Cryptocurrency networks are intensely political. But it’s often fiendishly hard to work out how those politics operate.
Can governance problems be addressed by industry codes, or should software developers carry legal responsibility as fiduciaries?
“A new cryptocurrency is a piece of technological design work”
In his academic work, MacKenzie looks at the political consequences of apparently mundane choices regarding computer hardware and programming languages.
“When someone sets up a cryptocurrency what they are doing is a piece of technological design work,” MacKenzie tells listeners during the podcast.
“I’m interested in how Satoshi Nakamoto solved the crucial technical problem of achieving consensus in a decentralised system, where some of the actors can be assumed to be bad.”
According to MacKenzie, who trained as an applied mathematician before devoting his research efforts to sociology, the pseudonymous inventor(s) of the first cryptocurrency, bitcoin, deserve great credit.
“Proof-of-work is a conceptually brilliant idea,” says MacKenzie.
“The problem Satoshi set out to solve was a very difficult one. Unfortunately, what has also become clear is that it is an extraordinarily energy-intensive way of solving the problem.”
“The centralising and decentralising forces are in permanent tension”
Aside from the rising energy costs of cryptocurrency mining, this activity has also changed from an amateur pastime to a highly specialised form of computing, dependent on specially designed chips.
This has created an unstable balance between network participants, says MacKenzie.
“The centralising forces and the decentralising forces are in a kind of permanent tension,” he says in the podcast.
“You have a decentralised model that in actual practice can become a lot more centralised than one might imagine: both at the level of the core software developers and at the level of mining.”
More broadly, says MacKenzie, there are always political consequences of apparently neutral technical decisions, such as those regarding software protocols.
“It’s very commonly the case that apparently technical design decisions—say, what should be the block size in bitcoin, or should a cryptocurrency be designed around bitcoin-style proof of work—are simultaneously political. They involve vested interests, as well as cultural and political goals,” MacKenzie says.
“Bitcoin has become a fairly conservative system”
Are the disputes over bitcoin’s protocol now over?
Perhaps surprisingly, MacKenzie says he doesn’t expect further major upheavals in the most widely traded cryptocurrency, at least at the protocol level.
“My sense is that bitcoin has become a fairly conservative system. It’s difficult to anticipate any radical change in its design,” he says.
But the same is not true for other cryptocurrencies, whose protocols may still see significant change, says MacKenzie.
“Ethereum seems to more in flux. A move from proof-of-work to proof-of-stake would be very interesting. But there’s also the issue of the fundamental security of proof-of-stake. By comparison, proof-of-work seems pretty robust.”
MacKenzie has written extensively on the technology of high-frequency trading (HFT). On the face of it, bitcoin is the antithesis of HFT.
“Bitcoin was designed to be slow finance”
“Bitcoin was designed to be slow finance—like the slow food movement—precisely to achieve this goal of global decentralisation,” says MacKenzie. “It takes time for blocks to percolate through the network.”
Bitcoin blocks (files of transaction data) are processed around every ten minutes. By contrast, HFT operates at close to the speed of light.
But under the surface both HFT and cryptocurrencies are examples of the application of the latest technology to financial markets, he adds.
“There is a curious structural structural parallel between the world of high-frequency trading and bitcoin. In both cases you’ve got a kind of arms race. In HFT it’s a speed race. In the case of bitcoin mining it’s a computational capacity race. But in each case there’s a reward available. In the case of bitcoin, it’s the block reward. In HFT it’s the opportunities for arbitrage.”
MacKenzie finishes his comments on the podcast by returning to cryptocurrency protocols. He reminds listeners of the origins of cryptocurrencies as a protest movement.
“People have this democratic idea”
Popular support, he suggests, may be tied to the principle that the users of these new forms of money should have some kind of say in how they operate.
“People have this democratic idea—that in a properly designed cryptocurrency, ordinary users should be able to do the mining and earn the rewards. Hence there have been attempts to build ASIC-resistant currencies.”
ASIC-resistant cryptocurrencies are those in which standard computer chips, rather than expensive, specialist application-specific integrated circuits (ASICs), are used in the mining process.
And so, in MacKenzie’s view, there are a few key questions for analysts to focus on as cryptocurrencies continue to evolve.
“If the world of cryptocurrencies does get its momentum back, for me the key question will be which design wins out,” he says.
“Will it be bitcoin-style proof-of-work or proof-of stake? Will people succeed in making ASIC-resistant currencies mainstream, or will industrial-scale mining continue to dominate?”
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