Blockchains, DeFi, DAO, and Web 3.0 in general, all carry the message of decentralization, and particularly of decentralizing financial systems. Decentralization means, for the most part, eliminating the trusted authorities that are involved in various types of transactions. Those transactions could be agreements (to be facilitated by decentralized smart contracts) and the transfer of funds in general (to be facilitated by Bitcoins and alike). Centralization of financial services is considered evil, because the middlemen often have their own incentives, and even when they don’t, they often charge a lot for their essential role in the system. As we move into the decentralized era, we have smart contracts, which enforce themselves using machine code, without a trusted executor, and Bitcoins, which carry value and can be transferred between people without them having to trust any specific or state-owned service provider. Nice.
This post is neither for nor against decentralization. As I see it, nothing can be said against what is essentially an option. A decentralized system is considered as such because it does not require a centralized authority, not because it does not allow one to exist. If you find that you really miss a middleman, then you can always appoint one. If you want the state bank to manage your Bitcoins, then nothing would prevent that. You get an option, and having options is always good.
This post discusses how suitable the current decentralized financial systems are, considering the world they operate in. My take, as the title may disclose, is that while decentralized systems are an excellent idea and a worthy option, their current implementation suffers from shortcomings that we will just have to fix before they can become mainstream. There are many shortcomings, of course, and who am I to even enumerate them, so I will focus on one: the decentralized systems today assume too much perfection; it’s not that they don’t work well — it is that they don’t fail well.
Continue reading "Decentralized Finance that is too perfect for reality"
An NFT (Non-Fungible Token) is a data structure that points at a particular data object in a unique way. See it as a way of naming digital objects, such as photos, texts, audio or video, in a way that allows referring to them with no ambiguity.
The ability to refer to data objects allows to “mention” them in transactions. This seemingly trivial ability, when combined with the ability to create immutable records of transactions (as provided by Blockchains), allows us to create immutable records that refer to data objects.
Technically, NFTs do not require blockchains. You could take a photo of a cat, create an NFT for this photo, which is essentially a unique pointer to (or: a descriptor of) it, and then go on to write a real contract on paper that says “this photo of a cat, bearing this unique ID, is hereby assigned to John Smith”, whatever this assignment means.
Blockchains and smart contract technologies allow for such digital agreements to be stored in a public immutable record that does not allow anyone to change it once it was written. The combination of NFTs and blockchain-based smart contracts thus allows us to securely record agreements that declare ownership of digital goods. If you have any file (photo, text, video, etc.), you can create an attestation that tells the entire world that you assign this file to be owned by whoever. What does this “ownership” mean? – Good question; but whatever it means, billions of dollars have already been paid towards such ownerships. Is this real? The money surely is, but is also the value?
Continue reading "On the value of NFT"
Don’t get me wrong; Bitcoin and crypto currencies are a big deal, at least technology-wise. Bitcoin and blockchains taught us a lot on what can be done with security protocols, and at a lower level, it even taught us that computation inefficiency is not always a bad word, but something that can yield benefits, if that inefficiency is properly orchestrated and exploited. It was also the most prevalent demonstration of scarcity being artificially created by technology alone. As I wrote before, blockchains will probably have some novel use-cases one day, and Bitcoin, aside of being a mechanism for transferring money, also provides a target of speculation, which in itself can be (and is) monetized.
What I truly do not understand are the advocates who see Bitcoin wallets as the near-future replacement for bank accounts, and Bitcoin replacing banks (and other financial institutions) in the near future. I understand the motivation, as those are dreams easy to fall for, but for crypto-currency wallets to replace financial institutions much more is needed, and for the sake of this discussion I will not even delve into the many technical difficulties.
Continue reading "Your Bitcoin wallet will never be your bank account"
One of the biggest technological controversies of the decade are blockchains. There is no debate on how brilliant the technology is. It is very clever, if not genius. The only debate is on how useful it really is. Crypto currencies like Bitcoin are a strong use-case for blockchains, but how many other real use-cases are there? Some people claim that blockchains will change the Internet for good, while others consider it as a clever solution still seeking a problem. Reality is probably somewhere in between, as it usually is.
Blockchains often appear to be more useful than they really are, because their proponents bring up uses for blockchains which could also be facilitated using other, simpler and traditional techniques. Most of those uses, which could also be attained without blockchains, are indeed better off without them. As clever as blockchains are, they always add complexity where they are deployed. In other words, I have not yet seen a single problem that could be solved by either blockchains or other technical means, and where the blockchain-based approach was the simpler one. It follows that if we want to discuss the true merits of blockchains, then we shall identify those problems that could be solved using blockchains, and which could not be solved by simpler existing technologies.
Continue reading "Blockchains: useful or not?"
When people discuss Bitcoin, one of its properties that is often considered is its presumable anonymity. In this respect, it is often compared to cash. However, it shall be recognized and understood that Bitcoin is not as anonymous as cash; far from it, actually. Its anonymity relies on the concept of pseudonyms, which delivers some (unjustified) sense of anonymity, but very weak anonymity in practice.
Continue reading "Bitcoin does not provide anonymity"