoin is essentially a Bitcoin clone, but brings a new transaction validation algorithm, Scrypt, which is still considered one of the most important crypto-assets today. However, this importance stems in the vast majority from its age, this cryptocurrency having brought no truly innovative element at the technical level, and ultimately suffering from the same scalability problems as Bitcoin.

Ripple is also one of the crypto-assets still considered important in 2018, but it has the advantage of being an entirely original creation. Indeed, it was imagined from 2004 and finally saw the light of day in 2012, therefore having little in common with Bitcoin. It is indeed much more centralized, because to date, the only existing network nodes have been selected directly by the company Ripple Labs. Many also criticize Ripple for its unequal distribution: indeed, it would seem that more than half, and perhaps up to 80% of all existing Ripples are held in the hands of a single person (individual or company). ).

Crypto-assets of a more original nature then appeared: we will mention in particular the Monero, the Ethereum, then crypto-assets based on DAG such as NANO.

Appeared in 2014, Monero aims to overcome a major problem with Bitcoin: the non-fungibility of Bitcoin coins. That is, due to the nature of Bitcoin, the path that each Bitcoin has taken since it was mined is recorded, cataloged, and can be traced. As a result, bitcoin that has been used for criminal activity is therefore “tainted” forever.

This is one of the problems that crypto specialists were already talking about in 1994 in the article you may have read: without fungibility of electronic money, it is the death of privacy. Monero is therefore a first attempt at a solution to this problem. And many have also decided to make their own copy with the modifications of their choice: there is therefore today a whole ecosystem of cryptocurrencies based on Monero.

In 2015 then Ethereum appeared. Created by Vitalik Buterin, a Russo-Canadian student, it is the first crypto-asset designed for the sole purpose of facilitating the implementation of smart contracts. These are in fact programs that exist on a blockchain and allow certain tasks to be performed completely independently.

Other projects had imagined such concepts before: we will mention in particular Ripple Labs which had conceptualized this under the name of Codiusin July 2014, although nothing finally saw the light of day until 2018.

Finally, we have recently seen the advent of a last category of crypto-assets: those based on directed acyclic graphs. Rather than always placing blocks in a predefined order, DAGs are chaotic in nature and do not necessarily put transactions in a unique order. This mode of operation allows them to achieve transaction speeds unmatched by the blockchain to date, despite the occasional appearance of some other concerns relating to the consensusor at the centralization.

Among the crypto-assets based on the DAG, the most famous is certainly the NANO: formerly called Raiblocks (XRB), this cryptocurrency was created by Colin LeMahieu, formerly a programmer at Dell and then AMD. The chosen method of distribution, that of the faucet, as well as the incredible speed of transactions quickly propelled this crypto-asset to the top of Coinmarketcap.

However, it is not the only DAG-based crypto asset, nor the oldest. In fact, in this category we will mention in particular the IOTA, whose objective is to be used for micropayments within the framework of the Internet of Things, or Byteball, a little-known crypto-asset which was notably the first to allow the implementation of smart contracts on a DAG ...

As we have seen, the term crypto assets very clearly includes a motley set of objects based on completely different technologies. However, does this prevent giving a general definition to crypto-assets, or even separating the wheat from the chaff? To answer it, we will look more specifically at the Bitcoin white paper, which was the catalyst for this revolution.

Part 2: Nature and philosophy of cryptocurrencies

When Bitcoin launched in 2008, Satoshi Nakamoto's goals were relatively clear. Although no paragraph is dedicated to the reasons for his project or his philosophy, certain sentences and expressions are particularly appealing. We therefore invite you to read this white paper for yourself before continuing to read this article. It is located at the address that this link points to.

A purely peer-to-peer electronic money

The very first words of the white paper already tell us what the main purpose of Bitcoin is: the creation of a purely peer-to-peer electronic money. What does this expression mean? The answer is simple: a peer-to-peer system is a system that operates without any intermediary between the participants. Everyone is equal within the system.

A purely peer-to-peer electronic money must therefore operate without banks and governments, and must allow individuals to transfer value in the same way they exchange hard coins. This was not the case with the predecessors of Bitcoin that we saw above, since the latter operated only through servers belonging to the companies that created them. Most were anonymous and cryptographically protected, but their existence was conditioned by that of the company that created them.

But is the electronic money function the only one that is really important? Difficult to say. From a societal perspective, it is the power to control money that is at the center of the invisible conflict between cryptocurrency and the institutions of the world.

However, as many cryptoassets such as Ethereum, NEO or Lisk have been able to demonstrate, it does not have to be used as a currency to generate value and bring something to our society. The simple fact of allowing the implementation of new processes can open the way to new professions, to new modes of exchange and wealth creation.

In addition, it is also not necessary to have been created as currency to be used as currency: for example, despite its status as a platform for creating tokens and smart contracts, Ethereum is very often offered as an alternative. to Bitcoin by merchants who accept cryptocurrency payments.

Crypto-assets, whatever their category, therefore all seem to have the same objective, although it is through various and varied paths: it is to allow individuals to become financially independent from any external entity. But the reality is not always that simple, and it is by looking at the problem of trust and consensus that one can determine which cryptocurrencies truly pursue this ideal.

The question of trust

The two notions of trust and consensus, briefly mentioned in the Bitcoin white paper, nevertheless remain at the center of the ideal of freedom promoted by the crypto-asset revolution.

Trust, first of all, is fundamental because it is what gives any currency its value.

In the Bitcoin white paper, Satoshi Nakamoto referred to intermediaries in online payments: third parties such as PayPal through which payments pass. The minimum objective of a cryptocurrency worthy of the name would therefore be a priori to allow a direct transfer of value between two people, instantaneously and without the intervention of a third party.

But let's look at it from another angle: Basically, when exchanging cash for goods and services, each party to the transaction implicitly places its trust in the entity issuing that currency.

Thus, the use of a cryptocurrency worthy of the name should in principle make it possible to dispense with any trust in a third party since the code and the mathematical laws must be the only masters in the matter. This already disqualifies a large number of current crypto-assets: many allow the spontaneous creation of coins or tokens by their creators; others do not have really fixed rules as to the total amount existing ... Our trust must be in the hands of these people.

In fact, even Bitcoin is to a certain extent subject to the will of third parties: since 2014, it is a company called Blockstream, made up of people to whom Satoshi Nakamoto had entrusted certain important codes, which takes care of maintaining and improve the Bitcoin code. It is therefore this company that alone decides on the technological improvements to be made to Bitcoin, and as a result, could overnight change major rules as far as it is concerned.

The ideal cryptocurrency is therefore freed from this ball of trust,and should only be subject to the mathematical rules defined by its code.

This is not the only thing to analyze, however, since the consensus method used is just as important.

The problem of consensus, lacking a perfect solution to date

As you probably already know, consensus methods are, in cryptocurrency, the mathematical processes by which the validation of transactions is carried out. For Bitcoin, this is theProof of Work. For others, more experimental, various methods have been devised, and all have their advantages and disadvantages.

But rather than talking about technique, we're going to talk about power. Because that's what it is: the consensus method actually determines how power is distributed within the community. And this is where the words “centralization” and “decentralization” appear: the more power is held by a large number of people equally, the more decentralized a cryptocurrency is. And the more power is centralized, the more it is held by a small number of people.

This notion is sometimes vague:it should not be confused with that of distribution, which is an entirely different problem.

To put it simply, distribution is the problem of the concentration of wealth, while centralization is the problem of the concentration of power.

In traditional societies, the concentration of power and wealth often go hand in hand. While in the cryptocurrency world, things are sometimes very different. In fact, it all depends on the consensus method.

Because certain methods of consensus are close by nature to the oligarchy, which means that the rich have a power superior to the others. These include systems ofMasternodes, which require to immobilize a not insignificant quantity of assets before having any power on the network.

Does this mean that Bitcoin and its famous Proof of Work are unattainable by any criticism? Difficult to claim. Indeed, on the scale of a network of specialists, very little used, the Proof of Work allows all minors to make their voice heard. But as soon as the network grows and the number of users increases, disaster: mining farms and miners' cooperatives appear, in search of profitability.

And what exactly are mining farms, if not a collection of supercomputers all controlled by one man, or sometimes a single company? As for the miners' cooperatives, it is not much better: although many miners participate in them, the “director” of the cooperative often remains the only real master on board.

Addendum: For "mining pools" in which several "big" miners are found, decision-making power can sometimes be shared between the miners in the manner of a traditional company. The problem of the centralization of power in miners' cooperatives applies especially to those whose model is similar to NiceHash, where individuals mine a crypto-asset without having any control over the outcome of their work. The simple rental of computing power by a malicious person would enable 51% attacks to be set up on a very large number of blockchains, at very modest costs given the potential benefits.

However, in the case of Bitcoin, at the present time, if we consider only the four largest sources of calculations carried out, we arrive at more than 50% of the total calculation power supplied to the network by the humanity.

This means, in short, that the four people who own the entities that generate this computing power have enormous power over Bitcoin. And, if they wished, they could quite join forces to modify the blockchain according to their wishes.

It is therefore a problem calling into question the validity of Bitcoin in its entirety. Because if we take a good look at the white paper, Satoshi Nakamoto writes in particular the following sentence: To solve this, we proposed a peer-to-peer network using proof of work to record a public history of transactions, which quickly becomes computationally inconvenient for any attacker to modify if honest nodes control the majority of the computing power.

But as it's been so well written, this security is only valid if honest nodes control the majority of the computing power.

In other words, the decentralization and security of the Bitcoin network is based on an ideal in which there is an immense number of miners whose computing power is equal, and where it is therefore impossible to corrupt enough miners to alter the blockchain.

This ideal died a long time ago, when BTC rose in value and the first mining farms appeared. From there, the imbalance between the miners grew and centralization began.

Also, a lot of people don't understand how network security works. I am thinking in particular of all Bitcoin maximalists, taking pleasure in systematically belching the term 51% attack. This is in fact an extreme simplification of the principle of mining with the proof of work, assuming that a modification of the blockchain by a single entity is only possible when this entity holds more than 51% of the power of total calculation.

This assumption is entirely false.Indeed, this mythical figure of 51% in fact only represents the moment from which the probability of success is 100%. But from 30% of computing power held by a single entity, the probability of successfully creating “false blocks” is already around 50%.

You will therefore understand that today, even Bitcoin, which for many represents an ideal, is currently, in fact, much more centralized than it should be. And this is unfortunately an inherent flaw in Proof of Work as we know it. So, eventually, all cryptocurrencies based on a proof of work modeled on that of Bitcoin will end up suffering from the same problem if their value increases. Mining farms and miner cooperatives will appear, and take control of the network through overwhelming superiority in computing power. Obviously, this is not the guarantee of a double spending attack, but only the guarantee of the possibility of a double spending attack. In a way, it is a bit like the difference between guaranteeing that your car's engine will explode the next time you start it, and guaranteeing that the engine might explode the next time you start it. Anyone in their right mind will scrap this car rather than driving it again, even if the risk is low.

Furthermore, this issue raises another question: what if the community becomes aware of manipulation by an entity holding the majority of power, and rejects that manipulation? So aforkwill occur, and a new cryptocurrency will appear. But this new crypto-currency will most certainly be based on the same algorithm… Which means that some time later, the same problem may reappear.

The possibility of forking therefore only shifts the problem and does not solve anything, unless a change of consensus method is made at the time of the fork.

In short, Bitcoin and its proof of work are just as open to criticism as the other consensus systems invented recently. To date, none are perfect, and each of these systems decides to make different compromises. Some are faster and less secure, et cetera.

So we cannot really say that a cryptocurrency does not deserve this name if its consensus system is imperfect. The only test that can be applied to determine whether a cryptocurrency has an acceptable consensus system is: is it designed to be centralized?

If so, then generally speaking, the cryptocurrency that uses it is really just a disguised Monopoly currency, wanting to take advantage of Bitcoin's notoriety.Because it is only through decentralization that crypto-currency users will achieve a real form of financial freedom, which is the desired objective of this revolution.

Distribution, or the problem of the concentration of wealth

We briefly mentioned above the difference between distribution and centralization.

To put it simply, an unequal distribution should be rejected. This, for several reasons:

• The more unequal the distribution, the faster the price rises. Why? It's very simple. In this case, only a small percentage of the total is bought and sold by people outside the circle of the “lucky ones” with the majority. So the crypto-asset seems to be scarce, and people are willing to buy it for more than they should. Which, in turn, increases the capitalization of the relevant crypto-asset, and propels it to the top of sites such as Coinmarketcap. This is an insidious form of manipulation aimed at making the crypto-asset appear more important than it really is, thanks to unduly inflated capitalization.

• The more unequal the distribution, the more there is a possibility of immediate division of the price by 10, 20, or more. Imagine that, overnight, 50% of all Bitcoins were resold at market price: the result would be catastrophic, with Bitcoin under $ 50 in a matter of minutes. This further allows manipulators to buy back immediately at a low price by capitalizing on the fear of small holders who would be pressured into selling them for a fraction of the previous value, thus making it possible to generate money AND redeem all the tokens just sold. before.

• The more unequal the distribution, the more the big holders will be tempted to manipulate the market in various ways, whether through disinformation campaigns, by placing false sales walls, or by meticulously crafted intoxes.

All this leads to excluding Ripple from the list of crypto-assets deserving your attention. Indeed, as we mentioned above, it seems that over 80% of Ripple tokens are in the hands of less than ten people. Ripple's objective is therefore clear and defined: to make infinite money for the sole benefit of this small group. Realize this: these people have made tens of billions of dollars out of nothing.

On the opposite side of Ripple Labs, there are people like Colin LeMahieu, creator of NANO, also mentioned above. NANO, then referred to as Raiblocks (XRB), was distributed fairly through a website asking for daily action for a small amount, absolutely free, until enough people got it. . In particular, this has enabled many disadvantaged people in South America to emerge from poverty. Which of the two, between Colin LeMahieu and the Ripple company, seems more honest? The question shouldn't even be asked.

By itself, the distribution of a currency does not prove anything about the nature of the technology, or the true potential of the crypto-asset in question, but it is a clue to determine the exact intentions of its creators. And if the intentions of the creators are bad, then it's usually best to steer clear.

Protection of privacy, an essential and yet often forgotten element

One of the least commented items in the Bitcoin whitepaper happens to be the paragraph dealing with the protection of privacy.

Satoshi Nakamoto briefly explains the differences between the traditional model and his: in fact, it is about stopping the flow of information accessible to the public in a different place. Rather than hiding everything, Bitcoin only hides what is necessarily hidden: the real identity of the parties to the transactions.

However, this poses a serious problem that Satoshi Nakamoto did not fail to point out. Indeed, he takes the time to specify that a new key must be used for each transaction to avoid allowing the public to link sums to a common owner.

And the risk was already evident in 2008: if the owner of a key sees his identity revealed, it suffices to retrace his steps on the blockchain to know all his activity.

Bitcoin therefore offers no real privacy protection in practice, and Satoshi Nakamoto knew it. Does that mean that the protection of privacy is of no importance? As many societal developments this decade have proven, leaks of privacy can destroy anyone's life. We can mention in particular the various people sentenced to death for apostasy because their religious opinions were revealed following "leaks" of material published on social networks.

We could one day suffer the same fate for much more trivial reasons. For example, what if you bought alcohol with Bitcoin and then went to travel to a country where possession of alcohol is punished with jail, as was the case in the United States in the last century? ?

Also, always keep in mind that what is legal today may not be legal tomorrow. If ever a fascist regime of croissantophobes ever emerges, you could end up in jail for buying a croissant with Bitcoin.

Indeed, the Bitcoin blockchain leaves an indelible trace of all your transactions, which in return gives incredible power to anyone who holds the secret of your identity. It is for this reason and many others that the protection of privacy is fundamental.

Here again, Bitcoin therefore totally fails to offer a viable solution.

How can you determine which cryptocurrencies are worth your interest?

Quite simply, it will be necessary to favor those allowing a true anonymity of the users of the network, whatever the means employed. Cryptoassets offering such features are still not very widespread to this day, but we advise you to educate yourself about the entire ecosystem based around Monero, which offers transactions protected by some of the best crypto techniques aimed at ensuring anonymity. .

In addition, a large number of other crypto-assets have appeared around Monero: a few competitors, but also and above all, many imitators who have added or removed various features.

Today, it's hard to judge cryptoassets based on their methods of protecting privacy, given that this part of the equation has been relatively unexplored. Fortunately, in the years to come, we will certainly be able to see the maturation of this somewhat special ecosystem. This will undoubtedly allow the advent of a real cryptocurrency with all the ideal characteristics, including anonymity.

Conclusion

Cryptocurrency still has a bright future ahead, but also a long, arduous and winding road. There are many pitfalls that need to be overcome, both by creators and investors, and many goals that sometimes conflict with one another need to be achieved.

Today, existing crypto-assets are ultimately only prototypes, despite the various preachers that can be found on the Internet say. But maybe one day a perfect cryptocurrency will emerge; and perhaps it will be truly universal, peer-to-peer, equitably distributed, decentralized, no need for trust, and anonymous.

That day still seems a long way off, but that doesn't mean we should lose sight of these goals. Because if only one of these elements were to disappear entirely from the ecosystem, then that would be proof that the crypto-asset revolution has failed. And the people would remain subject to the ruling classes and the bankers, who all too often have great powers without any responsibility.

I trust you, dear readers, to invest in the projects that deserve it. It is not necessarily obvious, but the future of an entire section of society is at stake.

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Louis choquet
Louis choquet
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