By George Gilder
Rising into a gray Baltimore dawn recently after nearly two hours of rousing live video, I felt less like a prophet on the way to the White House that day, and more like a hungover pilot after a bombing raid.
I issued predictions of “doom” for Bitcoin, the leading blockchain, dim futures for 5G wireless spectrum auction winners, and dethronement of the dollar as reserve currency by new cryptocurrencies, including one to be launched by China’s central bank.
The rule in predictions is to tell what or tell when, but never foretell both at once. But I declared that it would all happen in the whopping year of 2020, glowering down at us less than three months away.
The doom for Bitcoin is only partial. It will survive my bombs, but will sink into specialized niches suited to their particular limitations.
Today, I will discuss the bitcoin prophecy.
Bitcoin suffers from its 21 million cap on the number of total units to be released by 2040 It is already close to 17 million. Defining a currency by the number of units rather than by the price of each unit was Satoshi’s tactical coup.
It evoked sugar plums in the minds of many purchasers and it accelerated — or even possibly enabled — bitcoin’s adoption. Its first miner and advocate Hal Finney calculated that as it took over its role in global transactions, each coin would ultimately be worth $10 million.
Each coin could be broken down into a potential 100 million “Satoshis,” each worth a dime. But the number of coins was rigidly limited.
The 21 million cap was a strategic error because it made bitcoin too volatile and speculative to serve as viable transactions medium or unit of account. The cap thus prevents it from functioning as a currency or monetary measuring stick.
Satoshi aimed to create “digital gold.” But as Mike Kendall, author of the authoritative Man on the Margin blog, has calculated, if bitcoin’s supply tracked the growth of gold through mining, there would be not 21 million units in 2140 but 316 million units.
The blockchain aims to be a distributed immutable database for timestamped transactions beyond centralized control. With a mathematical hash or fingerprint of all transactions on every node in the network, it is impossible to hack without capturing more than half the nodes.
While the cap attracted investors and traders, however, it disabled bitcoin and its blockchain architecture as a joint remedy for the twofold hacking crisis in the world economy — the hacking of internet sites by spies and saboteurs and the hacking of world money by Central Banks and politicians.
The more that is spent on internet security the less secure becomes the net. After cracking the threshold of one billion breaches of personal data in 2018, the net is on track for three billion breaches in 2019. While internet security becomes a bonanza business, the Internet becomes catastrophically less secure.
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As a result, no one trusts anyone on the net and it disintegrates into national fragments. The exclusion of Huawei equipment from the US is chiefly the result of this technical failure causing a breakdown in trust.
Bitcoin is becoming a niche currency good for large international transactions and emergency use in broken economies such as Venezuela and Zimbabwe. But despite the rise of “Lightening’s” off-chain transaction channels, bitcoin has failed both as a currency for transactions and as a platform for applications.
Adding to the volatility flaw of the 21 million cap is the shrinkage of rewards for “mining.” Inflicting this effect is the quadrennial halving of bitcoin block rewards for the so-called miners who compete to assemble blocks of transactions and validate them for the system.
This payoff is about to drop from 12 bitcoins to six bitcoins, reducing the total value of rewards from around $400 million to $200 million depending on the bitcoin price.
As bitcoin approaches its cap, it has a tendency both to centralization and fragmentation. With a decline in rewards, control migrates to an ever-smaller group of the most successful miners.
When the system fractures into different coinages through what are called hard forks — now original bitcoin, bitcoin cash, and bitcoin Satoshi version — mining rewards shrink still further. The system becomes vulnerable to a centralized takeover called a 51% attack.
Bitcoin’s chief rival and complement is Ethereum. The brilliant creation of Vitalik Buterin, lured from Waterloo University by Peter Thiel’s $100 thousand entrepreneurial fellowship, Ethereum simultaneously launched five key innovations: a new blockchain, a new native currency, Ether, a new source of value, the “gas” or energy it uses, and a new platform for smart contracts, programmed in a new language, Solidity.
Ethereum proved Buterin’s genius by supplying a robust architecture for thousands of Initial Coin Offerings (called ERC-20 tokens), raising some $20 billion for startups at a time of IPO dearth.
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But as Giuseppe Gori explains in his definitive book, Reinventing the Blockchain, Ethereum is ultimately modeled on the bitcoin blockchain and exhibits many of the genetic flaws of bitcoin. Like bitcoin, it seeks user anonymity. This choice necessitates a burdensome mining system to remedy the resulting lack of trust.
Ethereum’s smart contract model requires its software to run on all nodes, with results verifiable and storable on the blockchain and identifiable by a hash (or mathematical fingerprint) of the blockchain’s content.
In theory, Gori explains, such a smart contract model, using independent addressable objects (the contracts), linked through asynchronous messages could form the primitives for any applications. But because of the resource limits of a blockchain in which every program has to run on every node, the smart contracts become bottlenecks.
The smart contracts, Gori declares, are ultimately “costly, slow, unscalable, and vulnerable.” Thus, they render Ethereum, like bitcoin, a niche system, good for ICOs raising millions of dollars but not a new Internet architecture or new money.
With persuasive detail and resonant authority, Gori presents a superior alternative. It begins by replacing anonymity with identifiable unique users. Anonymity was always a mistake.
Reflecting the privacy paranoia prevalent among cryptographers, it cripples any system that adopts it. It cannot even readily comply with Know Your Customer (KYC) requirements of financial regulators.