Why permissionless blockchain is garbage

This is part two of my critique of block­chain. In part one, I explained the technology behind block­chain, and listed three types of distributed block­chain: permissioned, proof-of-work, and proof-of-stake. If you already know what these things are, you’re welcome to skip part one, but otherwise, it’s probably worth a read.

This part is going to be dedicated to a takedown of permissionless block­chain. That includes Bitcoin, Etherium, and basically every block­chain that anyone talks about.

The case in favour of permissionless (proof-of-work and proof-of-stake) block­chain is brief: Permissionless block­chain doesn’t require a central authority, so in theory, Bitcoin doesn’t rely on any one government or group. The idea is that this makes Bitcoin more reliable. But in practice, this idea has a lot of problems.

Every permissionless block­chain requires a cryptocurrency, both for proof-of-work and proof-of-stake systems. The continued existence and security of the block­chain depends on this cryptocurrency, this token, retaining value. But why would anyone value it in the first place? A thing only has value if people want it, and for a completely invented asset which doesn’t do anything, the only reason to want it is if it has value on the market.

So the reason the price of these cryptocurrency token climbs above zero is speculation: the idea that their value will rise in the future, and that anyone who buys now will be able to turn a profit later. This creates an asset whose price is completely untethered from the material world, and which continues climbing so long as people believe it will continue to climb. If it ever does stabilize, the investors who were looking to turn a profit will all start selling, looking for new investment opportunities. And when a lot of people start selling something, its price crashes.

When the price crashes, two things happen. Number one, anyone who didn’t get out early loses their money. And since no real value was created by the whole affair, all that the cryptocurrency really did in the first place was redistribute money away from late investors and into the pockets of early investors, much like a Ponzi scheme would.

Number two, the incentive to mine or stake disappears, and the miners and stakers start investing elsewhere. If most of the miners and stakers leave, then the block­chain becomes very vulnerable to a 51% attack, meaning that it is no longer secure. This means that permissionless block­chains are actually fairly unstable in the long term.

They can also be very centralized. China has overwhelming control over the Bitcoin network — as much as 65% of miners and 74% of BTC tokens are inside of China, putting them under the sway of the state. This means that Bitcoin is potentially vulnerable to 51% attacks in a way that a permissioned block­chain would not be. If a watchdog discovers fraud on a permissioned block­chain, legal action can be taken against the group running the system, and the original, pre-fraud state of the system can be restored. If a watchdog discovers fraud on a permissionless block­chain, then not only is no legal action possible (because in a permissionless system, no one can be expected to sign any contracts), but a hard fork must be undertaken to reset history — a difficult ordeal for any block­chain to survive, and one which will have to be repeated every single time that a 51% attack is made.

This is not simply a hypothetical example. Bitcoin itself has never been subject to a 51% attack, but various less-popular block­chains have been, with devastating consequences — proving again that if a cryptocurrency loses popularity, then it becomes insecure.

However, centralization can be a good thing. Ransomware attacks have been on the rise in recent years, because cryptocurrencies like Bitcoin allow for anonymous ransom payments. On a permissionless system, there is no way to reverse any such ransom payout. But if we were to use digital cash managed by a permissioned block­chain — even one using anonymity protocols like the protocol used by zcash¹ — then fraudulent transactions could be easily and transparently reversed, after due legal process. The system could even be set up such that the administrators ­— but no one else — could de-anonymize transactions.²

I’m not necessarily saying that such a system would be the best way to run a digital currency, or that a block­chain-based digital currency is even desirable. But a permissioned block­chain gives us the flexibility to incorporate legal decisions into such a currency system, while permissionless block­chains are entirely out of our control.

Finally, permissioned block­chains are a lot cheaper. Even setting aside the unconscionable energy cost of proof-of-work, running a permissioned system requires fewer servers than running a permissionless system, because permissionless systems are only secure given a large number of contributors. Permissioned systems just cost less. Granted, permissionless systems distribute server management costs across a large swath of the public, while the cost of managing a permissioned system falls squarely on a few smaller groups, but that cost winds up being much smaller anyway. And if such a system truly serves the public good, surely our taxes can pay for it anyway.

Overall, I think it’s clear that permissionless block­chains have severe drawbacks that should disqualify them from having a significant role in our society — especially given that the problems they solve can be solved better by permissioned block­chain. If we really think that auditable public ledgers are the future, then we should have our institutions run them, instead of leaving it to the whims of the market. Permissioned block­chains are more efficient, more stable, and simply better all around.

— Pan-fried, 2021-03-21. Back to top