The power of a blockchain: freedom, tyranny and the importance of the five elements of a decentralized blockchain.
Stable coin news
Today I read four seemingly unrelated news stories:
- China continuing to increase adoption of its country backed digital currency or CBDC.
- Tether; freezing a users funds, removing a users funds and assisting the government in tracing a users activity.
- The NFT company NBA Hotshots, on the Flow blockchain, froze a users account because the user chose the account name Free Hong Kong, and the user now has no control over his legally purchased property.
- A US Senator calling for the creation of a US government stablecoin, or Country Backed Digital Currency. But with the stipulation it be an open, public, cryptographically protected and decentralized blockchain.
Different subjects with common thread.
I admit these three news stories may seem exciting for different reasons. But as I thought about it they all show the critical importance of the five core principles of a decentralized blockchain and two critical points:
- The decentralization of a Country Backed Digital Currency is a critical to privacy and with it the preservation of the freedoms we hold so dear in democracies.
- We are at the critical cross roads of either Freedom or Tyranny, and the way we adopt the blockchain technology in our national currencies will determine our fate.
Drama or Valid Concern
I realize that Tyranny or Freedom sounds dramatic. But the founding fathers of our country argued against a Central Bank, stating that a government and the people should control their currency. They further stated that if control over the currency were turned over to central banks the majority of our citizens would find themselves poor and indebted in the land their fathers founded. Dare I say that economic crisis we face now may have that which our founding fathers warned against?
Today instead of academic writing, practical examples.
I wish to look at these stories and point out which things these blockchains lack, so you can see the real world impact of the lack of these five core components.
- The People’s Republic of China’s CBDC
- Tether
- NBA HotShots
- US Senator calls for US CBDC to be on an open blockchain
The People’s Republic of China’s Country Backed Digital Currency.
The first story about the The People’s Republic of China’s CBDC or Country Backed Digital Currency. I have the utmost respect for the progressive attitude towards cryptographic technology in the People’s Republic of China’s. I will not presume knowledge of all the details of this blockchain based digital currency. However I will comment on the Features of the Digital Ruan published in State Controlled Media as a fair reporting of its characteristics. The report released by the government states the Digital Ruan wisely possesses several features designed to promote harmony in their society. These features include these features and others:
- the government can see all financial transactions,
- the government can freeze anyone’s digital currency, and
- the government can remove some or all of anyone’s digital currency, from their bank accounts for activity the government decides is illegal, improper or inappropriate.
I don’t wish to make value judgements on these features so I will limit my comments to whether these features adhere to the ideal five features of a decentralized blockchain.
First, the blockchain the cryptocurrency PRC digital currency doesn’t possess immutability. It is not immutable, as in transactions are not permanent. Because the government can change the balances of the cryptocurrency in the users of this blockchains wallets.
Second, we see this blockchain is not Trustless in that once a transaction is concluded you cannot trust that the payment you receive for goods or services will be in your wallet until you choose to move it. Because it can be taken away.
Third, this system is not decentralized as in having a single copy of the same ledger all over the network, which all computers on the network agree is accurate. This is called consensus or agreement. It is actually ccentralized in that one or more official computers alter the ledger at will and then report out to all other devices what the correct ledger looks like. As an aside this compromises the principle of blockchains and finance known as true settlement of account. Because that requires that you can rely on ledger entries regarding all transactions as being final after a pre-agreed upon settlement period and settlement mechanism. In the case of the Digital Yuan I don’t understand how true settlement can be achieved under the list of features above. Interestingly enough this deficiency is not allowed in legacy banking systems, which are centralized, but have clear mechanisms for arriving at true settlement. I am sure this reflects a deficiency in my knowledge base. And I would find it very educational to learn how this subject was circumnavigated.
Tether
The creators of the stablecoin Tether do not run an open, permissionless blockchain. They maintain control of the ledger so it is permissioned as they have permission to change it, and therefire they can rewind the chain at will, changing transactions, freezing funds and they reveal the identities of account holders and assist the government and other parties in removing cryptocurrency from the wallets of users.
First, this means their blockchain is not immutable if they can change the ledger entries at will. This is necessary to take away users funds.
Second, thus means it’s not a decentralized ledger, but a centralized ledger. So they can change it and inform or not inform everyone else viewing the ledger. They determine what is a true copy, as it can change at any time.
Third, it means it is is not Trustless as in you cannot rely on the cryptocurrency you receive for goods and services to go to your wallet, because they can reverse all or part of the transaction. You can sell goods and have the transaction reversed with the return of the goods or you can lose the goods and the payment leaving you with nothing.
Lastly, this means there is no true settlement of accounts time interval and there are no assurances of settlement finality. Because the ledger is not immutable, the blockchain is decentralized and therefore ledger entries which create transactions can be changed.
NBA HotShots on Flow blockchain
The story: a user created an account with the name Free Hong Kong. The creators of this blockchain were informed of the existence of this account, presumably by representatives of the communist government of the People’s Republic of China. The Flow blockchain administrators froze this users account. And reportedly this user cannot access their NFT assets, so they cannot sell or transfer their NFTs they bought from NBA Hotshots.
First, this blockchain is not cryptographically protected. The users should have sole control over the assets in his Flow blockchain wallet. So if this chain was cryptographically protected he could move or sell his NFT assets at will.
Second, this blockchain is not immutable, because the blockchain administrators have rewritten the ledger to change the transactions record to remove the users NFT assets from his wallet.
Third, the blockchain is not decentralized as there is a central ledger which the blockchain administrators have altered to remove these assets from the users control. If the ledger were decentralized they would need the agreement of 51% of the computers maintaining a copy of the ledger to change the ledger rewriting the transaction log and erasing this users purchase of NFTs from the blockchain ledger.
Third, The blockchain is not trustless . The ledger is not cryptographically protected, it is not immutable and it is not decentralized and therefore you have to Tryst the blockchain administrators, so it’s not trustless.
Fourth, the blockchain is not permissionless in that entries are only made by all users to create transactions over funds controlled by their private keys. Instead in this blockchain the record of transactions can be changed or reversed by the central authority. The system is permissioned in that the central authority has special permission that users don’t have.
US Senator calls for US CBDC to be on an open blockchain.
I told you the first three stories first, so you would better understand this last story. A US Senator proposed that if the government of the United States of America creates a Country Backed Digital Currency, that it be a truly decentralized blockchain with all the core privacy principles of the current United States Paper Dollar. So the purpose of this article was to show the importance of such a currency being on a blockchain which adheres to the core five principles of a decentralized blockchain.
Thus you now understand why a blockchain need five core characteristics:
First, Distribution:
The people who are part of the blockchain network are all in different physical locations, but all connected via the internet and access the network by utilizing special software.
Second, Encryption:
Every blockchain utilizes 23 digit alphanumeric passwords called keys to decide who can enter transactions or other forms of data on the digital ledger or database.
Third, Immutability:
This means using a special form of math called cryptography all entries to the ledger are date and time stamped, and added to the ledger in order of date and time permanently. These ledger entries can be made anonymously or semi anonymously, and can never be altered unless all participants on the network agree and that’s called a fork which is permanently recorded also.
Fourth, Tokenization:
All transactions and other interactions on a blockchain involve the secure exchange of value.The value comes in the form of Tokens. A CBDC is a token. Tokens can also function as digital representations of physical assets, which can be exchanged in a peer to peer or person to person fashion without a middleman. These passwords or keys can also be used to allow people or companies to control their data.
Fifth, Decentralization:
All the information in this digital ledger, along with the rules controlling it are stored on multiple computers on the network as separate copies of the same database and every entry, transaction or record is made using the alphanumeric passwords called keys and verified by all computers on the network as new data is entered into the ledger. This decentralization and approval of every transaction by all the computers on the network is called consensus and because the computers are are spread out in different physical locations they are called distributed and the consensus is called distributed. Because the ledger is not maintained by one computer record in one central location, but by many computers in multiple locations the system is referred to as being decentralized.
Last words
The combination of all five elements requires computers and specialized software to create a ledger or record of transactions using what is essentially a virtual or digital currency, whose ledger is protected by cryptographic code and these five elements. This system doesn’t require trust, because anyone can view the ledger and verify the transactions. This type of system is known as Trustless because it is not based on Trust, it is based on verification.
This post is the song of the canary in the coal mine. Announcing the presence of the colorless, odorless, poison gas. So ignore the chirping at your peril.
Digital money can be a great financial step forward helping people improve their lives by improving their financial status. It is a great tool which can be used for great good.
But it possesses great power, and with great power comes great responsibility and the obligation to use it not to imprison people, but to free them.
But only those with knowledge to understand this new technology will always be free. The others must be educated, so they remain free, because only when we are all free, is our freedom actually safe.
The end…for now. @shortsegments
