It’s Better to Lose Your Investment than Lose Your Blockchain

Decentralization, Blockchains and Control

The vision of open, public and decentralized blockchains is that there is no central authority who has authority over your money or token. In reality, in these early days, the major blockchains are not as decentralized as we wish or think they are. A handful of key miners and other actors have significant influence.



This brings us to an important question of what can be done when a relatively small number of actors can change a blockchain, it’s rules, or how coins, tokens or smart contracts are disposed. In the case of an exploit or hack on a smart contract, a remedy involving changes to the related blockchain that were not an initial part of the code risk the entire chain’s credibility. Changes to a chain based on hacks and exploits are a horribly slippery slope with serious functional and security weaknesses.



For example, what if we could have simply returned all the stolen Mt. Gox coins from the hacker. Should we have? Suppose for a moment that the shooter responsible for the tragedy in Orlando was known to own Bitcoin. Would we be right to freeze it or block his address? How about if his wife, who has been accused of being involved, owned Ether, should we block or seize her Eth holdings? These scenarios are not even as extreme as, say, a 9–11 scale tragedy that is directly linked to funding by a crypto currency. Would the politicians and some of the public be right to call to freeze or seize the funds of the suspected perpetrators? Should they?



The resounding answer to all of these questions is absolutely not. Not if we care about the integrity of the underlying blockchain and the tech as a whole. The strength blockchain tech is that it is a ledger, a statement of truth. That ledger is only as good as its resistance to censorship, change, demands or attack.



Not only should we avoid changing any chain, we should strive, with decentralization and other means, to make it technically impossible for such changes to be made. We are not there yet. Can the closed blockchain of a private organization be changed? Yes. Can the Ethereum chain be changed, it seems yes as well. How about Bitcoin, the oldest, largest and strongest blockchain? It is very difficult but unfortunately the network is not immune to such an attack. We all remember the emotion surrounding 9–11 and the bad legislation that was rushed through as a result. Is it that far of a stretch to imagine that a similar event, tied to Bitcoin, could cause a few major governments to work together on demanding that an address be blocked? What would this take logistically? Basically an executive order from the US President followed by three phone calls from the Secretary of State to China, the EU and UK organizing collaboration. An order and three phone calls and it’s game over. Mining is centralized among less than 20 individual people who are all relatively easy to reach and who are all nearly certain to comply with a serious enough government demand.



We don’t need to dive into the fantasy land of doomsday scenarios to see the issues with centralization in a blockchain. The very fact that it can be done or is done for any reason shows the network and the world what is possible. It is then inevitable that governments will make demands on whoever they feel has the authority to make such changes. At best, the people so named will fight in court and prove that they can’t make such a change, at worst they comply and destroy the integrity of the blockchain or they refuse and face potentially life-ruining penalty.

We must remember, any such action to change a blockchain does not end with that action. It doesn't end with reversing a hack, seizing the coins of a terrorist or complying with a National Security Letter, it ends with a chain becoming centrally controlled and subject to lawsuits and IRS orders. It continues with the IRS and a dozen other authorities specifying what compliance actions will be required for them not to make such orders. It transforms the blockchain to a database. That trade off is one that is not worth it for any reaction to bad actors.

Addendum / Edit: I wrote this today in light of the DAO issue but didn't mention it in the original post because I wanted to provide food for thought on the nature of blockchains. As the situation with the DAO unfolds I thought it would be fair to mention the point of view of those in favor of a code change. A few points on this specific case: 1) Ethereum is in its early days and now is a time to fix issues 2) the potential for lawsuits and other issues could set back the industry 3) the majority of the holders seem to benefit from this short term / some argue that the short term benefit which certainly keeps money from a hacker and in the hands of the original owners is worth the potential, but not certain drawback of a fork.

To paraphrase on what Vitalik said today, I don’t want to criticize anyone for decisions and positions around this. For some its black and white on one side or another…for others its a hard decision and I prefer to believe that everyone has the best of intentions unless proven otherwise.