Open thread: Bitcoin and similar cryptocurrencies

2013-12-11

in Economics, Geek stuff, Internet matters, Security

This article is a good explanation of how the Bitcoin protocol actually works. This one describes some of the problems the Bitcoin system is experiencing.

{ 29 comments… read them below or add one }

. December 11, 2013 at 1:37 pm

Many people claim that Bitcoin can be used anonymously. This claim has led to the formation of marketplaces such as Silk Road (and various successors), which specialize in illegal goods. However, the claim that Bitcoin is anonymous is a myth. The block chain is public, meaning that it’s possible for anyone to see every Bitcoin transaction ever. Although Bitcoin addresses aren’t immediately associated to real-world identities, computer scientists have done a great deal of work figuring out how to de-anonymize “anonymous” social networks. The block chain is a marvellous target for these techniques. I will be extremely surprised if the great majority of Bitcoin users are not identified with relatively high confidence and ease in the near future. The confidence won’t be high enough to achieve convictions, but will be high enough to identify likely targets. Furthermore, identification will be retrospective, meaning that someone who bought drugs on Silk Road in 2011 will still be identifiable on the basis of the block chain in, say, 2020. These de-anonymization techniques are well known to computer scientists, and, one presumes, therefore to the NSA. I would not be at all surprised if the NSA and other agencies have already de-anonymized many users. It is, in fact, ironic that Bitcoin is often touted as anonymous. It’s not. Bitcoin is, instead, perhaps the most open and transparent financial instrument the world has ever seen.

Anon December 11, 2013 at 10:22 pm

It’s pretty funny that all those Silk Road customers bought their drugs with the only currency in the world where every transaction is permanently logged and where every single user gets a copy of the log

. December 14, 2013 at 8:12 pm

The Bitcoin Ideology

One could argue that bitcoin isn’t chiefly a commercial venture at all, a funny thing to say about a kind of online cash. To its creators and numerous disciples, bitcoin is — and always has been — a mostly ideological undertaking, more philosophy than finance.

“The ideas behind it — that’s what attracted me,” said Elizabeth Ploshay, a regular writer for Bitcoin magazine, which describes its mission as being “the most accurate and up-to-date source of information, news and commentary about bitcoin.” And if the magazine has a mission, so, too, does the subject that it covers. As Ms. Ploshay explained it, bitcoin isn’t merely money; it’s “a movement” — a crusade in the costume of a currency. Depending on whom you talk to, the goal is to unleash repressed economies, to take down global banking or to wage a war against the Federal Reserve.

. December 22, 2013 at 11:04 pm

Why Charles Stross Wants Bitcoin To Die In a Fire

“SF writer Charles Stross writes on his blog that like all currency systems, Bitcoin comes with an implicit political agenda attached and although our current global system is pretty crap, Bitcoin is worse. For starters, BtC is inherently deflationary. There is an upper limit on the number of bitcoins that can ever be created so the cost of generating new Bitcoins rises over time, and the value of Bitcoins rise relative to the available goods and services in the market. Libertarians love it because it pushes the same buttons as their gold fetish and it doesn’t look like a “Fiat currency”. You can visualize it as some kind of scarce precious data resource, sort of a digital equivalent of gold. However there are a number of huge down-sides to Bitcoin says Stross: Mining BtC has a carbon footprint from hell as they get more computationally expensive to generate, electricity consumption soars; Bitcoin mining software is now being distributed as malware because using someone else’s computer to mine BitCoins is easier than buying a farm of your own mining hardware; Bitcoin’s utter lack of regulation permits really hideous markets to emerge, in commodities like assassination and drugs and child pornography; and finally Bitcoin is inherently damaging to the fabric of civil society because it is pretty much designed for tax evasion. “BitCoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states ability to collect tax and monitor their citizens financial transactions,” concludes Stross. “The current banking industry and late-period capitalism may suck, but replacing it with Bitcoin would be like swapping out a hangnail for Fournier’s gangrene.”

Why I want Bitcoin to die in a fire

. December 22, 2013 at 11:05 pm

Bitcoin has a dark side: its carbon footprint

At today’s value of roughly $1,000 per bitcoin, the electricity consumed by the bitcoin mining ecosystem has an estimated carbon footprint – or total greenhouse gas emissions – of 8.25 megatonnes (8,250,000 tonnes) of CO2 per year, according to research by Bitcarbon.org. That’s 0.03 percent of the world’s total greenhouse gas output, or equivalent to that of the nation of Cyprus. If bitcoin’s value reaches $100,000, that impact will reach 3 percent of the world’s total, or that of Germany. At $1 million – which seems farcical but which may not be out of the realm of possibility given the artificially limited bitcoin supply – this impact rises to 8.25 gigatonnes, or 30 percent of today’s global output, and equivalent to that of China and Japan combined.

anon February 25, 2014 at 10:46 am
. February 28, 2014 at 4:49 pm
. March 10, 2014 at 12:16 pm

The problems began with the discovery of a flaw in Bitcoin’s code at the start of February. Bitcoin is, in effect, a giant shared transaction ledger, recording who owns each individual unit of the currency at any one time. Everyone must use the same copy of the ledger—known as the “blockchain”—to prevent the same coins from being spent twice. The flaw, known as “transaction malleability”, muddles up the ledger so that successful Bitcoin payments do not appear to have been made. This could make it possible for hackers to trick badly-coded software—such as the proprietary Bitcoin wallets used by some exchanges—into sending money repeatedly.

. March 17, 2014 at 3:28 pm

Allegations of theft and hacking continued to swirl around Bitcoin, a “cryptocurrency” with a devoted following. Mt. Gox, one of the currency’s biggest trading platforms, which is based in Tokyo, shut its website amid rumours that around 750,000 Bitcoins have been stolen. A joint statement to “the Bitcoin community” by several other big exchanges insisted the system was still “trustworthy”, but that “there are certain bad actors that need to be weeded out”. See article

. March 30, 2014 at 5:09 pm

This set-up is the first workable solution to one of the more nagging problems of the digital realm: how to transfer something of value from one person to another without middlemen having to make sure that the item is not copied or, in the case of money, spent more than once? And Bitcoin does the trick while being open (unlike conventional payment mechanisms, which aim for security by shielding themselves from outsiders). This means that third parties can make use of Bitcoin’s features without having to ask anyone for permission—as is the case with the internet.

Such “permissionless innovation”, in the jargon, should in time result in a cornucopia of applications. Bitcoin’s technology could be used to transfer ownership both in other currencies and of any kind of financial asset. This, in turn, would allow the creation of decentralised exchanges which let asset holders trade directly. And money could be “programmed” to come with conditions: for instance, it might be released only if a third person agrees.

BITCOIN, to its most ardent fans, is more than a useful way to pay for drugs. It is also a technological marvel that could disrupt much of the consumer-finance industry. But is it money? The Bitcoin economy keeps growing, despite the periodic disappearance of large quantities of currency in hacker heists. The total value of Bitcoins in circulation has risen to $7.9 billion, from just $490m a year ago, while daily transaction volume is up by almost 60%. If Bitcoin aspires to match dollars and euros for money-ness, it will need to be more than just a Mastercard for nerds.

That other currencies remain the medium of account has so far been the Bitcoin economy’s saving grace. If Bitcoin matured into a complete currency, with large numbers of workers using it as their medium of account, then its inflexibility could bring economic havoc. Money-supply “shocks”, like the disappearance of Mt Gox, could set off a systemic collapse. Given a loss of faith in exchanges, users might withdraw their coins in a panic, leading to a dangerous decline in transaction volume. Such hoarding could threaten Bitcoin’s status as a medium of exchange, leading to its complete demise as a currency.

Reputable exchanges with large institutional holdings could help stem such panics by advertising a willingness to sell their Bitcoins to meet liquidity demand. Yet because Bitcoin reserves are finite, users may not find the promise credible. By contrast, central banks with the inexhaustible resources of the printing press face no such inconvenient constraints.

. December 27, 2014 at 4:39 pm

Bitcoin Is Not Anonymous After All

“The Bitcoin system is not managed by a central authority, but relies on a peer-to-peer network on the Internet. Anyone can join the network as a user or provide computing capacity to process the transactions. In the network, the user’s identity is hidden behind a cryptographic pseudonym, which can be changed as often as is wanted. Transactions are signed with this pseudonym and broadcast to the public network to verify their authenticity and attribute the Bitcoins to the new owner. In their new study, researchers at the Laboratory of Algorithmics, Cryptology and Security of the University of Luxembourg have shown that Bitcoin does not protect user’s IP address and that it can be linked to the user’s transactions in real-time. To find this out, a hacker would need only a few computers and about €1500 per month for server and traffic costs. Moreover, the popular anonymization network “Tor” can do little to guarantee Bitcoin user’s anonymity, since it can be blocked easily.”

. April 25, 2016 at 5:23 pm

Hence the hype around “fintech”—the hope that the whole system can be overhauled by disruptive innovators, much as Uber is revolutionising the taxi business and Airbnb is taking on hotels. Fintech firms operate in many areas, from digital payments to automated wealth management. But at a London Business School conference this week, the greatest excitement was reserved for blockchain technology. A blockchain is a “distributed ledger” under which transaction records are held by a wide number of participants in a network; it is the technology behind Bitcoin, a digital currency.

Technology experts seem to think a distributed ledger is more secure. A hacker would be required to break into a wide range of sites rather than a single, central register. But there are doubts over whether such a system could handle the sheer volume of payments in the financial system—hundreds of thousands of transactions every second.

http://www.economist.com/news/finance-and-economics/21694531-all-money-spent-technology-banking-not-efficient-high-tech-meets-low

. June 18, 2017 at 5:16 pm

A surge in the value of crypto-currencies provokes alarm

Bitcoin is far from the only game in town

. September 9, 2017 at 5:45 pm
. September 25, 2017 at 12:23 am

Bitcoin is fiat money, too

Bankers talk about “governance”, ways to ensure private banks and central bankers make sound decisions—so they create just enough money make commerce easier, but not so much that the system collapses through inflation or panics. The developers behind distributed ledgers, however, often talk as if governance is something they are beyond. They are not. Computer code is just a set of rules. Code is governance. And it can change. Take bitcoin: if a supermajority of the computers running the bitcoin distributed ledger run an upgrade, the upgrade becomes the new code. But behind each computer is a human, making decisions. Distributed-ledger developers talk about a consensus-driven model, where you improve the system by bringing everyone on board. So do central bankers.

And different humans have different interests. In bitcoin, the people who own the computers verifying transactions—the “miners”—want code that increases fees for miners. People who use bitcoin want code that keeps those fees low. These two sides could not agree, and so in August the bitcoin distributed ledger “forked”—a smaller group of developers created a copy with slightly different rules, called “bitcoin cash”. Everyone who owned one unit of bitcoin also suddenly owned one unit of bitcoin cash. Out of a governance dispute, new money. In mid-September bitcoin traded at about $3900, while bitcoin cash fetched only $500.

. October 23, 2017 at 12:11 am

The ICO boom is an outgrowth of the emerging, occasionally inscrutable world of cryptocurrencies. These are a form of money (bitcoin and ether are examples) used in transactions which are recorded on a distributed public ledger called a blockchain. An ICO is a scheme to raise funds for an enterprise written into a contract on a blockchain. To buy in, punters use cryptocurrency to pay for tokens. Those tokens become the working currency within the new enterprise. A new social network, for instance, might fund itself through an ICO, then allow users to spend their tokens on goods or services on the network once it is up and running. In successful projects, demand for tokens should rise and early investors should profit. ICOs resemble both a new form of crowdfunding, and a technological leapfrog over the regulations that hem in more orthodox funding strategies. They are also all the rage. Ether, the currency used on the ethereum blockchain, is up by more than 2,400% against the dollar over the past year and boasts a market capitalisation of nearly $28bn. ICOs have so far raised nearly $2bn in 2017.

This looks like irrationality in action, bound to end in tears. Why, then, should the party continue? Manias are as old as finance, and economists have devoted plenty of time to studying them. Though often blamed on easy credit, human nature alone can goad a raging bull. As Charles Kindleberger explained in his book “Manias, Panics and Crashes”, enthusiasm for new markets or technologies frequently results in excessive optimism, which ultimately collides with reality in a spectacular crash.

. November 7, 2017 at 4:53 pm

One person permanently locked up $300 million worth of other peoples’ Ethereum

According to a blog post released by Parity on Tuesday, the code that fixed the July bug contained another vulnerability. That vulnerability allowed a user known as “devops199” on GitHub, a site for developers to collaborate on open source code, to allegedly accidentally trigger a function that turned the contract governing Parity multisignature wallets into a regular wallet address and made him or her the owner. Devops199 then killed this wallet contract, or, as Parity put it, “suicided” it. This made all multisignature wallets tied to that contract instantly useless, their funds locked away with no way to access them.

If the story is true, it seems like Devops199 was jiggling door handles and when one door opened, they tried to close it and the whole house exploded.

. November 11, 2017 at 4:30 pm

One Bitcoin Transaction Now Uses As Much Energy As Your House In a Week

Bitcoin’s incredible price run to break over $7,000 this year has sent its overall electricity consumption soaring, as people worldwide bring more energy-hungry computers online to mine the digital currency. An index from cryptocurrency analyst Alex de Vries, aka Digiconomist, estimates that with prices the way they are now, it would be profitable for Bitcoin miners to burn through over 24 terawatt-hours of electricity annually as they compete to solve increasingly difficult cryptographic puzzles to “mine” more Bitcoins. That’s about as much as Nigeria, a country of 186 million people, uses in a year.

This averages out to a shocking 215 kilowatt-hours (KWh) of juice used by miners for each Bitcoin transaction (there are currently about 300,000 transactions per day). Since the average American household consumes 901 KWh per month, each Bitcoin transfer represents enough energy to run a comfortable house, and everything in it, for nearly a week.

. December 7, 2017 at 1:42 pm

Bitcoin Is Still Basically Useless for Making Payments

Steam, a popular platform for buying video games, announced on Wednesday that it will no longer be accepting payment in the form of bitcoin because of the volatility of its worth and transaction fees.

Valve, the company that owns Steam, noted the value for Bitcoin only stays stable for a certain period of time and can change before a transaction has been completed. The statement announcing the decision reads, in part, “At this point, it has become untenable to support Bitcoin as a payment option. We may re-evaluate whether Bitcoin makes sense for us and for the Steam community at a later date.”

Valve’s shirking of bitcoin is another development in a broader debate about the usefulness of the cryptocurrency. There are some major companies, such as Microsoft and DISH, accepting bitcoin payment, but few others have followed suit. Its volatility and transaction costs are a common sticking point for those looking to use it as a currency, yet the possible solutions to these pitfalls could imperil the decentralization that makes bitcoin appealing in the first place.

. December 14, 2017 at 6:46 pm

Bitcoin can be used to buy a few things. But a currency has three main functions: store of value; means of exchange; and unit of account. Bitcoin’s volatility, seen when it fell 20% within minutes on November 29th before rebounding, makes it both a nerve-racking store of value and a poor means of exchange. Imagine buying an iPhone X with bitcoin in January. You would by now be cursing as the same coin could buy ten phones—Christmas gifts for the whole family.

A currency is also a unit of account for debt. Paul Mortimer-Lee of BNP Paribas, a French bank, tartly remarks: “Imagine if you had financed your house with a bitcoin mortgage.” This year your debt would have risen tenfold. Your salary, paid in dollars, euros or whatever, would not have kept pace. Put another way, had bitcoin been widely used, the last year might have been massively deflationary.

But it is worth remembering that the cost of using bitcoin is going up. Each transaction has to be verified by “miners” who need a lot of computing power to do so, and a lot of energy: 275kWh for every transaction, according to Digiconomist, a website. In total, bitcoin uses as much electricity a year as Morocco, or enough to power 2.8m American households. All this costs much than processing credit-card transactions via Visa or MasterCard.

Whether the investors driving the price higher are pondering all this is open to doubt. It looks like a re-run of the dotcom craze. Adverts for trading digital currencies are appearing on the London tube and celebrities have piled onto the bandwagon. As seen many times before, when lots of investors buy an illiquid asset, the price can rise exponentially.

. December 17, 2017 at 11:20 am

“Those politics may shift if bitcoin’s adherents come to agree with mainstream economists, who say the currency will hit a deflationary spiral as bitcoin are accidentally lost over time and the supply dwindles. Computer scientists also fear that the protocol will become unstable as inflationary rewards for bitcoin “miners” (who secure the system using tremendous computing power) are phased out in favor of transaction fees. For these reasons, some newer cryptocurrencies have eschewed bitcoin’s finite-supply plans. Instead, they follow a digital version of Milton Friedman’s proposal for low but constant inflation”

https://www.washingtonpost.com/outlook/five-myths/five-myths-about-bitcoin/2017/12/15/7a506742-e044-11e7-8679-a9728984779c_story.html

. January 14, 2018 at 8:54 pm

Bitcoin is a speculative asset but not yet a systemic risk

Is there an investment case for the cryptocurrency?

The usual tools of finance are no guide. An equity is a claim on the assets and the profits of a firm; a bond entitles the investor to a series of interest payments and repayment on maturity. Bitcoin brings no cashflows to the owner; the only return will come via a rise in price. When there is no obvious way of valuing an asset, it is hard to say that one target price is less likely than another. Bitcoin could be worth $10 or $100,000.

Instead, investors must weigh the scenarios that enthusiasts posit: what if, say, every pension fund invested 1% of its portfolio in the cryptocurrency? One argument made by bitcoinnoisseurs is that it is a type of “digital gold”. Stores of value are supposed to keep their value; bitcoin, by contrast, is extremely volatile. Its code ensures that no more than 21m coins can ever be created; that sets bitcoin apart from fiat money, which central banks can create at will. Yet being limited in supply is a necessary, but not sufficient, condition for having value; signed photographs of Economist journalists are rare but, sadly, of negligible worth. Nor is supply really limited. Plenty of other cryptocurrencies exist.

. January 26, 2018 at 1:23 am

Bitcoin’s high valuation has ruined it as a medium of exchange

Technological limitations in the design of the Bitcoin system means that the network only processes about seven transactions per second, unless you pay someone with a lot of compute-power to log your transaction, currently at the rate of about $20/transaction.

This makes Bitcoin largely useless as a “medium of exchange.” It’s bad enough to shell out 6% to Paypal for a handling fee, but $20 to process a $15 eBay purchase is nuts. That’s why most merchants that started out accepting Bitcoin have stopped (Bitcoin remains cheaper to process than certain kinds of realtime long-haul money transfers, and it’s cheaper than traditional means of paying ransom, buying drugs, or paying for illegal services).

. January 26, 2018 at 6:00 pm

Your early darknet drug buys are preserved forever in the blockchain, waiting to be connected to your real identity

Blockchain transactions are recorded forever and indelibly, and that means that all the Bitcoin transactions on early Tor hidden service marketplaces like Silk Road are on permanent, public display; because many people who made these transactions later went on to link those Bitcoin wallets with their real identities, those early deals are now permanently associated with their public, identifiable selves.

In a new paper, a group of Qatari computer scientists show that they could easily trace 100 dark market accounts to real people. About 20 of those accounts had made purchases on the Silk Road, and some had gone on to divulge their legal names and addresses in other, linkable contexts.

. January 26, 2018 at 6:10 pm

Monero, the Drug Dealer’s Cryptocurrency of Choice, Is on Fire

For the cryptocurrency community, 2016 was a very good year. Bitcoin doubled in price. The far-out Bitcoin alternative Ethereum shot up by a factor of 10. But another, once-obscure cryptocurrency called Monero outpaced all of them, multiplying its value around 27-fold. That’s a windfall not just for cryptocurrency speculators, but for financial privacy advocates everywhere—including a few suddenly wealthy dark web drug dealers.

Over the last year, the value of the hyper-anonymous cryptocurrency Monero grew 2,760 percent, making it almost certainly the best-performing cryptocurrency of 2016. Today each Monero is worth around $12, compared with just 50 cents at the beginning of last year, and the collective value of all Monero has grown to close to $165 million. The source of that explosive growth seems to be Monero’s unique privacy properties that go well beyond the decentralization that makes Bitcoin so resistant to control by governments and banks. It’s instead designed to be far more private: fully anonymous, and virtually untraceable.

. February 22, 2018 at 6:25 pm

IT STARTED as a joke. Dogecoin was launched in 2013 as a bitcoin parody, using as its mascot a Japanese shiba inu dog, a popular internet meme. The crypto-currency was never really used, except for tipping online, and one of its founders has called it quits. But recently its price has soared: on January 7th the dollar value of all Dogecoins in circulation reached $2bn, a sign of how crazy crypto-currency markets have become. It is also a reminder that, for all the focus on bitcoin, it is no longer the only game in town. Its market capitalisation now amounts to only about one-third of the crypto-market (see chart).

. July 2, 2018 at 6:43 pm

Speculative bubbles are hard to model—how to find a rational way to assess irrationality? But Barclays uses the ingenious parallel of an infectious disease. A bubble starts with a small number of asset owners (the “infected”). New buyers are drawn in (or catch the bug) because they witness price increases and fear they will miss out. A large share of the population is immune and will never succumb.

Buyers use a combination of the current price and an extrapolation of the recent increase in price to estimate their expected target value. The faster the price rises, the wilder investors’ hopes and the more the infection spreads. Eventually the market runs out of potential participants and the price rise slows. Once it starts to fall, holders lose hope of big gains and start to sell. The epidemic dies out.

The Barclays model fits the history of the bitcoin price pretty well. And it suggests that the long-term outlook for the value of crypto-currencies is bleak. After all, plenty of people will have bought in the past few months, when enthusiasm was at its height. Some will have taken extra risk to buy the currency, via spread betting or other types of gambling. Instead of the riches they expected, they will be nursing losses. Some will be keen to sell their holdings. But new buyers will be harder to tempt now that crypto-currencies no longer look like a one-way bet.

. October 1, 2018 at 3:08 pm

Bitcoin and other cryptocurrencies are useless
For blockchains, the jury is still out

It was not supposed to be this way. Bitcoin, the first and still the most popular cryptocurrency, began life as a techno-anarchist project to create an online version of cash, a way for people to transact without the possibility of interference from malicious governments or banks. A decade on, it is barely used for its intended purpose. Users must wrestle with complicated software and give up all the consumer protections they are used to. Few vendors accept it. Security is poor. Other cryptocurrencies are used even less.

With few uses to anchor their value, and little in the way of regulation, cryptocurrencies have instead become a focus for speculation. Some people have made fortunes as cryptocurrency prices have zoomed and dived; many early punters have cashed out. Others have lost money. It seems unlikely that this latest boom-bust cycle will be the last.

Economists define a currency as something that can be at once a medium of exchange, a store of value and a unit of account. Lack of adoption and loads of volatility mean that cryptocurrencies satisfy none of those criteria. That does not mean they are going to go away (though scrutiny from regulators concerned about the fraud and sharp practice that is rife in the industry may dampen excitement in future). But as things stand there is little reason to think that cryptocurrencies will remain more than an overcomplicated, untrustworthy casino.

. October 1, 2018 at 3:13 pm

This Technology Quarterly will take a more sceptical view. It will point out that, despite a decade of development, bitcoin has failed in its stated objective: to become a usable currency. Security is poor (according to one estimate, around 14% of the supply of big cryptocurrencies has been compromised); its decentralised nature inevitably makes it slow; there is no consumer protection; and the price is so volatile that not many people would want to use it as a means of exchange for goods and services. Other cryptocurrencies suffer from similar problems. Few merchants accept them.

At the same time the technology’s built-in antipathy to regulation has attracted plenty of people who feel the same way for the wrong reasons. Some cryptocurrencies amount to Ponzi schemes, and unscrupulous ICO operators have swindled investors. America’s authorities are investigating allegations of widespread price manipulation. Social-media firms have banned advertisements for ICOs amid concerns about fraud. Anyone thinking of investing in such instruments will need to do a lot of homework first.

Other drawbacks of bitcoin and such like are becoming increasingly apparent, too. The “mining” process required to verify all transactions is hugely power-hungry. Data centres have sprung up from Mongolia to Quebec, collectively consuming as much electricity as entire countries to run a system that cannot manage more than a handful of transactions per second.

There are structural problems, too. The size of an individual block of transactions is fixed, and the network enforces an average block-generation rate of one every ten minutes. In practice, that limits bitcoin’s throughput to around seven transactions per second. (Visa’s payment network can manage tens of thousands.) So when demand for bitcoin transactions is high, the system clogs up. Users have to accept that their transactions may be delayed or not go through at all, or offer miners extra fees as an incentive to prioritise their payments. Mr Nakamoto had hoped that bitcoin’s transaction fees would settle at fractions of a cent, but at the height of the boom in late 2017 they briefly reached $55. They have since come down to about $0.65.

The most striking statistic is the sheer amount of electricity needed to run the system. Mr de Vries estimates that bitcoin mining consumes at least 22 terawatt hours of electricity a year, and probably as much as 73TWh, roughly the same amount as Austria does. Ethereum, the second-most-popular cryptocurrency, eats up a further 21TWh.

The advantages of blockchains are often oversold. Because of the overheads involved in shuffling data between all participants, blockchains are less efficient than centralised databases, a problem that gets worse as the number of users rises. When the Bank of Canada tried using blockchains to process domestic payments, which are already quite efficient, it found they offered no benefit. Stripe, a big digital-payments firm, has abandoned its blockchain experiments after three years of trying, describing the technology as “slow and overhyped”.

Talk about blockchains as “truth machines” is particularly unhelpful, says Kai Stinchcombe, who runs True Link, a financial-services firm for retired people. Many products, such as diamonds or luxury handbags, already come with certificates of authenticity. A blockchain could reassure buyers that those certificates have not been tampered with. But that is not the same as proving they are true. “If you put garbage onto a blockchain, all you get is distributed, encrypted garbage,” he points out.

Better, then, to evaluate cryptocurrencies and blockchains on their own merits. Start with cryptocurrencies. It is clear that, a decade after they were invented, their use for their ostensible purpose—as a means of exchange—is negligible. A lot of work is being done to fit them better for this task, so that could change. But if their use is to become widespread, they will have to offer something that existing currencies do not. Bitcoin’s original selling- point—freedom from any kind of central control—holds little appeal for ordinary people, says Gary Barnett of GlobalData. Most of them just want a payment system that is safe and easy to use. And given cryptocurrencies’ shortcomings—the lack of consumer protection, dizzying price fluctuations, fiddly software, slow throughput and a voracious appetite for electricity—at the moment they fail that test.

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