Web 3.0 - The Great Con

Blockchain is the greatest technological fraud of the last decade. A fraud so simple, so ridiculous and yet so brilliant, it's taken in even some genuine experts in its thrall of empty hype and false promises. On top of this fraud sits the even greater fraud of Bitcoin and cryptocurrencies, which are nothing more than unregulated, unlicensed, wild west securities. They are functionally useless as currencies outside the realms of criminal activity and a Ponzi scheme in effect if not name for everyone else.

That's one paragraph and already I can feel the simmering controversy, the reddening faces, the indignation and the angry accusations that I don't know what I'm talking about.

The Emperor's New Clothes teaches us the folly of following the crowd and failing to have courage in our convictions. In Hans Christian Andersen's tale, it took the naive honesty of a small child to point out the Emperor wasn't wearing anything at all. All the adults in the room could see the Emperor wasn't wearing any clothes but when everyone else was agreeing the Emperor's new suit looked perfect, they didn't want to risk appearing stupid by pointing out the obvious.

It was easier for these townspeople to go along with the pretence than open themselves up to ridicule. In the real world, if enough people are telling you the Emperor is wearing clothes, you might even start to question your own senses and sanity when what you see is a man parading naked; how can so many people be wrong? Isn't it more likely you're wrong instead?

When I say blockchain is a brilliant fraud, I mean one of its greatest accomplishments is that a huge ecosystem built on what is in reality a simple data structure which is neither particularly novel nor interesting has somehow captured enough hearts that even many knowledgeable, rational minds adjacent to them who aren't necessarily on board with the digital currency side of things will still enthusiastically nod and agree "the technology" will herald some new era of innovation, the future of the internet, even if they can't ever quite pin down the details of what, how or why.

And like the townspeople in the fable of the Emperor, I wonder how many of those minds can see the naked truth and just don't want to admit there is no innovation, there is no interesting tech here, for fear their reputation will be undermined and they will be subject to derision by those who have invested in a fantasy?

A brief history of blockchain

I'm hardly the first person to say blockchain and crypto is a fraud. I'm not even the millionth. In October 2017, JP Morgan's CEO Jamie Dimon called the idea a fraud and said he would fire any employee trading Bitcoin for being "stupid". This was followed in January 2018 by Warren Buffett saying "In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending."

I will say it again; blockchain is a fraud and Bitcoin (and all cryptocurrency) is a fraud built on top of that fraud. How did we get here? How could something so simple and so stupid be turned into such an all-consuming FOMO frenzy? Let's take a step back and look at the history of blockchain, bitcoin and cryptocurrencies.

Let's start with exactly what we mean by a blockchain. In the Web 3.0 / Web3 and crypto context, blockchain refers to a data store where several items of data are grouped together in to "blocks", which are then hashed in some way (in Bitcoin, SHA-256) to produce a verifiable signature of all that data, which in turn includes the hash of the previous block. This ensures the integrity of all data throughout this "chain" of blocks, because in order to modify any data, you would need to recalculate all the hashes of subsequent blocks.

So we have a basic structure for an append-only and tamper-resistant audit log. Add to that conventional asymmetric cryptography techniques for digitally signing data and we have the foundation of a cryptocurrency; you can have a "wallet" which is a regular private/public keypair and you can sign transfers from your wallet to someone else's by knowing their public key (i.e. wallet address) and your private key. These transfers are then verified by digital signature and recorded on the blockchain for all to see.

The first widely known public blockchain was created by a person or persons using the pseudonym Satoshi Nakamoto in 2009 as part of the Bitcoin protocol. Bitcoin's breakthrough was that it solved the "double spending" problem with the idea of a digital currency; how to prevent someone from spending the same coins twice.

After all, we can't just have some software running on a bunch of random people's computers, listening on a port, operating on copies of the same database and just blindly accepting other computers' word about what transactions are taking place. How do you stop people cheating?

Proof of Work

Bitcoin prevents users trying to cheat the system by adding a further element to the blockchain, called "proof of work". To add a new block of data to the blockchain, you first have to do some work which is difficult to carry out in the first place but easy to verify.

For Bitcoin this is based on hashing data with the SHA-256 algorithm until you find a value which starts with a certain number of zeroes. I won't bother going in to this in more detail, you can read about it any number of places, but I will grant for what "Satoshi" envisioned with Bitcoin as a digital currency, the use of adjustable difficulty hashing was an innovative solution.

The important point to understand is this proof of work mechanism meant computers verifying transactions had an economic incentive by competition - in the form of newly created Bitcoins - to prevent cheating and allow the network to reach consensus about the legitimacy of data being added to the chain.

So now we have what's called a trustless, permissionless and decentralized digital currency.

Trustless - meaning you don't have to trust any one party. There is no bank or authority who can block your transactions, there is no person who can cheat you by reversing a transaction or claiming a refund.

Permissionless - meaning anyone with a computer can join in, use Bitcoin and help verify transactions

Decentralized - meaning there is no single point of control or failure for the network.

This model is of course not without its problems - in fact I would argue the very features advocates claim make crypto such a new and innovative approach to finance are fatal flaws which are inherently undesirable in any currency with real world value and application.

Imagine, for example, a world where you're out at a restaurant, or something, and you accidentally drop your keys. Someone else picks them up off the floor, only instead of handing them back to you, they now legally own your house and car. You call the police, but they say they have no power to insist this person gives you back your property. It's their property now, because possession is ownership, access is authorization.

That's the world of cryptocurrency.

Smart contracts are dumb

Crypto's come some way over the last decade. As the VC money kept rolling in, start up after start up - and indeed some more established big players - jumped on the bandwagon and attempted to solve some of the problems with Bitcoin (not least that it has a very slow rate of throughput).

Alternative, faster, more eco-friendly models to proof of work were conceived and built (in particular an alternative known as proof of stake) and one competitor to Bitcoin called Ethereum created the concept of simple code which could be run on top of its blockchain, to carry out transactions automatically when specified conditions were met.

These code snippets were called "smart contracts".

The problem with smart contracts is that they're not smart and they're not contracts.

They're just simplistic code, running on top of a blockchain, which anyone can write. And because code is just a set of instructions for a computer to follow, it can do anything you tell it to.

Including in effect deleting all your money. Or stealing it. Which is exactly what has happened.

A lot of people almost lost a lot of money when the Ethereum blockchain was hacked in 2016 and $50 million worth of digital currency was stolen. The only way this loss was averted was by creating a hard fork of Ethereum which effectively reset the clock on the transaction ledger to before the attack had taken place (and not everyone was on board with this decision, hence the original Eth blockchain survives today as Ethereum Classic). So much for immutability and code is law.

And people are still losing money, because as blockchain applications become more complex, the code becomes more difficult to write, more bugs are introduced and the whole thing becomes more vulnerable to attack.

What's amazing about most of the attacks on blockchains and crypto is that far from complicated "hacking" of these systems, the exploits are more often than not simple open doors in the code, or the code-within-code of so-called smart contracts. This is what happened with DAO - the attacker simply found a way to exploit the legitimate rules of the smart contracts which enabled them to drain wallets.

Because the fundamental ethos of these "contracts" is that code is law, you have no recourse when this happens to you, or to the exchange which holds your wallets.

Not content with merely transferring units of digital currency between people, Ethereum has also given rise to the idea of the non-fungible token (NFT). The idea basically is that you can use blockchain to not just store and transfer coins but also auxiliary information, like a receipt for an internet resource or digital asset. So people started building all sorts of applications on top of Ethereum, from decentralized versions of things like Twitter to digital art galleries to blockchain based advertising networks.

And this is where it all starts to go very wrong, because blockchain is a terrible way of storing and verifying data. Compared to any conventional database technology which has been nigh-on perfected over the last thirty years of computer science, blockchain is slow, expensive and unnecessarily complicated to work with.

The solution searching for a problem

Although almost every public blockchain implementation today necessarily includes some kind of token (that is, "coins") which you must somehow mine or straightforwardly purchase from an exchange in order to participate on and make use of the network, the hype of the last few years has seen grandiose and frankly delusional claims made about how the idea of blockchain might be used in future for purposes besides currency.

Search the web, Twitter, forums etc. and you'll see the extraordinary, hand-wavy claims which have been made about blockchain in the future.

Everything will be an NFT. Your airplane ticket will be an NFT on the blockchain. You'll see a movie at the cinema by purchasing an NFT on the blockchain. Your medical records will be indelibly etched on the blockchain. The list goes on like this.

Quite what future those behind these grand pronouncements have in mind is impossible to ascertain - because they can't say. If there's one thing which stands out to me in every conversation about blockchain, it's the sheer absence of any explanation or detail as to what problem its advocates believe they are solving, or how blockchain would be a viable solution which offered any improvement over existing conventional techniques in data and cryptography.

I'd go as far as to suggest a cynic might say it looks a lot like even these advocates don't believe their own hype and promises of innovation, but are merely interested in attracting as much fiat money as possible in "investment" for projects with zero value.

Do you have any problem buying airline tickets now? Do airlines have any problem selling them to you? Of course not; this process is already efficient and optimal. You can't improve the security, reliability, cost effectiveness or user experience of any part of the process involved in this transaction space by sticking it on a blockchain.

The reason over ten years on from the advent of Bitcoin we're not seeing widespread adoption of blockchain in any space outside cryptocurrency is because it simply isn't solving any problem.

I postulate that no one has ever said “Here is a problem that I have. Oh look, blockchain is a good solution.” In every case, the order has been: “I have a blockchain. Oh look, there is a problem I can apply it to.” And in no cases does it actually help.

-- On the Dangers of Cryptocurrencies and the Uselessness of Blockchain

Much of the conversation on these proposed abstractions to the blockchain for everything from the now infamous ape JPEGs to your medical history seem to swiftly devolve in to something I can only describe as being more in the realm of sixth form political ideology than useful tech; we're asked to imagine a world where we all transact with each other directly, without banks and corporations, and put our faith in (allegedly) immutable code written by un-named, unaccountable developers. A world where we're not just users of the internet, but participants in a global democracy, owning a little piece of each of the systems we use.

Yet centralization in some form always seems to creep in to these digital democracies.

It's a false utopia being pedaled to us by people who are in the business of selling blockchain as a solution to an undefined problem, or straight up preying on the fears, credulity or greed of the layperson, whether they're (not unjustly) paranoid about the level of centralized control of data in Web 2.0 services, or just hoping for a quick, free buck, a promise of prosperity and riches in a mythical El Dorado.

This highly vague, wishy-washy pipe dream which sounds like something your old buddy from college would talk about at parties with red, glazed over eyes and a suspicious smelling cigarette in hand is what's actually meant by the term "Web3", by the way - or at least, insofar as anything is meant by it at all.

While we can easily summarize the definition and ethos of Web 2.0 - the shift of the web from a simple library of linked documents to a rich, interactive, application-driven user platform - the same can't be said of Web 3.0.

"Do we have anything resembling a plan?", "Find Lucy and kill everybody else.", "No, I mean more like a plan. Like, a way to do that."

-- Matt Farrell to John McClane, Die Hard 4.0

Web 3.0 isn't a plan or even a real concept, it's just the vague notion of people taking back power from corporations and governments.

In at least some senses, this is undoubtedly an admirable aspiration (though I would exclude monetary policy from that list) but saying it's the future of the internet is rather like me saying "The future of transport is instantaneous teleportation", without anything to back it up.

One of the most distinguishing features of "web3" is the sheer level of handwaviness surrounding it...Generally speaking, "web3" is an umbrella term to refer to the "future of the Internet", which believers say will be decentralized and based on the blockchain. Proponents tend to tout how data won't be controlled by "Big Tech", and how it will be uncensorable and egalitarian.

-- What is Web3 - Web3 is going just great

Frequent objections to criticism

Many people have made a lot of money from Bitcoin and crypto

Yes, they have, I'm not saying they haven't. Some people have gotten very rich indeed (in fiat currency, might I add).

But every person who's made money from crypto has only done so by buying in earlier at the expense of people who bought in later. It's a zero-sum game, and for every "HODLer" who's cashed out at a profit, there's someone else who bought in at a higher price and lost money. Cryptos transfer wealth upwards, they don't create it.

And remember, the vast majority of people who've invested in crypto have done so very recently (post-2020), and therefore haven't had time to cash out at a profit yet. They're the ones who are going to get burned when the bubble finally pops.

Big companies have invested in or are using blockchain

Yes, that's true. But just because a big company is using blockchain doesn't mean it's a good idea. Even big companies like IBM can make bad decisions and blockchain is a bad decision. Corporations will follow the money and a technological fraud can still have money in it.

What blockchain isn't doing for any big companies is efficiently or optimally solving any existing or novel problem.

Many other big companies who explored getting involved in blockchain have quietly dropped those projects, unsurprisingly without the same fanfare they announced getting in to them.

The blockchain is immutable and secure

This is one of the most common misconceptions about blockchain. Just because data is written to a blockchain doesn't mean it can't be hacked (e.g. wallet theft). Just because data is immutable, doesn't mean it's accurate (oops, that airline just wrote the wrong date for your flight to the blockchain). And just because a blockchain might be reasonably secure, it doesn't mean the data written to it is secure (eek, your medical records have just been leaked).

Blockchain is no more inherently secure than any other conventional data storage method. It's often less secure, because the decentralization of blockchain means that there are more opportunities, more surface area, for hacks and attacks.

Here are just a few of the hacks, thefts and collapsed schemes which have occurred:

• The DAO hack, in which $50 million worth of Ethereum was stolen

• The Parity Wallet hack, in which $30 million worth of Ethereum was stolen

• The Coincheck hack, in which $500 million worth of NEM was stolen

• The Bitconnect Ponzi scheme, in which hundreds of millions of dollars were stolen from investors

• The Mt. Gox hack, in which 850,000 Bitcoin were stolen (worth over $14 billion at today's prices)

Crypto will revolutionize the economy/payments/banking/etc.

No, it won't. This is a statement of ideology, not an evidenced application of technology. At best, crypto will be a niche payment method used by a small number of people (mostly criminals), which is still the only real world usage it's managed to achieve in over ten years of hype and countless billions of dollars in investment.

As it stands today, the only thing you can really, lawfully do with crypto - besides holding on to it and hoping the next random spin of the wheel on price roulette rolls in your favour - is exchange it for fiat (at a commission) or other crypto.

Bitcoin's grossly inflated value is predicated and reliant on the people who have it not spending it and instead hoarding it as a finite digital commodity. That's deflation-by-design for you.

As I said earlier, many of the features to which advocates point are simply flaws which are undesirable in anything used as a monetary system.

No one wants to live in a world where losing their digital equivalent of a debit card means all their money is gone forever, where the value of their money is subject to wild swings of volatility, where fraudulent transactions can't be reversed, stolen funds can't be traced or recovered and where there's no legal authority to mediate disputes.

You can do [thing] with a blockchain

I'm sure you can. I'm not saying blockchain is literally useless in all cases, as in "unable to be used" for any given problem, I'm saying it's a sub-optimal solution in almost all cases (the exception being the trustless, permissionless, decentralized cryptocurrencies well suited to criminal activity and little else).

You can build a convoluted, slow, inefficient, expensive, bloated and wasteful database system entirely on top of XML if that's what you want to do, you'd just almost always be better off doing something else.

In conclusion

In over ten years since Bitcoin captured the public imagination with the idea of blockchain, we've seen no significant real world adoption of cryptocurrency as currency (and the few attempts to do so have ended in failure), no use of blockchain as a superior alternative to conventional databases and cryptographic signatures, no democratic revolution of the internet and big data.

What there has been is a countless number of investors who've lost money, outright illegal scams preying on the hype, projects which started with good intentions but subsequently collapsed (while their founders miraculously got away with millions), pump-and-dump schemes which leave a large number of "bag holders" separated from their life savings and an increasingly stagnating market of useless tokens which are primarily used as a form of gambling.

So next time someone tries to tell you that blockchain is the future, or that crypto is going to revolutionize the economy, my advice is simple: don't buy in to the hype.

More than that, challenge the hype. Have the courage of your convictions. Don't be the townsperson afraid of looking silly.

When you can see the Emperor is naked, when you can see the adults around you are acting crazy, be the innocent child who dares to say it out loud.

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Addendum - Response to feedback

Wow! This article has now been viewed more than 15,000 times in less than a couple of weeks. This is probably about the same as the total all-time views of every other blog post on this site put together. Sure, 7,500 of those people probably hate me for what I've said on this topic, but it still feels amazing to have seen those kind of visitor numbers to my humble, digital abode.

My only motivation in writing this piece is I truly believe it's a matter of shame that more people, especially engineers, in my industry are not willing to publicly denounce the glaring uselessness of blockchain and the sheer grift of cryptocurrencies. People have lost money, in some cases entire life savings, falsely believing they were investing in real assets with durable value and market demand driven by real world application.

So, in discussion comments where my post has been linked, I've seen a couple of general points and themes in comments critical of my position which I'd like to quickly address; that we are still in the early phase of where this stuff is headed, that blockchains are being used successfully for legitimate applications right now, and that just because the space may be rife with scams, rug-pulls and failures, these same criticisms can be leveled against email, the early web, or other widely used tech.

Respectfully, we are not in the early phase of blockchain/crypto, nor will this space meaningfully mature as more time passes. A blockchain is not a novel technology, it's just a hash-based data structure. These have existed since long before Bitcoin. Private blockchains are just less efficient databases. They are not solving any problems in any new way, so niche cases of use in supply chains etc. are just a nonsense from a technological point of view - in any such cases, blockchain started as the solution and a problem was then moulded to fit around it. There has yet to be any use case where we can say "We couldn't do this without blockchain, and now we can because we have blockchain."

Public blockchains have no significant extant applications outside cryptocurrencies, which in turn have no significant extant use as currencies and have proven to fail as both secure mediums of decentralized exchange and stores of value. Proponents will always cite trustless, permissionless and decentralized when you ask what this "technology" is good for, but these are not use cases, they are attributes which are far more often than not undesirable, especially in anything relating to financial instruments.

Pointing out that other data storage technologies can be used to enact scams or frauds - anything from Excel to email to a handwritten note - is just an attempt to wave away criticism of crypto with frankly risible whataboutery. No other technology is so optimally designed to be used for gray and criminal activity, and so bad at being used for anything else.

As always, your comments and feedback remain welcome, whether you agree with my take on all this or not 🙂

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