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The Dangers of Decentralized Digital Money

After discussing the many potential benefits of a currency like Bitcoin, we would be remiss if we didn't also examine the potential dangers of this technology. Here, we'll consider the ways that Bitcoin might be harmful to society if it is widely adopted. Even if the technology is sound, some ethical reasons might exist for opposing Bitcoin.

Bitcoin and Illegal Activity

Given the early and eager adoption of Bitcoin by illegal product marketplaces, such as the infamous Silk Road website that allowed customers to buy drugs and other illegal products via mail order, it has been argued that Bitcoin's privacy features enable criminals. Arguably, there's some truth to this debate: Just as water always seeks the lowest level, criminals will always seek tools that give them the most anonymity and protection against law enforcement.

However, in 2013, the US government successfully found and prosecuted the alleged creator of Silk Road and arrested alleged drug dealers selling products on the site. The swiftness with which Silk Road was dismantled seems to have been a strong deterrent for other marketplaces trying to adopt Silk Road's business model. For now at least, only limited evidence suggests that Bitcoin offers criminals any meaningful protection from the law.

Additionally, arguing that technologies that promote anonymity are somehow suspect from a purely moral perspective creates dangerous precedents. With the recent widespread use of public cameras, facial recognition technologies, social networking sites, and GPS-enabled cars, it is becoming more difficult for people to maintain their privacy each year. This erosion of privacy has its own downsides, compromising personal liberties.

For this reason, a counterargument can be made that encouraging and destigmatizing the use of privacy-enhancing technologies like Bitcoin may actually be positive for society. The idea that it's acceptable and normal to use tools that protect privacy is called anonymity by default. If you agree that valid reasons exist to remain anonymous in many situations and that anyone doing so doesn't "have something to hide," you will appreciate the privacy protections afforded by the Bitcoin currency.

There is also the simpler argument that Bitcoin is merely a useful tool and so it has an enabling effect to anyone who uses it, even criminals. Certainly cars, phones, computers, and the Internet are all used by criminals to accomplish illegal activity, but we wouldn't ban those technologies solely to hinder criminal activity.

The Energy Costs of Bitcoin

Another ethically contentious facet of Bitcoin is that miners expend enormous amounts of energy when mining for bitcoins. These energy costs are significant, and some people have argued that this makes Bitcoin wasteful and harmful to the environment.

However, this argument does not take into account the massive costs that are expended by our existing financial system for security. Every armored van, security officer, and bank vault that is used to protect traditional currency uses resources, and if we moved to a currency that leverages modern cryptography for security, many of these traditional security mechanisms that physically deter thieves from accessing this money may in theory no longer be necessary.

Additionally, credit card issuers charge high fees (upward of 2 percent per transaction in the United States), and a large chunk of these fees are used for fraud-prevention purposes. If we widely adopted Bitcoin, that would greatly reduce such fraud, so this 2 percent resource drain on the entire credit card economy would be decreased.

The bottom line is that the energy cost of Bitcoin mining is a necessary component of the Bitcoin currency system, and it serves a real and useful function. Naturally, if a person starts a priori with the assumption that Bitcoin is not useful, no argument will suffice to convince such a person that the energy expended to protect the Bitcoin network is anything but a waste. However, in this book we've described many benefits of Bitcoin that provide some justification for its use of energy.

PROOF-OF-STAKE: A LESS WASTEFUL WAY TO SECURE A CRYPTOCURRENCY?

Bitcoin mining uses a concept called proof-of-work to secure the system. In this system, new blocks (and bitcoins) are awarded randomly to miners based proportionally to the number of hashing calculations they perform. However, some developers have attempted to build cryptocurrencies that adopt a different concept called proof-of-stake, which awards blocks in a manner proportional to the amount of currency a miner holds (or proportional to a similar metric, such as the number of coins owned multiplied by the days the coins have remained unspent). Two currencies that use this approach are Peercoin[1] and NXT.[2]

A proof-of-stake mining reward doesn't require the same considerable energy expenditure required by a proof-of-work currency, like Bitcoin. However, it isn't clear whether proof-of-stake-based currencies are as secure as proof-of-work-based ones. Just as proof-of-work-based systems are "vulnerable" to a 51 percent attack, proof-of-stake-based systems have their own vulnerabilities (51 percent attacks are described in detail in Chapter 8). Although we know that a 51 percent attack in a proof-of-work-based system requires extraordinary resources and is economically irrational for the attacker, attacks on proof-of-stake-based systems may be easier than on proof-of-work-based system. Peercoin mitigates this issue by combining proof-of-stake with some additional proof-of-work to maintain stronger security. NXT addresses this issue by adding nuances to the consensus mechanism to decide which blocks are valid, potentially sacrificing some decentralization in the process.

The bottom line is that no consensus yet exists among cryptocurrency experts as to the practicality of proof-of-stake. Even so, it is an interesting concept with the attractive benefit of dramatically reducing the energy requirements for operating cryptocurrency.

  • [1] peercoin.net/
  • [2] nxtcommunity.org/
 
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