Manipulating Decentralized Systems
There’s been a lot of mud in the water about decentralized systems. Most critically, in the matter of bitcoin and blockchain-based financial infrastructure.
The utility of blockchain and bitcoin, relies fundamentally on the decentralized nature of the system; i.e. there is no central banking authority; reliance on centralized entities for finance, theoretically, drops to nil. And because you don’t have a central bank manipulating the supply, bitcoin has a capped supply and at least in theory, is more inflation-resistant than USD.
All very well and good.
While much time it spent extolling these virtuous properties, infinitely less is spent on the topic of *HOW DECENTRALIZED SYSTEMS CAN BE MANIPULATED AND VULNERABLE TO ATTACK *, how control can be established over a decentralized system, and how a decentralized system can be vulnerable to centralized actors, like venture capital; how the properties emerging from decentralization can be compromised by malicious actors.
In focusing on the many virtues of such systems, we have forgotten to examine the important matters of how people, institutions, capital, etc. interact with and function in a decentralized system, which is equally a factor as the existence of the system itself. We have neglected the importance of examining what *systems attacks* of *many kinds* can look like in a decentralized system.
In fact, we are facing a number of threats and manipulations of blockchain, bitcoin and other decentralized platforms, yet the standard line about decentralization is keeping us from talking about it.
Decentralization must not just exist, it must be defended. And blockchain has been stormed.
I think a good categorical comparison here is Tor, which is a decentralized system to provide, in theory, truly anonymous browsing and networks. Like blockchain, it is supported by a global network of nodes. Tor offers us some good examples of how a decentralized system can still be compromised, particularly in the matter of nation-state level threats and resistance to intelligence agencies, etc.
Most significantly, in quite a bizarre story, Carnegie Mellon University (my alma mater) in 2014, funded by the department of defense, attacked the Tor network as part of efforts to de-anonymize Tor. CMU introduced a critical mass of malicious nodes to the system; because of how much control they were able to have in the system through these nodes, they were able to de-anonymize traffic. Tor’s write up of the incident:
“A traffic confirmation attack is possible when the attacker controls or observes the relays on both ends of a Tor circuit and then compares traffic timing, volume, or other characteristics to conclude that the two relays are indeed on the same circuit. If the first relay in the circuit (called the "entry guard") knows the IP address of the user, and the last relay in the circuit knows the resource or destination she is accessing, then together they can deanonymize her…
Then the second class of attack they used, in conjunction with their traffic confirmation attack, was a standard Sybil attack — they signed up around 115 fast non-exit relays, all running on 50.7.0.0/16 or 204.45.0.0/16. Together these relays summed to about 6.4% of the Guard capacity in the network. Then, in part because of our current guard rotation parameters, these relays became entry guards for a significant chunk of users over their five months of operation.”
In another famous incident in 2021, law enforcement cracked around 400 hidden services on dozens of Tor servers. A malicious party gained control of more than 27% of node exit capacity; the Tor exit nodes are the final node that information goes through to be delivered. This allowed them to “spy” on the network.
One of the major themes here is *the ability to gain a large bloc of resources* by an organized actor in the decentralized system, presenting a fundamental threat to it.
It is this threat most fundamentally, that I believe is being missed in most of the talks about decentralization. Yes, bitcoin has no central bank and has a fixed space, but giant blocs of bitcoin are owned by just a few monolithic actors and venture capitalists are building a giant centralized infrastructure around it, full of thousands of centralized financial startups all answering to the same centralized money and implementing centralized features, goods and services. So what is the truth?
The truth is that blockchain is a distributed database or protocol, depending on your leanings, with some fantastic underlying principles; AND that this is not enough to create a fairer, better, or materially different economic system. I.e., outcomes. And it is also not enough to make a decentralized financial system. Necessary, but not sufficient.
How much of the bitcoin today do you think is owned by the top crypto VCs, such as a16z and Founder’s Fund, and by all of the startups that they have founded, including huge portions of the crypto ecosystem, some of which are now publicly traded? And how much is owned by those investors personally, by their direct colleagues, their families? By the tech elite, the many multi-billionaires we continue to churn out? What is the personal holdings of all tech elite, all of whom know each other, work together, and have for 3 decades? How much bitcoin will they have as they build ever-bigger and faster bitcoin mining operations in everywhere from Texas to El Salvador, where there are no taxes on crypto, and where venture capitalists are the only ones with the capital and core competency to do so?
In fact, the wealth distribution of bitcoin is even worse than in the American financial system, which is internationally known for its insane and cruel wealth distribution, in which the top 1% own significantly more wealth than the bottom 50%.
In 2021, the National Bureau of Economic Research released a blockchain analysis [PDF] that showed just how extreme the distribution problem on Bitcoin is: .01% of all Bitcoin holders have 27% of the digital currency. That was in the end of 2021; last year, this only accelerated as large institutional investors as well as the tech elite and venture capital, bought up crypto, crypto startups and inked crypto deals at the rock bottom of the “winter”; weird!!!!
Attesting to our theme that protocol alone is not enough, through legal measures, nation-state level actors have been able to consistently confiscate bitcoin, making intelligence agencies the custodians of major chunks of coin. For example: in 2013, following the raids on Silk Road, the FBI had the largest bitcoin wallet in existence, with 174,000 bitcoin. So we have already seen how a hostile actor is able to attack the system through the nation-state-level formation.
Now, you may say: “no one said it was going to be fairer / have different wealth equality / *actually* be resistant to nation-state level actors”, but that is emphatically NOT the case, EVERYONE has been saying things like this, from venture capitalists themselves to their startups to the many crypto pundits and influencers. Discussion of wealth access and opportunity and equality and a fairer financial system, leveling the playing field, brighter financial futures, stability, generational wealth, etc. are nice words, all of which are deeply tied up in, materially, ownership and distribution. And in that matter suddenly no one has anything to say, because that would mean facing the reality that while a decentralized system has many advantages, it certainly doesn’t protect against the formation of monopolies and high concentrations, even centralized concentrations, of resources in the system.
What if you thought less about how bitcoin was a decentralized system, and more about how it is a decentralized system that, because of how it has been implemented and operated and controlled, has even more wealth inequality than the existing centralized bank system? And that that trend is more than likely to continue as venture capitalists and major financial institutions buy up huge amounts of crypto and invest in all of the infrastructure around it, making sure they are the primary beneficiaries of this?
To this, we must add the issue of bitcoin mining, which is generating huge crypto wealth for those who can afford the compute (venture capitalists, primarily). There has been a huge increase in investment in bitcoin mines over the past several years, exemplified by both Elon Musk and Peter Thiel opening mines in Texas and the largest mine in the world being planned, backed by venture capital, in El Salvador. On this topic, our MIT and NBER study from 2021 reports:
“We show that the Bitcoin mining capacity is highly concentrated and has been for the last five years. The top 10% of miners control 90% and just 0.1% (about 50 miners) control close to 50% of mining capacity. Furthermore, this concentration of mining capacity is counter cyclical and varies with the Bitcoin price. It decreases following sharp increases in the Bitcoin price and increases in periods when the price drops or when there are halving events. Thus, the risk of a 51% attack increases in times when the Bitcoin price drops precipitously or following the halving events.”
An issue of highly concentrated resources brings us within sight of a major failure condition; a 51% attack, in which an entity gains 51% of the computing power in the system and thus is able to tamper with the blockchain and the entire system in various ways like rerouting transactions, blocking transactions, and overriding the “double spending” mechanism which is a fundamental technical attribute of the blockchain. Many of the alt coins that are currently in circulation provide an immediate concern as the relatively smaller system makes it possible for malicious actors to gain majority over the system.
Most people I see in crypto disregard the 51% attack as totally improbable; when a small, identifiable group of people with shared goals for global financial domination is within a stone’s throw of a 51% attack, why in the FUCK would we not be talking about it
all of the time?
Why is there no major effort to intercede in this resource allocation?
I find it extremely hard to believe that people are serious about decentralization when there is very much a 51% attack bloc here.
ANYTHING but discuss the venture capital threat.
If someone WERE to commit a 51% attack, who would that be? Venture capital and the crypto system around venture capital are the only ones who even have the possibility of this type of attack due to their massive and consistent investment in stockpiling crypto, crypto infrastructure and crypto mines, and due to the access to compute and capital that they have. And the fact that they have gained even the possibility of the power to commit such as attack — which is the reality — speaks to a deep, deep problem in how the ecosystem around this technology is evolving. It is highly likely that venture capital either has or is trying to secure the ability to do such an attack and if you think they don’t seek that power or would never use it, I simply don’t know what to tell you. They openly state they are fascists who want to run their world. Next question.
The ownership over mining is obviously a massive concern here and again, we are seeing VERY aggressive build-outs by crypto VCs in the mining space, with mines in construction all around the world and a host of mining startups coming online. They will be able to also grow this through acquisitions in the space. Consolidation is a serious threat.
This is a major issue of concern. Venture capitalists are engaged in multiple vast financial conspiracies and one of their core competencies is being able to drive large amounts of capital, pieced together from various parts of their vast portfolios, towards shared goals. The ecosystem of crypto startups, including banks and platforms for institutional investors, required a massive coordination of capital to push this thing into the market. Even if you don’t believe that VCs would use their resources in a 51% attack — in which case, I would say you are a fool — it is unquestionable that the massive concentration of bitcoin and bitcoin mining capacity by venture capital opens up bitcoin to very serious market manipulation and even compromise of the system itself. And that venture capital has done absolutely nothing to address this. Why would they? It makes them kingmakers.
If I were the them, I’d be making sure I had 51% at all times. Period.
Having a massive bloc of the currency in this system, most of the mines, and most of the financial infrastructure around blockchain, means they can do all kinds of shit with it, really throw their weight around. They are the nation-state level force in the system. If you looked at just the economic patterns here, you would point to their role and say “this is the nation-state level actor in this system”. They can issue their own loans with their own rates, to anyone they want, including nation-state level actors. They can manipulate those rates across their entire portfolio of financial companies; they form a formidable monopoly even now. They can sell fuck-tons at once, or buy up tons more all at once. They can cause shocks in the market with buying and selling behaviors. Their control of the financial ecosystem around crypto means they can absolutely cause system-wide manipulations in interest rates and how much bitcoin is available to buy in the market. They can do sell-offs. They can bolster or reduce trust in the financial system around crypto, that they control, impacting its price. In a world where they hold significant amounts of the global financial infrastructure, they can shut down services to individuals and countries at will, can even seize money like we have seen PayPal do in the past when suspending or banning users, because even though blockchain is decentralized, the financial system we are actually building on top of it, is not.
This is their speciality: manipulating markets. And blockchain hands them their biggest market yet. It is these types of attacks and vulnerabilities that we should consider: what it is possible to achieve in a decentralized system once you have captured and concentrated a large amount of the resources in it — currency or compute or financial infrastructure? What mechanisms above the protocol layer are needed to build this very complex ecosystem and ensure its integrity?
It is so early and this level of concentration is at this point baked in — venture capital control and dominance is baked into everything about this system. As in, we can expect this situation to retain this level of inequality and in fact to become more unequal overtime. The madly, irresponsibly, cruelly unequal distribution that VCs have worked relentlessly to secure in crypto, has become an enduring substrate in its own right. It will be unmoving.
There is no sign that the share of either bitcoin or compute capacity or crypto financial infrastructure and startups is going to begin decentralizing. The implications of bitcoin replacing government currencies — likely in a state of economic collapse — means that their huge percentage of the pie will encompass more and more of the world’s total economy. All they have to do is hold. The *potential* market share of bitcoin is much bigger than any other currency; this is quite literally a play to command 27%+ of the global markets, and that is very much how venture capitalists are thinking of it. And say so often. “Blowing up the central banks” and talk of replacing existing government currency is the everyday fare of crypto podcasts and tech elite openly talk about all of this. Yet there is far more hysteria around single shitcoins than about the very real threat that hyper-concentration of currency and compute and access/transaction infrastructure, poses to a decentralized system. Such as the fact that VC is now incentivized to cause the sudden collapse of existing financial infrastructure and economies.
At this level —the level of startups, businesses, financial technologies, wallets, exchanges, etc. — centralization is inevitable and we already know that there are more centralized exchanges than decentralized exchanges at this point. Centralization is inevitable because the people who are building infrastructure for this — venture capitalists — are purposefully building everything to be centralized, because that is how they make money. In reality, blockchain has been leveraged by entities whose primary financial motivation is to hook a point of centralization up to it so they can gain control over access and monetize around it.
The vast majority of the system is and will be manipulated via centralized points of control — whether that is an exchange, one of the many crypto banks that VCs are funding, a blockchain “stock exchange”, a wallet host, a financial platform like Fidelity or Blackrock via partnership with venture capital, etc.
Most access and use of the blockchain is going to go through a point of centralization, owned by venture capital. No matter how decentralized the system is at the machine level, the point of access creates a choke point and is the final bar for decentralization. Everything VC is building involves mediating access to the technology and transacting around it. The access that was supposed to be so decentralized. Because what venture capitalists DO is they build choke points and centralization points on decentralized systems. Take social media.
Take the whole fucking internet.
No matter how much it is theoretically possible to transact directly on chain and to have self custodianship, using only decentralized technologies at each step, that is simply not realistic and the reason it isn’t realistic is because its not in the interests of anyone who is being trusted to build this infrastructure, to actually offer decentralized solutions. The decentralization is for them; the centralization is for you, via a layer they erected using a superlative of capital, compute and talent deployment. There is no true incentive at the level of real power and money, around building up around blockchain, higher-level systems which are themselves decentralized. This has ceded more than half the battle for the possible virtues of blockchain.
It is not enough to have one part of a system, even at a foundational level, be decentralized, while the rest are not, and in very real ways, actually generate income from the tension between the centralization point they impose and the underlying properties of the protocol.
The same people who own most of the cryptocurrency and bitcoin mining operations, will continue to have more of it than any other party; they will continue to also control the ecosystem around it, in the form of hundreds and thousands of crypto startups which are, for our purposes, access points and all reporting into one centralized structure: the venture capitalist. This ecosystem consists of banks, loan companies, exchanges, technical infrastructure, institutional investor platforms, retail platforms — most people do not realize just how advanced the entire ecosystem around the blockchain has become in terms of its financial infrastructure.
Before most people of the world even have meaningful access to this, in these incredibly early days, venture capitalists have already built a giant moat and put into motion plays that fundamentally affect this system forever, have put into play fundamental principles of how the crypto system works on anything higher than a protocol level. This is THEIR currency, make no mistake.
So if you think of all of those as access points to the blockchain, we see that the venture capitalists have it essentially surrounded, and are working as hard as possible to control as many access points to the system as possible, and to do that using centralized entities, technologies, etc.. If you have to go through a centralization point owned by technofascist billionaires, through their new banks, for example; if the blockchain is totally surrounded in centralization points, can you call that system decentralized?
If you did, I would argue that you are officially mistaking an implementation detail for a system.
It is my contention that “decentralized” is a much deeper design principle that cannot possibly be ATTAINED only at one layer of a stack, and that ANY layer of the stack might compromise this enduring quality; that principle must suffuse the architecture. And that is not the case here. Decentralization will always be something you are working to obtain and that you must work to obtain and to protect.
There WAS another option: which would be a financial system, wealth distribution, compute, and infrastructure that was owned, built and operated by the people, to provide a decentralized FINANCIAL SYSTEM to those PEOPLE (not VC firms). Crypto is by VC, for VC. Even if other communities see value and utility in it, such as crypto hobbyists and “builders”, they are immaterial compared to the reality of this system and HOW THE PROTOCOL IS BEING IMPLEMENTED, not simply what it is mystically capable of in a world without power and money hungry venture capitalist pigs who are hell-bent on riding blockchain to the top of the world.
If central banks are the old boss, this is the new boss.
A financial system is a much more complex thing than a single decentralized protocol, and that the two have been equated, and then no additional attention paid to the BLUEPRINT for how this all going to go down, for the *implementation* of the technology — is frankly a fucking joke. 99% of crypto Twitter seem to have been sold or is selling a lie that a decentralized protocol can create a magically and holistically better FINANCIAL SYSTEM. And it is amazing all the talk you hear that seems to care so much about the architectural principles at play in the micro, but abandon it the second shit gets more real than you and your buddy sending shitcoins to each other’s self custody wallets. This apparent interest in architecture, systems design, etc. actually doesn’t go into any greater depth and has nothing of creativity or systems thinking to spend thinking about what the financial system that is BUILT on top of this system could look like and how our supposed principles and values are, or are not, reflected therein.
Much less imagine anything better. There *is* a different direction that bitcoin and blockchain could be going in, but it has been effectively captured and held hostage by crypto venture capital.
There are many ways to negate the power of a technology. Try pulling the power plug out of your lamp. Now it produces no light. You can say it’s a light, still, but you are once more in darkness, your old friend. Outside forces can act on a system in a way that influences it. This includes financial systems, however sound their underlying protocols are. We seem to have mistaken a coin for an economy. And as a result, the chance to actually re-do the economy slips away into billionaire oligarchy while they continue to sell the dream.
People tend to assume outright that because I critique technology that I think blockchain is like, bad or something. Rather, it is that: only by taking a systems view, particularly when it involves the economy, can we get a better material grasp on what is actually happening. Because it sure ain’t more equitable, more accessible, better for poor people, more inclusive, etc. And that was a choice that was made. By venture capital. The #1 enemy of crypto.
It’s only a fucking protocol. And there’s monsters in here.