cryptocurrency – Close Read

A survey of El Salvador’s bitcoin adoption

On December 22, a group of researchers from the US had a paper published in Science in which they reported the results of a survey of 1,800 households in El Salvador over its members’ adoption, or not, of bitcoin as currency.

In September 2021, the government of El Salvador president Nayib Bukele passed a ‘Bitcoin Law’ through which it made the cryptocurrency legal tender. El Salvador is a country of 6.3 million people, many poor and without access to bank accounts, and Bukele pushed bitcoins as a way to circumvent these issues by allowing anyone with a phone with an internet connection to access a central-bank-backed cryptocurrency wallet and trading the virtual coins. Yet even at the time, adoption was muted by concerns over bitcoins’ extreme volatility.

In the new study, the researchers’ survey spotlighted the following issues, particularly that the only demographic that seemed eager to adopt the use of bitcoins as currency was “young, educated men with bank accounts”:

Privacy and transparency concerns appear to be key barriers to adoption; unexpectedly, these are the two concerns that decentralized currencies such as crypto aim to address. … we document that this payment technology involves a large initial adoption cost, has benefits that significantly increase as more people use it …, and faces resistance from firms in terms of its adoption. … Moreover, our survey work using a representative sample sheds light on how it is the already wealthy and banked who use crypto, which stands in stark contrast with recurrent hypotheses claiming that the use of crypto may help the poor and unbanked the most.

Bitcoin isn’t private. Its supporters claimed it was because the bitcoin system could evade surveillance by banks, but law enforcement authorities simply switched to other checks-and-balances governments have in place to track, monitor, and – if required – apprehend bitcoin users, with help from network scientists and forensic accountants.

The last line is also reminiscent of several claims advanced by bitcoin supporters – rather than well-thought-out “hypotheses” advanced by scholars – in the late 2010s about the benefits the use of cryptocurrencies could bring to the Global South. The favour the cryptocurrency enjoyed among these people was almost sans exception rooted in its technological ‘merits’ (such as they are). There wasn’t, and still isn’t in many cases, any acknowledgment of the social institutions and rituals that influence public trust in a currency – and the story of El Salvador’s policy is a good example of that. The paper’s authors continue:

There is substantial heterogeneity across demographic groups in the likelihood of adopting and using bitcoin as a means of payment. The reasons that young, educated men are more likely to use bitcoin for transactions remain an open question. One hypothesis is that this group has higher financial literacy. We found that, even conditional on access to financial services and education, young men were still more likely to use bitcoin. However, financial literacy encompasses several other areas of knowledge that are not captured by these controls. An alternative hypothesis is that young, educated men have a higher propensity to adopt new technologies in general. The literature on payment methods has documented that young individuals have a greater propensity to adopt means of payment beyond cash, such as cards (87). Nevertheless, further research is necessary to causally identify the factors contributing to the observed heterogeneity across demographic groups.

India and El Salvador are very different except, by virtue of being part of the Global South, they’re both good teachers. El Salvador is teaching us that something simply being easier to use won’t guarantee its adoption if people also don’t trust it. India has taught me that awareness of one’s own financial illiteracy is as important as financial literacy, among other things. I’ve met many people who won’t invest in something not because they understand it – they might – but because they don’t know enough about how they can be defrauded of their investment. And if they don’t, they simply assume they will lose their money at some point. It’s the way things have been, especially among the erstwhile middle class, for many decades.

This is probably one of several barriers. Another is complementarity (e.g. “benefits that significantly increase as more people use it”), which implies the financial instrument must be convenient in a variety of sectors and settings, which implies it needs to be better than cash, which is difficult.

What the bitcoin price drop reveals about ‘crypto’

One of the definitive downsides of cryptocurrencies raised its head this week when the nosediving price of bitcoin – brought on by the Luna/Terra crash and subsequent cascading effects – rendered bitcoin mining less profitable. One bitcoin today costs $19,410, so it’s hard to imagine this state of affairs has come to pass – but this is why understanding the ‘permissionless’ nature of cryptocurrency blockchains is important.

Verifying bitcoin transactions requires computing power. Computing power (think of processing units on your CPU) costs money. So those bitcoin users who provide this power need to be compensated for this expense or the bitcoins ecosystem will make no financial sense. This is why the bitcoin blockchain generates a token when users provide computing power to verify transactions. This process is called mining: the computing power verifies each transaction by solving a complex math problem whose end result adds the transaction to the blockchain, in return for which the blockchain spits out a token (or a fraction of it, averaged over time).

The idea is that these users should be able to use this token to pay for the computing power they’re providing. Obviously this means these tokens should have real value, like dollar value. And this is why bitcoin’s price dropping below a certain figure is bad news for those providing the computing power – i.e. the miners.

Bitcoin mining today is currently the preserve of a few mining conglomerates, instead of being distributed across thousands of individual miners, because these conglomerates sought to cash in on bitcoin’s dollar value. So if they quit the game or reduce their commitment to mining, the rate of production of new bitcoins will slow, but that’s a highly secondary outcome; the primary outcome will be less power being available to verify transactions, which will considerably slow the ability to use bitcoins to do cryptocurrency things.

Bitcoin’s dropping value also illustrates why so many cryptocurrency investment schemes – including those based on bitcoin – are practically Ponzi schemes. In the real world (beyond blockchains), the cost of computing power will but increase over time. This is because of inflation, because of the rising cost of the carbon footprint and because the blockchain produces tokens less often over time. So to keep the profits from mining from declining, the price of bitcoin has to increase, which implies the need for speculative valuation, which then paves the way for pump-and-dump and Ponzi schemes.

A permissioned blockchain, as I have written before, does not provide rewards for contributing computing power because it doesn’t need to constantly incentivise its users to continue using the blockchain and verify transactions. Specifically, a permissioned blockchain uses a central authority that verifies all transactions, whereas a permissionless blockchain seeks to delegate this responsibility to the users themselves. Think of millions of people exchanging money with each other through a bank – the bank is the authority and the system is a permissioned blockchain; in the case of cryptocurrencies, which are defined by permissionless blockchains, the people exchanging the money also verify each other’s transactions.

This is what leads to the complexity of cryptocurrencies and, inevitably, together with real-world cynicism, an abundance of opportunities to fail. Or, as Robert Reich put it, “all Ponzi schemes topple eventually”.

Note: The single-quotation marks around ‘crypto’ in the headline is because I think the term ‘crypto’ belongs to ‘cryptography’, not ‘cryptocurrency’.

The persistence of NFTs

NFTs freak me out. One of the ways in which my grandmother lost touch with her daughter – my mother – was my mother’s generation’s access to and use of computers, smartphones and the internet. And one of the ways in which my mother and father are out of touch with my generation is digitisation: the amount of information, and ways to manipulate it and extract wealth from it, that has become virtual. And I’m becoming surer that NFTs will be one of the big ways in which I’ll lose touch with the generation following mine.

From my point of view, NFTs have two facets, one each for the physical and the digital worlds they span. NFTs are essentially digital, but their name itself – non-fungible tokens – indicates that they are the product of a time in which the physical, typified by the fungible, and the digital coexist but in which the fungibles are still more important, even as the non-fungible is starting to evolve its first ‘offline communities’. Such communities are perhaps the best indications there could be that something is worth noticing, even if it’s misguided or just culturally hollow.

The film (and the book, which I haven’t read) Ready Player One should quickly clarify how powerful and how liberating the non-fungible universe, the metaverse, can be, even though it’s very much an outcome fantasy, and NFTs are allowing people to crenellate around such possibilities. Yet I remain deeply sceptical of NFTs because they exist in a superposition of high energy-consumption, the socio-economic privileges of their proponents, the absence of socialist values in their development trajectories and, immutably, a soup of jargon that constantly keeps their principles out of reach of those who would like to debate them. (The last point is non-trivial: intended inexplicability is a common symptom of scams).

I’m aware that, with these vectors of scepticism, I’m also part of a global community that’s pushing back against the nebulous rhetoric that has enveloped NFT culture – a community animated by the obvious and considerable distance between the present as lived by countless people in the “Global South” and the future as those in New York and California are imagining it.

At the same time, I’ve also been sort of wary of what the essential motivation for the NFT culture and the metaversal tendencies more broadly might be. This picture isn’t immediately clear because both cryptocurrencies and the metaverse are the brainchildren of that white + libertarian + Silicon Valley + tech-bro space that has prided itself on its profiteering, technocratism, cynicism of politics and a unique brand of super-rationalism. So it’s hard to conclude that anything this group thinks is a good idea is more than a good idea to make more money.

On the flip side, the existence of communities around an asset as baffling as NFTs at least indicates the presence of a deeper angst, particularly among people of certain ages. What might this be?

I recently read an article by Ginevra Davis, published on January 21, that attempted a diagnosis:

Our generation is notable for our lack of a youth-led counterculture, or any coherent rebellion, at least not on the scale of the late 1960s. But this lack of open rebellion does not mean that we are more satisfied than previous generations, or that we have nothing to rebel against. We are by many measures poorer, sicker (mentally and physically), and have fewer close relationships than our parents or grandparents. But instead of running away to some proverbial California, we have mostly chosen to express our frustration in private, on the internet, where you can laugh at memes about major depression or wanting to kermit sewer slide from the safety of your bedroom.
In the NFT community, we are witnessing the logical conclusion of a generation that is so alienated, so profoundly unfulfilled, that they are considering abandoning the physical world altogether. At least the metaverse is something new—maybe somewhere they can be rich, or important.

Either this is really true or it’s what the NFT-evangelists are telling themselves. Either way, it’s led to the creation of a parallel dimension that apparently promises to quell the tension that inhabiting the physical world in the 21st century entails. But it’s probably what the evangelists are telling themselves because, for an observer at infinity, it’s very difficult to distinguish the mores of the wider cryptocurrency + metaverse community, especially the self-indulgence and consumerism, from those of the tech scene that this community is apparently tiring of (Metakovan’s eyebrow-raising purchase of that piece of art for $69 million comes to mind). In fact, it’s tempting to consider whether NFTs are the result of a people doubling down on a culture and worldview in search of a purpose that this culture and worldview have thus far failed to produce, that their angst is less the desperation to break out and more the desperation per se. Davis herself is more charitable in her conclusion:

In “Slouching Towards Bethlehem,” [Joan] Didion captured a moment in time; a small group of teenagers who tried to find meaning in psychedelics. But it was also one of the first major literary works documenting the broader phenomenon of American decadence, or cultural malaise in the face of unprecedented economic prosperity. In the fifty-odd years since “Slouching” was published, a diagnosis of “decadence” has become shorthand for a constellation of cultural neuroses plaguing Western countries, including technological stagnation, cultural repetition, sterility, and nihilism. Unlike in the 1960s, it no longer includes coping with unprecedented prosperity.
As I wandered through New York, I wondered what Didion would think of the festivities at NFT.NYC. Are the desires of NFT proponents to rebuild the world online the endgame of a fully stagnant society—a final detour into the absurd before we give up on progress for good? Or is the starry-eyed optimism of digital true believers a last stand against decadence?
…
I came away from NFT.NYC with a certain respect for the NFT community. They are not taking decadence lying down, and have found a way to revel in the absurdity.

I don’t know agree with her, of course. My principal point of disagreement is Davis’s use of the word “we” to refer apparently to all of us as one cohesive mass. But there are many wes here: on the ground, there are super-rich Americans, wannabe-rich Americans, white Americans, non-white Americans, immigrants; off the ground, there are people around the world that technically belong to the same generation but are operating in much less privileged socio-economic contexts, as well as others in the same context who are in turn further disprivileged by class, caste, race, gender, geography, leadership, etc.

On this multi-layered pyramid denoting many strata of a single generation of people, there are many, many things that people on the lower rungs have left to do – from exiting poverty to eliminating caste-based discrimination, from improving income equality to reducing carbon emissions – before the future looks bare enough to populate with NFTs. The only way a unified “we” makes sense is that we will all suffer the vision this vanishingly small group of wealthy and influential people has for a better future.

The federation of our digital identities

Facebook, Twitter, email, WordPress, Instagram, online banking, the list goes on… Offline, you’re one person maintaining (presumably) one identity. On the web, you have many of them. All of them might point at you, but they’re still distinct packets of data floating through different websites. Within each site, your identity is unified, but between them, you’re different people. For example, I can’t log into Twitter with my Facebook username/password because Facebook owns them. When digital information becomes federated like this, it drives down cross-network accountability because my identity doesn’t move around.

However, there are some popular exceptions to this. Facebook and Twitter don’t exchange my log-in credentials – the keys with which I unlock my identity – because they’re rivals, but many other services and these sites are not. For example, I can log into my YouTube account using my GMail credentials. When I hit ‘Submit’, YouTube banks on the validity of my identity on GMail to log me in. Suddenly, GMail and YouTube both have access to my behavioral information through my username now. In the name of convenience, my online visibility has increased and I’ve become exposed to targeted advertising, likely the least of ills.

The Crypto-Book

John Maheswaran, a doctoral student at Yale University, has a solution. He’s called it ‘Crypto-Book’, describing its application and uses in a pre-print paper he and his colleagues uploaded to arXiv on June 16.

1. The user clicks ‘Sign up using Facebook’ on StackOverflow.

2. StackOverflow redirects the user to Facebook to log in using Facebook credentials, 3. after which the user grants some permissions.

4. Facebook generates a temporary OAuth access token corresponding to the permissions.

5. Facebook redirects the user back to StackOverflow along with the access token.

6. StackOverflow can now access the user’s Facebook resources in line with the granted permissions.

Crypto-Book sits between steps 1 and 6. Instead of letting Facebook and StackOverflow talk to each other, it steps in to take your social network ID from Facebook, uses that to generate a username and password (in this context called a public and private key, respectively), and passes them on to StackOverflow for authentication.

OpenID and OAuth

It communicates with both sites using the OAuth protocol, which came into use in 2010. Five years before this, the OpenID protocol had launched to some success. In either case, the idea was to reduce the multiplicity of digital identities but in the context of sites like Facebook and Twitter that could own your identities themselves, the services the protocols provided enabled users to wield more control over what information they shared, or at least keep track of it.

OpenID let users to register with itself, and then functioned as a decentralized hub. If you wanted to log into WordPress next, you could do so with your OpenID credentials; WordPress only had to recognize the protocol. In that sense, it was like, say, Twitter, but with the sole function of maintaining a registry of identities. Its use has since declined because of a combination of its security shortcomings and other sites’ better authentication schemes. OAuth, on the other hand, has grown more popular. Unlike OpenID, OAuth is an identity access protocol, and gives users a way to grant limited-access permissions to third-party sites without having to enter any credentials (a feature called pseudo-authentication).

So Crypto-Book inserts itself as an anonymizing layer to prevent Facebook and StackOverflow from exchanging tokens with each other. Maheswaran also describes additional techniques to bolster Crypto-Book’s security. For one, a user doesn’t receive his/her key pair from one server but many, and has to combine the different parts to make the whole. For another, the user can use the key-pair to log in to a site using a technique called linkable ring sgnatures, “which prove that the signer owns one of a list of public keys, without revealing which key,” the paper says. “This property is particularly useful in scenarios where trust is associated with a group rather than an individual.”

The cryptocurrency parvenu

Interestingly, the precedent for an equally competent solution was set in 2008 when the cryptocurrency called bitcoins came online. Bitcoins are bits of code generated by complex mathematical calculations, and each is worth about $630 today. Using my public and private keys, I can perform bitcoin transactions, the records of which are encrypted and logged in a publicly maintained registry called the blockchain. Once the blockchain is updated with a transaction, no other information except the value exchanged can be retrieved. In April 2011, this blockchain was forked into a new registry for a cryptocurrency called namecoin. Namecoins and bitcoins are exactly the same but for one crucial difference. While bitcoins make up a decentralized banking system, namecoins make up a decentralized domain name system (DNS), a registry of unique locations on the Internet.

The namecoin blockchain, like its website puts it, can “securely record and transfer arbitrary names,” or keys, an ability that lets programmers use it as an anonymizing layer to communicate between social network identities and third-party sites in the same way Crypto-Book does. For instance, OneName, a service that lets you use a social network identity to label your bitcoin address to simplify transactions, describes itself as

a decentralized identity system (DIS) with a user directory made of entries in a decentralized key-value store (the Namecoin blockchain).

Say I ‘register’ my digital identity with namecoin. The process of registration is logged on the blockchain and I get a public and private key. If Twitter is a relying partner, I should be able to log in to it with my keys and start using it. Only now, Twitter’s server will log me in but not itself own the username with which it can monitor my behavior. And unlike with OpenID or OAuth, neither namecoin or anyone on the web can access my identity because it has been encrypted. At the same time, like with Crypto-Book, namecoin will use OAuth to communicate with the social networking and third-party sites. But at the end of the day, namecoin lets me mobilize only the proof that my identity exists and not my identity itself in order to let me use services anonymously.

If everybody’s wearing a mask, who’s anonymous?

As such, it enables one of the most advanced anonymization services today. What makes it particularly effective is its reliance on the blockchain, which is not maintained by a central authority. Instead, it’s run by multiple namecoin users lending computing resources that process and maintain the blockchain, so there’s a fee associated with staking and sustaining your claim of anonymity. This decentralization is necessary to dislocate power centers and forestall precipitous decisions that could compromise your privacy or shut websites down.

Services like IRC provided the zeroth level of abstraction to achieve anonymity in the presence of institutions like Facebook – by being completely independent and ‘unhooked’. Then, the OpenID protocol aspired, ironically, to some centrality by trying to set up one set of keys to unlock multiple doors. In this sense, the OAuth protocol was disruptive because it didn’t provide anonymity as much as tried to provide an alternative route by limiting the number of identities you had to maintain on the web. Then come the Crypto-Book and blockchain techniques, both aspiring toward anonymity, both reliant on Pyrrhic decentralization in the sense that the power to make decisions was not eliminated as much extensively diluted.

Therefore, the move toward privatization of digital identities has been supported by publicizing the resources that maintain those identities. As a result, perfect anonymity becomes consequent to full participation – which has always been the ideal – and the size of the fee to achieve anonymity today is symptomatic of how far we are from that ideal.

(Thanks to Vignesh Sundaresan for inputs.)