Blockchain: Erosion of the promise of trust

Blockchain is a promising technology that has made a lot of geeks rich in a short period of time. At the same time, the lack of regulations and knowledge surrounding blockchain-linked investment products means that scams abound. Is blockchain really what we think it is?



One of the key capabilities that the pseudonymous Satoshi Nakamoto introduced with his white paper on Bitcoin was the ability to conduct financial transactions in a network with no central authority where most of the participants were unknown to oneself (and therefore untrusted). He contended that the network consisting a “chain of blocks” (Satoshi did not coin the term “blockchain”) was trustworthy so long as the majority of the participants were non-malicious (more accurately, that the majority of computation power on the Bitcoin blockchain was controlled by non-malicious actors).

Why did it need to be so? The financial crisis was still ongoing in 2008. Major financial institutions had been entrusted with money and there was considerable discontent at the risks that they took to make money for themselves, as well as the fact that the public were faced with the bill for bailing them out. Trust in institutions was low in 2008. In addition, central banks had been printing money over decades, inflating the amount of currency in circulation while decreasing its value. (Note: This article does not provide an opinion on what is sound monetary policy.)

Satoshi published the whitepaper in 2008 and implemented Bitcoin in January 2009. If Bitcoin succeeded as a currency (i.e. something that could be exchanged for goods and services) one would no longer need to trust centralised institutions such as private banks, central banks or governments with money – well that is the dream of the libertarian-inspired “crypto-anarchists” who backed the cryptocurrency movement in its infancy. The individual, the ordinary man, would be in charge of his destiny. Satoshi believed, at the launch of the initial release of Bitcoin that technology such as Bitcoin could one day become as easy to use as SSL/TLS, the encryption technology used by the HTTPS protocol that secures most of our internet communication. That technology was widely adopted by technologists and put to the benefit of the public without the average person needing to know what it was or how it worked.



Understanding Bitcoin and blockchain technology requires a level of technological sophistication. It also requires an appreciation of the libertarian ethos and its distrust of human institutions. This may have been true of early adopters of cryptocurrencies. It is not true of the average investor today (one of my colleagues advises people that “invest” is not the right word). Today’s investors are out to make a quick buck, to sell the Bitcoin (or other currency or token) and convert it back to dollars when Bitcoin hits $20,000 (or $100,000 or $1,000,000 or <insert prediction of the day>).

While we can be quick to criticise new investors, early investors were not necessarily much better. Bitcoin is capped at 21 million – a number of tokens that will be arrived at in the year 2140. Early adopters could get Bitcoins cheaply at at minimal effort. Late adopters would need to spend orders of magnitude greater hashing power (or fiat currency) to get their Bitcoin. The currency is designed to be deflationary. We have observed the natural consequence – large numbers of people who believe in HODLing (a corruption of HOLD that made it into cryptocurrency popular culture). For a currency to be useful, people need to transact with it, not cling to it for dear life. This provides another avenue for doubt: did Satoshi really create Bitcoin to benefit people or just to build something that could potentially make himself very rich? Assuming a valuation of $15,000 per bitcoin (the value has been fluctuating drastically at the time of writing) Satoshi’s bitcoins would be worth approximately $15 billion. Satoshi disappeared from the forums where he made contact with others in December 2010 (the last post from 2014 is widely believed to be a forum administrator’s). People who have been suggested of being Satoshi have either denied it or been unable to prove they were indeed him. Any movement of Satoshi’s coins in this situation could cause a panic in the market.

A similar situation presented itself recently. Charlie Lee, the creator of Litecoin, announced in December 2017 that he had sold or donated all his coins recently. Litecoin is billed as the silver to Bitcoin’s gold. It makes transactions more effectively than Bitcoin does. Lee stated that he sold his coins in order to stop being accused of making statements to manipulate Litecoin’s price given his standing. However, Lee is not an academic or journalist. His writing and commentary are less important than the leadership he provides to the Litecoin community and the community benefits from him having a vested interest in its success, not the other way round. Lee’s Twitter handle, “@satoshilite” gives away his own idea of his role and standing (prior to the sale).

The question now is whether a number of whales (people with significant holdings of cryptocurrencies with the buying / selling power to influence the markets) sell off their crypto-assets as they determine that the prices have peaked and exit the market.  In the months leading to December 2017, the charts displaying the “market cap” (USD valuation of a cryptocurrency expressed as the number of tokens times the value of one token) and prices of a number of these currencies rose dramatically. While some people understand the tokens as having some value, the prices have clearly been driven up by speculation with wild swings of 20% and more seen in a single day, with surprising frequency. This lack of stability undermines trust in the tokens even if their underlying technology was sound, primarily by making it too risky for new entrants to try buying in, entering the market and transacting with the newly bought tokens. A further complication is brought about by pump and dump schemes, which are common in the unregulated cryptocurrency world.


Centralisation in cryptocurrencies

Cryptocurrency exchanges further complicate the situation. The first exchanges were (and most exchanges still are) designed as centralised locations where users can exchange between fiat currencies and cryptocurrencies and between different cryptocurrencies. The most notorious was Magic: The Gathering Online Exchange (better known as “Mt. Gox”). This was cobbled together by a teenager named Jed McCaleb who used the same domain as his website for a card game (Magic the Gathering). Eventually he realized the amount of money people were putting into the exchange was a risk to himself and he sold it. The buyer, Mark Karpeles, has little website maintenance skills himself and allowed it to deteriorate. Mt. Gox was hacked in 2011 leading it to declare bankruptcy in 2014. In 2015 and in 2016, the exchange Bitfinex announced that it was hacked and that a number of Bitcoins were stolen. Bitfinex “socialised” the losses amongst its user base for the 2016 hack. Other exchanges and marketplaces have also claimed to be hacked, losing their users’ cryptocurrencies. The exchanges’ handling of cryptocurrencies is not regulated. They need not submit to audit procedures. In some cases, it is questionable as to whether the site was hacked at all.

What goes missing from the conversation about the hacking of these sites is the motivation of the people who keep their money in these exchanges. Why would people who distrust centralisation keep their money on a centralised exchange? In the case of a bank or otherwise regulated financial institution, customers would have legal recourse in the event of malpractice. The lack of regulatory oversight of cryptocurrencies means that users need to actually trust the integrity of the employees and owners of the exchanges to do the right thing. This goes fundamentally against the ethos that gave birth to blockchain technology in the first place.



That is not the end of it. Scammers have found rich pickings in cryptocurrency. I personally came across two instances of Bitcoin-related scams. An obvious pyramid scheme named USI Tech promises 35% referral commissions over 12 levels. I met two men at a cryptocurrency event in Hong Kong who scoped out the attendees and attempted to induct participants into the scheme. One of them admitted that it was a pyramid scheme when confronted with the fact.

Hashflare is slightly more sophisticated. It purports to be a “cloud mining service” which starts mining “immediately after confirmed payment”. Nevertheless the websites (they have separate sites with .com, .in and .eu domains) are light on technical details. It is clear enough that there will be no purchase of hardware after a customer buys in. As per the description, the hardware appears to be already in place and mining for the company. Why then would they need customers to distribute their earnings from the mining operations? My research into this company revealed that most “reviews” of the product on third-party sites were sponsored reviews or reviews that contained referral links to Hashflare. Even posts on seemingly neutral sites that headlined with the question about whether cloud mining was a ponzi scheme completely ignored the headline and promoted the product.

Bitconnect is probably the best-known of these dubious projects. It came close to breaking into the top 10 most valued “cryptocurrencies” at one point, reaching #12. Shortly after this post was drafted, Bitconnect shut down their platform, causing the value of their coin to plunge 90%. Why would a libertarian / crypto-anarchist who distrusts regulated institutions take the risk of trusting extremely untransparent institutions with their money? It could partly be explained by the ability to “invest” without letting the government know about these investments. Greed to make a quick buck is the more obvious answer. The hard-to-palate answer is that a lot of people recognise that some of the projects that they are investing in are outright scams but will invest in and promote them while they continue to make money.


Blockchain hype

Investment scams and greed notwithstanding, there is still need for caution. We come across lots of talk about blockchain technology being the equivalent of the internet 20 years ago. The comparison is not apples to apples; the blockchain is a technological development akin to relational databases in the 1970s. Relational databases benefited humanity, but the people who got excited about them (if any) were technologists. Their actual benefits were transparent to end users who had no need to see the underlying technology that powered the products they used. This is unlike the internet, with which users feel intimately familiar through their usage of the World Wide Web (note the “www” at the start of most webpages) and various apps connected to the internet.

It makes more sense that people be excited about the applications that improve their lives rather than the technology that powers these applications. You might have heard the wild stories of the companies that had their stock prices increased drastically by adding ‘blockchain’ to their name or getting started in a blockchain venture. The fact that something uses blockchain does not necessarily make it better. It will be better if the application uses the strengths of the blockchain (immutability of transactions, decentralised trust, etc.) and does not depend upon blockchain’s weaknesses (confidentiality, high volume of transactions, etc.). Valuations of blockchain companies and products based on the actual value they generate appears to be lacking from this narrative.


What were we saying about trust?

In this article about trust, we have covered a lot of reasons trust is weakened. We have also looked into the seeming irrationality of the cryptocurrency investment landscape. The technology and ethos that generated mathematically-secured transactions has been overwhelmed by hype and the pursuit of easy money. Tim Swanson provides a detailed analysis of problems with the cryptocurrency ecosystem as a whole.


Identifying the good stuff

Some wonderful technologies will ultimately emerge out of the blockchain revolution. A few questions will help to identify them: Do they solve real-world problems that benefit from the blockchain? Do they have a solid team of technically-inclined people (as contrasted with marketers) who update their code periodically? Review their chat pages and Github commits for frequent activity. Hype about valuation of coin prices (rather than about how the product will actually be of benefit) is generally a red flag.

This article is not meant to put you off blockchain. The technology is here to stay. I seek to put in perspective that the current mania is a distraction from the actual value of blockchain. We will realise this value over the coming decade, but there may be a lot of disappointed investors on the way to it.



New York Times article on cryptocurrencies – “Everyone Is Getting Hilariously Rich and You’re Not”:

Announcement of Bitcoin P2P e-cash paper in 2008:

The Bitcoin white paper by Satoshi Nakamoto –  “Bitcoin: A Peer-to-Peer Electronic Cash System”:

Bitcoin implemented:

Buying power of USD:

Forum post announcing Bitcoin v0.1 release:

Article on SSL/TLS used in browsers – Secure browsing with Chrome and Firefox:

“Hold” gets corrupted – “I AM HODLING”:

All posts by Satoshi Nakamoto at P2P Foundation / BitcoinTalk:

Charlie Lee announces the sale of his Litecoin holdings – “Litecoin price, tweets, and conflict of interest”:

“Market capitalisations” of cryptocurrencies:

A nice explanation of how cryptocurrency pump an dump schemes work – “The Anatomy of a Pump & Dump Group”:

Mt. Gox hacked – “The Inside Story of Mt. Gox, Bitcoin’s $460 Million Disaster”:

Bitfinex gets hacked, socialises losses – “Bitfinex users to share 36% of bitcoin losses after hack”:

A review of BitConnect – “What is BitConnect? Legit or Scam?”:

Another review of BitConnect – “Bitconnect Review: Is it Legit?”:

BitConnect shuts down platform – “Bitconnect, which has been accused of running a Ponzi scheme, shuts down”:

Kodak announces its own cryptocurrency and watches stock prices skyrocket –

$24 million iced tea company says it’s pivoting to the blockchain, and its stock jumps 200% –

Tim Swanson’s critical analysis of cryptocurrencies – “Eight Things Cryptocurrency Enthusiasts Probably Won’t Tell You” –

Secure browsing with Chrome and Firefox

Google is leading the push to an encrypted and more secure internet. The Chrome browser’s security team is changing the way Google Chrome handles web pages, with Firefox playing catchup.

Have you noticed that little padlock icon that often appears on your browser’s address bar? Look at the left end of the navigation bar. What do you see?

On Chrome: 

On Firefox: 

On Internet Explorer (to the right): 


With the default HTTP protocol (the S stands for ‘secure’) all information is sent in plain text (unencrypted); any computer in between the sender and receiver can read the traffic. The padlock with the HTTPS means that the connection between your computer and the computer at the other end is secure, i.e. the traffic is encrypted and information cannot be snooped by a third party in transit. This is why people who build websites in a responsible fashion have at least ensured that their login pages and sensitive information (such as credit card information) is served over HTTPS instead of HTTP.

If you click on the padlock, you might see some more information that helps verify that the site is indeed owned by those who claim to own it. Like so:

Nevertheless, few people actually watch out for the padlock to see whether the sites that they login to are secure. We need something simpler. This is what Chrome and Firefox have done: when a user goes to a page that requires sensitive information to be put in, it checks whether the connection is over HTTPS. If it is not, they warn the user that the page is not secure.

See what happens when I click the ‘login’ box for Qantas’ site.



What if a technically-informed user tries to force the website to use HTTPS, but the site tries to ‘downgrade’ to HTTP? See the example when I navigate to

On Chrome:

On Firefox:

Also notice how different these warnings are from equivalent warnings in Internet Explorer:

While it does look ugly and slightly menacing, we have come across them enough times, especially at our workplaces, that we have learned to click through the warning to reach the sites that we wish to reach. Chrome and Firefox makes the clicking a little bit more difficult in order to secure their users.

The major browsers, including Safari and IE/Edge have gone further for sites that they consider to be actually malicious. They block them to prevent the user from unintentionally accessing them.

The long-term goal from Google is to make all sites use HTTPS so that our browsing is generally more secure. Google will give HTTPS-using sites an advantage over sites that do not use it in their search results. The plan was announced in advance so that website owners would have the time to make the required changes. It has also given Mozilla time to catch up and join the plan.


What can you do to improve your browsing security?

  1. Use a modern browser such as Chrome or Firefox (stop using Internet Explorer) that puts in the effort to protect you.
  2. Use the ‘HTTPS Everywhere’ add-on from EFF (Electronic Frontier Foundation) to force sites to use HTTPS if there is an HTTPS version.
  3. Use an ad-blocker to prevent malicious advertisements from showing up.

Also see: