Is blockchain anti-science?

The blockchain world is full of amazing claims, many made by people who should know better. In the last few weeks, two examples have been posted on LinkedIn. 

In the first, the author write that “ Blockchain Will Completely Revolutionize How We Run the World” and claimed that blockchain

provides a system that can help tackle issues like poverty, hunger, equal rights, climate change, and clean energy

Pretty impressive for something that is based on 1980s technology - have we been missing something for the last 30 years?

One response stands out “I have no idea what blockchain is, but it sounds good”. Unfortunately, the respondent was not alone in abandoning skepticism.

Another post was equally enthusiastic, “Blockchain - Witnessing The Biggest Revolution By Mankind In My Lifetime”. Given the fact that the mid-30s Avatar has lived through the rise of the Internet, the fall of Communism, the dot.com boom, the dot.com bust, the Global Financial Crisis and the rise of the Chinese middle class, this is a hell of a call? And respondents loved it?

It appears that just mentioning ‘blockchain’ switches off that part of peoples’ brains that actually question and think when faced with a claim, however outrageous. Sometimes it seems like we are in a giant Behavioral Economics experiment to test the two modes of thinking hypothesis.

The title of this post is deliberately provocative and will undoubtedly bring responses that will be filled with invective but blockchain has become a sort of religion and hence subject to belief rather than rational analysis.

Let us take a recent example, the creation of Royal Mint Gold (RMG) which is interestingly referred to as the New Digital Gold Standard and is cryptocurrency created by the UK Royal Mint (RM), which also mints ‘real’ metal coins for over 100 countries around the world.

To market RMG, the Mint has formed a partnership with the Chicago Mercantile Exchange (CME) to “build digital gold product on blockchain to be available in 2017”. The mere mention of the word ‘blockchain’ sent the financial media into paroxysms of future gazing. 

Unfortunately, in the rush to file, there was little more than the usual cut and paste of the press release and precious little analysis. Admittedly, there was not a lot to work with but it was obvious that the Royal Mint had put a lot of thought into designing this new product. However, other than using the word ‘blockchain’, little technical detail was given about actually trading and settlement processes for this new asset.

However, one thing we do know about RMG is that it is not based on ‘blockchain’!

For a start, the issuance of RMGs is totally controlled by the ultimate central authority, a Mint, and furthermore the Royal Mint has also promised to put a floor on the RMG price so totally controlling the currency.

This runs completely contrary to the letter and the spirit of Satoshi Nakamoto’s original white paper which specifically designs away a central authority. And, once a central authority is introduced, the other pillars of blockchain, especially mining and consensus, fall away very rapidly.

But where is the analysis, where is the skepticism?

RMG is definitely a ‘thing’, but what is it?

The Royal Mint is the custodian of a huge amount of physical gold in its Vault in Wales. What it plans to do initially is to ‘segregate’ up to two tonnes of gold bars (around $1 billion) and to allocate a unique ‘token’ to each of gram in that pile. Each token will represent 1 RMG and the idea is that these tokens will be traded on the CME. Note, RMG could be classed as a synthetic derivative so is highly suited to trading on an exchange, such as the CME.

So far, so good. The Mint already has tradable product based on physical gold, called Signature Gold which is traded on its own dedicated platform. This immediately raises the question - if there is an existing system, why build a new one? To reach a different market is an obvious answer, especially one that does not want to pay Capital Gains Tax (CGT).

Now the Mint is not breaking much new ground with this new product as there are already gold-based currencies, based on physical holdings, such as Goldmoney. However, RMG is backed by some pretty good credentials, the UK Treasury, so is not only as good as gold but is actually better.

What makes it better? First, the Mint will not charge for storage, which, for a precious metal, can get quite expensive, quite quickly. Second, as in other gold based currencies, the pile of RMGs in circulation will be audited and reconciled every day by an independent auditor, so an investor can be sure the physical gold is still in Wales somewhere.

Of course, this knocks another plank out from under blockchain, as the ‘single source of truth’ is not the chain but the daily reconciliation report, produced by bean counters in Wales.

So, what is left of blockchain in RMG?

We don’t know as they haven’t told us the full details yet, but we can make educated guesses.

Reading between the lines, although initially trading will be through ‘trusted partners’, such as ‘FCA regulated investment advisers’ (as far as one can get from a public blockchain), there is obviously an eye down the road to opening RMG up to peer to peer (P2P) trading.

With that in mind, the press release notes that the trading mechanism will be “cryptographically secure” which implies that ownership of an RMG token will use some form of Public/Private Key encryption as is used in blockchain and other cryptocurrencies. 

It should be noted that such encryption was not invented for blockchain and, in fact, Nakamoto was very insistent in using existing cryptographic methods based on public/private keys.

So, if one takes away ‘mining’; adds central authority; removes consensus (since the Mint is the final arbiter); removes the need for transparency (as prices and transactions will be provided by the CME); and use standard cryptography, there is not much left of blockchain in the final implementation. It’s a catch-all, that has caught nothing.

But why is blockchain anti-science?

By the mere mention of the word blockchain, analysis of a proposal such as RMG is shut down. For example, the Mint did not think it needed to publish the details of how its particular solution would work, simply because it used the word blockchain, although there are many serious questions raised about what it was doing and how to prepare for it.

One very major question is how the infrastructure of public/private keys (so-called PKI) is to work for RMG? 

If RMGs are to be held as a distinct class of instrument within an investment portfolio, then the management of the infrastructure that holds private keys becomes critical, as a private key is worth far more than its (infinitesimal) weight in real gold.

And building a robust PKI is a non-trivial exercise with massive implications for existing computer systems in banks and investment management firms.

Going forward, how will trading and settlement functions gain access to such electronic gold, and how do firms stop fraud by staff who only have to pass private keys to criminals to make a huge amount of money? Having stolen a key, who owns the gold? How will such a crime be detected, because the theft won't be known until RMGs have to be spent? And how will firms prevent hackers gaining access to this pot of gold?

By cloaking problems with the cover-all term ‘blockchain’, the real difficulties of moving to cryptographic trading in general are obscured and, in the enthusiasm for all things blockchain, magicked away. For example, blockchain is a ‘ubiquitous’ technology, and everyone has to use it or no one does. To succeed, the Royal Mint has to ensure there is a real audience willing and able to move into cryptographic trading. 

If such problems and potential solutions are considered ahead of time today, there is a much better chance of succeeding, in future. But the attitude of ‘trust me, there will be a technology solution when needed, leave me to dream’ is classic anti-science.