How to debate Bitcoin, cryptocurrencies, blockchain, and the dark web
Recently there have been a number of debates set about Bitcoin and cryptocurrencies. These are technologies that rely upon another technology called the blockchain. I've seen at least one instance of a team trying to fiat out discussion of the blockchain and instead confine the debate to cryptocurrencies alone. This is not a legitimate definition. Bitcoin, and all other cryptocurrencies, only exists as a result of a blockchain: it's the part of the architecture of the blockchain that incentivises people to donate their computing power to keeping the blockchain running and working. That means that the two technologies are inseparable, and so you can't have a discussion about cryptos and their implications without also discussing the potential applications of blockchain for e.g. circumventing censorship and removing middle-men from transactions.
This guide should give you a decent understanding of the structure of a cryptocurrency and the potential applications of blockchain. It should also give a decent outline of current issues facing this field, before going on to give a brief explanation of the dark web and the ways in which it has been used - historically and currently - to facilitate the sales of illicit materials.
Before reading this, it would be a good idea to read this primer on encryption, as all of the technologies below depend upon it and it's often misunderstood.
Structure of a cryptocurrency
A blockchain is a distributed public database that keeps a permanent record of digital transactions.
Imagine you're a company in the era before computers and you have a ledger in which you keep a log of all of your transactions. Anyone who came along would be able to look at that ledger and check those transactions: where money came from and went to, what was sold and for how much, and whether everything added up.
The blockchain is like a ledger, but it's distributed across all computers that use a cryptocurrency like bitcoin. In order to mine bitcoin, or do a bitcoin transaction (in most circumstances), you have to download the entire blockchain onto your computer. That means that, unlike a normal ledger, the blockchain is stored across a lot of computers, and is thus decentralised and can be accessed and inspected by anyone.
Every "block" in the blockchain contains a record of recent transactions, a reference to the block that came immediately before it, and an answer to a difficult mathematical puzzle (see below).
The way that blockchain is used to support bitcoin (or any given cryptocurrency) is through the decentralisation mentioned above.
Whereas with a normal currency, there will be a central body that authorises your transactions and the currency they're performed in (for example withdrawing money from a bank, which was in turn issues by a central bank which sets interest rates), with bitcoin there is no central authorising body.
Instead, the authorisation (the process that checks and checks again to make sure that a transaction was correctly conducted (there was no fraud, the currency is real, and went from one specified address to another) is done by computers. That authorisation requires a massive amount of computing power, because in order to authorise the transaction, a very complicated mathematical problem must be solved (to prevent the aforementioned problems of fraud etc).
Where does that computing power come from?
There has to be some incentive to place your computer at the disposal of the blockchain: the calculations are time and processor intensive, and that means they cost money in electricity bills to both power and cool the computers involved.
The incentive is bitcoin. Individuals who devote their computing resources to the network compete to validate bitcoin transactions in each block by solving the complex mathematical problem associated with that block. If they solve the problem and validate a bitcoin block, they are rewarded with bitcoin, which then goes into their wallet.
The power of this decentralised network is that power, economic value and governance are distributed among the network's stakeholders (miners and consumers who use the currency) rather than concentrated in a single organisation (banks, governments and accountants). Anyone can own and transfer assets digitally without a third party.
A protocol is a set of rules that nodes in a network use when they transmit information to one another, specifying how interactions work between them. Examples include the Internet Protocol (IP) or Transmission Control Protocol (TCP), which governs how messages are exchanged at the packet level on the internet.
Protocols in blockchains are the "cryptoeconomic rules" that are enforced by a blockcain in order to maintain distributed consensus across the blockchain's network of users.
These cryptoeconomic rules govern a decentralised digital economy that:
a. Uses public key cryptography for authentication
b. Has economic incentives to make sure the rules are followed.
Tokens (bitcoin etc)
Bitcoin is an example of a token - the asset that incentivises the rules being followed on the blockchain. A token is built on top of the blockchain, and is an asset that someone owns that can be transferred to someone else.
Bitcoin is an intrinsic token - it's built directly on top of the bitcoin blockchain. Other tokens (Monero, Litecoin) are built by "forking" the bitcoin blockchain (taking the original blockchain source code, which is freely available, copying it, and building a new token on top of it) or by building an entirely new blockchain and then having tokens built on top of that (e.g. Ethereum).
Bitcoin was originally envisioned as a system where anyone could mine using their personal PCs to earn some cash by supporting the network.
As it became more valuable, people realised that the mining could be done more efficiently with custom built circuits called application-specific integrated circuits (ASICs).
These ASICs are mass-produced and owned by a few very large companies that house them in air-conditioned warehouses and make their money primarily from mining cryptocurrency. These ASICs are capable of computing the necessary problems so much more efficiently than PCs that PC miners soon couldn't produce enough bitcoin to even cover their electricity bills.
A number of forks have been executed with an aim to decentralise the mining process and put the power to mine back in the hands of individual users (e.g. Bitcoin Gold, launched in August 2017).
By analogy, you can think of tokens as currency and protocols as monetary policy.
Main takeaway here: every token is based on some underlying blockchain.
Money is only one application of the blockchain. There are an enormous number of potential uses for the blockchain for both protocols and applications.
Protocols developed for cryptocurrencies have the potential to solve problems with centralisation that are endemic to the internet.
Examples include protocols for payments, identity, domain name systems, cloud computing, reputation systems, etc.
Many of these systems are currently highly centralised through e.g. Paypal, Google and Amazon, and there are no defaults or standards on the Web.
Decentralised Applications (dApps) can be developed using the blockchain.
What does this look like?
Bitcoin uses a scripting system for transactions on the bitcoin blockchain. That script defines the requirements that recipient has to meet in order to gain access to the transferred bitcoins. In a typical transaction, the sender has to provide a public key which matches the destination address included in the script, and a signature to show evidence of the private key that corresponds to the public key they just provided.
There is flexibility in the parameters that can be sent with a transaction, e.g. a script that makes it only valid if there are two private keys. This means that we can move money or information around without requiring us to trust some third party to follow a set of rules. We just trust the code.
The main idea behind dApps is that there is a decentralised set of rules that define an application, sitting on a public and decentralised blockchain instead of a central server owned by a large entity like Facebook or Amazon. This enables the application to be governed by autonomy and be resilient to censorship.
Problem - where are the apps?
Bitcoin, since its release in 2009, has yet to become much more than a store of value and a speculative investment.
There are wallets and exchanges like Coinbase, GDAX and Kraken.
Likewise, there are dark net markets (most of which are now compromised or shut down) which have processed billions of dollars in drug sales.
Blockchain lacks developer friendliness and tooling, which makes it hard to program applications with it.
Building decentralised applications with strong network effects is hard.
Network effects are when a product or service increases in value as more people use it (think Facebook).
Those network effects help build better products and services, but there's a chicken and egg problem with building the network.
It's hard to get both investors and product builders involved in, say, a decentralised crowdfunding platform because there is no easy framework or tools provided to drive adoption of the network.
Decentralisation alone isn't all that great.
We have existing apps that work perfectly fine: Kickstarter for crowdfunding, Transferwise for remittances, Paypal and Venmo and Square for payments.
Ethereum was launched in 2015, built on its own blockchain technology. It's intended to include a built-in usable programming language which would allow anyone to write smart contracts and dApps.
You don't need to know the details, but the key point here is that Ethereum allows developers to develop any type of application, safely and reliably, with no centralised governance.
What could this look like?
Smart contracts - like a regular contract between people or entities, but run entirely on the blockchain, removing humans from the loop and making them automated, open, secure and trustless.
Decentralised organisation - an organisation that runs based on rules encoded within smart contracts.
In addition, Ethereum allows additional protocols and tokens to be launched very easily. This gives rise to the ICO, or Initial Coin Offering, where tokens are sold off as a means of kickstarting an application.
Initial Coin Offering (ICOs)
Comparable to an Initial Public Offering (IPO) - when a company goes public by selling shares to investors, who then sell to the public on the securities exchange.
ICOs are used to raise capital, just like IPOs.
KEY DIFFERENCE: IPOs are regulated by the SEC and have a set of legal requirements and a formal process for how they're done. ICOs are currently completely unregulated.
In an ICO, a party offers investors some units of a new cryptocurrency (tokens) for a certain price, that can then later be exchanged with other cryptocurrencies. So the investors buy into the tokens, which are then transferrable on cryptocurrency exchanges like Bitfinex and GDAX.
Ethereum's smart contracts enable startups to use token sales to fund the development of protocols and applications built on top of existing blockchains.
Tokens can be used to represent a very large number of different things:
Paid credits within an application; entitlement to a share of profits and losses, or assets and liabilities; ownership or equity interest in a protocol or project; voting power in a company; or just mere existence that can be freely traded.
Some projects have successfully raised funds via token sale, including Augur, Antshares, Melonport, and Gnosis.
The network effect problem outlined above (applications only become useful when they have users, but they need users in order to be able to attract users) can be resolved in part by dApps and protocols.
Early adopters who believe in a protocol or application have an incentive to buy the token because it may be worth more in the future.
Tokens can bootstrap a network of early adopters because their incentives and those of the development team align. Once you've bought the token, you have an incentive not just to keep it, but to proselytise.
Many of these new protocols and applications will fail in the same way that start-ups do, but over time it's likely that some core set of protocols and associated networks will successfully drive mainstream adoption.
Current issues & future prospects
Tokens would ideally have a value that is tied to the value of a protocol or application, in the same way that a company's stock is tied to the company that issued it, or to represent a valuable digital right to a service. Right now, the value of tokens is mostly speculation.
The cryptocurrency market is volatile and frothy.
Securities regulations make it hard to sell tokens (which are unregistered securities) as equity, and so developers instead structure them as unregulated crowdsales.
This is fine in some instances where respectable projects need capital, but there's a large number of projects that are just taking advantage of the excitement over ICOs to raise millions of dollars in capital with little to show.
There have been some scams where the funds have just ended up disappearing along with the developers.
Bitcoin is a game of chicken. Its rise in value has very little to do with the currency applications, and everything to do with it being a store of value.
The higher the value of bitcoin goes, the more confident investors become. For example, it's easy to believe in gold as a store of value because it's been used for thousands of years. As bitcoin gains more value, its increase in value becomes a self-fulfilling prophecy.
Arguably, it might not be a bubble: Amara's Law states that we tend to overestimate the impact of a technology in the short-run and underestimate it in the long-run. Even if bitcoin takes a short term hit after all the hype, it's likely that in the long run it continues to act as a store of value.
Blockchain's potential for disruption of industries comes through its decentralisation.
E.g. someone could invent a life insurance app on the blockchain, which would remove the insurance companies and allow people to directly pay in premiums and get payouts, rather than having a middle-man skimming off the top.
The industries most at risk are those where middlemen take the highest tolls: investment managers; internet software; banks.
Other examples: Augur is a decentralised prediction market; PROPS is a decentralised digital video economy; OpenBazaar is a decentralised P2P marketplace.
Balkanisation of bitcoin is another risk.
If you are unhappy with Bitcoin, you can either suck it up, sell your bitcoin and leave, or take the open source code and fork it. This splits the community and creates divergent loyalties, as well as meaning that Bitcoin's governance structure is fairly rigid as these are the only options.
Bitcoin (and specifically bitcoin) is traceable.
All interactions are transparent: transactions are public, traceable, and permanently stored in the network. Bitcoin addresses are private, but once used they become tainted by the history of all transactions they are involved with.
Anyone can see the balance and all transactions of any address. Since users usually have to reveal their identity in order to receive services or goods, Bitcoin addresses can't be anonymous.
Because the blockchain is permanent, something not currently traceable may become trivial to trace in the future.
The privacy concerns can be circumvented, either by "tumbling" your bitcoins (like laundering money), or by using a completely anonymous service like Monero.
Monero obfuscates the amounts, origins, and destinations of all transactions, and is untraceable.
This is rapidly becoming the crypto of choice for individuals wanting to purchase illicit goods.
The Dark Net
What is it?
A darknet is a network that can only be accessed via specific software or authorisation.
Two typical types are peer-to-peer networks often used for file sharing; and privacy networks like Tor.
It's not the "deep web", which refers to all of the pages on the internet that are not indexed by search engines.
The dark net is used for a number of different purposes:
Computer crime; protecting dissidents from political reprisal; file sharing; protecting the privacy rights of citizens from surveillance; sale of restricted goods on darknet markets; whistleblowing; circumventing network censorship; exercising human rights like free expression; and so on.
Tor, or "The Onion Router", is a piece of free software that allows users to access the internet anonymous. It drives traffic through a free worldwide overlay network consisting of thousands of relays, concealing the user's location and usage.
The fact that someone is using Tor can be seen, even if their activity cannot.
In order to access a site on the dark net, you need to already know its address. This means that it's quite difficult to access sites unless you already know of their existence (although it's not impossible, and notably experts are able to access many sites through various exploits and code loopholes).
Dark Net Markets (DNMs)
DNMs are used to buy and sell illicit or restricted products, such as drugs and identity documents.
Used to be incredibly popular. The first, the Silk Road, was shut down by US law enforcement in 2013 and markets have been under increasing attack ever since.
2017 saw the fall of AlphaBay, one of the largest DNMs. Dream, another still existing market, is thought by many to be compromised and under the control of law enforcement.
They work by keeping funds in escrow: buyers place bitcoin or another crypto in a "wallet" on the site and use those funds to purchase goods from vendors. The vendors send the goods, and on receipt the funds are released from escrow to the vendor.
This has made them vulnerable to exit scams, where the owners of a DNM have simply taken all of the bitcoin currently in escrow and disappeared, leaving buyers and sellers short of huge amounts of money.
Alternatives include P2P networks and forums where purchases can be organised without a middle-man. One example is The Majestic Garden, a forum where psychedelics are advertised by verified vendors. Users post reviews of the vendors' products, meaning the forum functions like an old-fashioned trust-based system of purchase.
This kind of peer-to-peer solution could also involve blockchain: if an application could be developed that would allow individuals to make purchases without having to go through a central authentication, then this would make the purchase and sale of e.g. drugs significantly easier and less vulnerable to law enforcement cracking down on it.
I hope you enjoyed this article. This website costs me quite a lot to host, and is entirely funded by adverts. If you have 2 seconds, it'd be great if you could give some of them a click. Every click genuinely makes a significant difference, and it won't cost you anything but an infinitesimal fraction of your time.