Anarchism and Cryptocurrencies
Original Author: Rai Ling
introduction
introduction
A cryptocurrency is a digital currency whose transactions are verified and recorded through a decentralized system using cryptography, rather than through a centralized authority. Although cryptocurrency is often used as a tool to weaken state power, it has sparked controversy among anarchists.
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How do cryptocurrencies work?
Before directly responding to the left’s arguments, it is first necessary to understand how cryptocurrencies work and why they are designed the way they are. Cryptocurrencies typically use a blockchain, an immutable distributed ledger that can be accessed by anyone but cannot be unilaterally modified to record transactions. No single entity can seize assets, reverse transactions, or change the ruleset of a given blockchain. This ledger is stored on a decentralized network of computers that must reach consensus in order to verify transactions, since at any given moment there is only one valid state of the ledger.
Blockchains use consensus algorithms to remove the transaction intermediaries that centralized payment processors rely on. Abstractly speaking, in physical space, consensus is based on trust between individuals or enforced by the government. The cost of centralized consensus includes global police and military spending to enforce government decisions. In anarchy, the cost of consensus is the labor put into relationship building, deliberation, and compromise to reach an agreement. In physical spaces, consensus becomes more difficult to scale without anyone being overthrown, because not everyone can agree on a certain course of action. In cyberspace, however, algorithms can be used to achieve distributed consensus at scale.
Blockchain provides a trustless, permissionless, open and anonymous infrastructure for conducting transactions. These properties are achieved by providing incentives to miners and validators, which requires the introduction of costs through artificial scarcity to prevent 51% attacks and validation of malicious blocks. A 51% attack is control of at least 51% of the computing power, or stake in a blockchain, enabling an attacker to censor transactions, reverse blocks, and change the order of transactions, the nature of these costs depending on the consensus algorithm used.
In the proof-of-work mechanism, miners earn the right to build the next block by solving a hash function (a computationally intensive process that consumes energy). Therefore, a 51% attack by miners requires a huge capital and energy investment, which is almost impossible to achieve. Energy consumption can also make miners reluctant to validate malicious blocks, since other nodes also have a copy of the ledger, and these nodes will refuse to accept these malicious blocks. Therefore, incentives revolve around earning block rewards and/or transaction fees. In the proof-of-stake (POS) mechanism, tokens are mortgaged, and nodes that verify malicious blocks will be deducted tokens. It must be impossible for an attacker to control a majority of the coins to conduct a 51% attack, so the coins must retain value. In all of these examples, costs are created through artificial scarcity, which in turn creates incentives to help ensure the security of the underlying network.
Thus, there is some path dependence, with early adopters accumulating tokens and power in their respective networks, leading to varying degrees of economic rent, where revenue exceeds costs (including labor costs). This can be mitigated by trying token economic models like increased issuance or consensus protocols like delegated proof of stake. The delegated proof-of-stake mechanism used by blockchains such as Cosmos allows all users to stake their tokens to validators without running any hardware. Technically, Ethereum could also do this by staking with a staking aggregator like Lido, but this is not part of the consensus protocol. There are also cryptocurrencies like Nano where there are no transaction fees, although this comes with some trade-offs, such as a lot of spam on the network. Across the cryptocurrency ecosystem, transaction fees are continually being slashed through layer-two scaling solutions and competing multi-chain ecosystems.
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Cryptocurrency as a tool of liberation
To most of the left, cryptocurrencies are primarily seen as instruments of financial speculation rife with scams. Indeed, many early adopters have made enormous fortunes from artificial scarcity and an influx of speculative capital, leading to exponential growth in cryptocurrency prices. The cryptocurrency space is also full of scams, some obvious and some not. However, these facts do not detract from its benefits and only cover a small part of the overall picture. Likewise, the Internet is also rife with scams and has created many billionaires. These facts do not mean that we should abandon the Internet, but rather think about how it was designed and organized.
Cryptocurrencies enable people to conduct unauthorized transactions, protect their assets from government seizure, and avoid financial surveillance, challenging several important aspects of state repression. Its permissionless nature means people can buy drugs, send money, fund illegal activities such as protests, and avoid taxation without going through state-controlled channels. For example, undocumented people could use cryptocurrencies to send money without using banks that may not be available and potentially expose them to state surveillance. Unlike banking, sufficiently decentralized cryptocurrency networks are not subject to international sanctions and do not require identity verification. Sex workers use cryptocurrencies to make payments after being banned from banks and platforms such as Patreon, Cashapp and Ko-fi, which also have arbitrary KYC (know your customer) requirements. In Nigeria, cryptocurrencies are being used to fund an anti-police brutality campaign banned by the banking sector. It is also used to buy recreational and life-saving drugs such as HRT (Hormone Replacement Therapy in the Transgender Field) on the black and gray markets.
A recent Chainalysis study showed that in emerging markets and countries with unstable financial conditions and relatively high levels of currency repression, such as Vietnam, Nigeria, and Ukraine,"Grassroots Cryptocurrency Adoption"very common. Cryptocurrencies also enable people to bypass foreign sanctions. In Afghanistan, for example, a U.S. dollar stablecoin, BUSD, was used by an NGO to circumvent U.S. sanctions, the Taliban, and bankrupt banks that lack access to systems like SWIFT to provide emergency food funding during the post-withdrawal turmoil. As adoption increased, the Taliban eventually banned cryptocurrencies to force people into the banking system, where their activities could be more easily monitored and funds transferred overseas, but given their nature, these bans were difficult to enforce.
Cryptocurrencies have seen widespread adoption as a means of fighting inflation. In Turkey, Bitcoin exchanges popped up on the streets as the government continued to devalue the lira. Likewise, many Lebanese turned to cryptocurrencies after banks stopped withdrawals and the Lebanese pound collapsed. The same trend was seen during Venezuela's period of hyperinflation. Despite the volatility of many cryptocurrencies, they still hold their value better relative to many global currencies. Additionally, cryptocurrencies enable global access to the U.S. dollar through stablecoins. Incidentally, while many claim that Bitcoin is not a hedge against inflation due to its recent performance in the face of extremely high inflation, a closer look reveals that global markets have not responded to inflation over the past year, but rather A reaction to the Fed's increasingly hawkish tone, especially starting in November 2021 when Fed Chairman Jerome Powell acknowledged that inflation is no longer a short-term phenomenon, a signal that they will stop devaluing the dollar. In the ensuing period, historical inflation hedges such as gold and growth stocks have lost value, while real yields on bonds have risen as the dollar has strengthened. Uncontrolled inflation lowers real bond yields and reduces the purchasing power of fiat currencies.
Cryptocurrencies are also very useful as a privacy tool for digital transactions, which is not possible in the banking industry. Cryptocurrency networks offer varying degrees of privacy; first, wallet addresses are randomly generated strings that do not require KYC (know your customer) authentication. Transactions on traditional blockchains are public, but outside observers cannot learn the identities of transaction participants unless they are linked to bank accounts through fiat onramps like centralized exchanges. Tools like LocalCryptos allow users to move funds on-chain and off-chain, bypassing centralized exchanges. However, most cryptocurrencies do not hide transaction amounts and wallet addresses by default, but privacy can be achieved through the use of mixing services such as Tornado Cash and Blender, which pool deposits from multiple addresses, allowing users to Withdraw later to an unassociated address, providing probabilistic privacy protection. There are also some "privacy coins" such as Monero and Zcash, which have privacy protection functions at the basic level. The former uses ring signatures to group transactions to achieve probabilistic privacy protection, while the latter uses zero-knowledge proofs to hide transactions. Only the proof will be on the chain. release. There are also many new privacy protocols with smart contract capabilities, such as Penumbra, Secret Network, DarkFi, and Aztec. Some argue that cash can serve the same function, but this fails to take into account the increasingly digital world we live in. Unlike cash, cryptocurrencies do not need to be physically carried and stored, allow people to conduct transactions remotely, and are not restricted by government monetary policies. Given the use cases we've covered, it's clear that privacy makes cryptocurrency networks more resistant to government intervention, while enabling marginalized users to achieve their goals.
A good way to assess the usefulness of a cryptocurrency is to consider whether it solves an existing problem or creates a hypothetical application. For example, cryptocurrencies are being applied as an incentive layer to P2P protocols such as decentralized wireless networks, torrent sharing, and decentralized file storage. Helium introduces Helium tokens as an incentive for users to operate hotspot devices that serve low-bandwidth P2P wireless networks for the Internet of Things. The project has had little success so far in a niche market with low demand and the need to compete with large state-subsidized internet service providers. Similarly, decentralized file storage protocols such as IPFS and Arweave adopt Filecoin and Arweave tokens respectively to calculate storage costs. Another example is Bittorrent, a communication protocol for peer-to-peer file sharing, which introduces tokens for downloaders to pay uploaders, incentivizing others to upload neglected files, and providing extremely fast download speeds for others, for users Said very useful.
Decentralized finance (DeFi) is another important use case for cryptocurrencies, providing intermediary-free financial services such as loans, insurance, and stablecoins provided on-chain through smart contracts. It competes with traditional banking services, sometimes with greater product advantages. For example, the Liquity protocol allows users to take out zero interest loans on Ethereum collateral with a 110% collateral ratio (you can lend 90% of the value of the collateral you provide) with a one-time fee as low as 0.5%. The protocol issues its own stablecoin against the underlying collateral, which means it has no associated cost of capital, making borrowing costs far lower than anything in traditional finance. The main disadvantage of Liquity compared to offline (traditional) lending is the need to provide collateral, which can be lower or non-existent depending on the mutual trust of the parties.
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Cryptocurrency in the context of anarchism
In the context of anarchism, cryptocurrencies still have some usefulness, and may even be a lifesaver in some cases. In the context of capitalism, while achieving consensus at scale is difficult and involves paying transaction fees and accumulating economic rents, cryptocurrencies are still very useful for some individuals. And what about in the context of anarchism?
In the absence of state monitoring of transactions and top-down rules and regulation, people may be more inclined to trust cheap and instant transactions provided by centralized services, accessible to everyone, and market competition will encourage trustworthiness degree and good risk management. However, there are no absolute guarantees, and centralized platforms can essentially do whatever they want with the funds they host, including blocking transactions, freezing funds, and leaking information. Centralized platforms also suffer from a single point of failure, making them more vulnerable to attack.
Cryptocurrencies offer an alternative to trust itself, which was the only basis for mutual social relationships before the invention of the blockchain. Even attempts to counter trust, such as using systems such as escrow, require the use of trusted intermediaries. Trust is scarce and therefore has a cost because it requires a certain amount of labor to maintain, and labor always has a cost, although in many cases the cost is negligible. In other words, the social dimension is not without friction, and our day-to-day interactions incur transaction costs.
Trust is also closely linked to social capital, and the path dependence of social capital accumulation is somewhat similar to artificial scarcity on the blockchain, both leading to the accumulation of scarcity rents. Although the market is relatively competitive, the institutions that people trust may become fixed, and the interaction model without trust provides a way for the entire social capital to exit and test. For any individual, the choice to use a trust-based or trustless system depends on which approach has higher transaction costs for it. This can vary widely from deal to deal, and it's unlikely to be entirely dependent on one. It is important to note that transactions that cannot be fully mediated through smart contracts are trustless, which means that it has limited scope at the current state of the art and may be limited to scarce digital goods such as P2P storage and processing power. However, as things become increasingly digitized and automated, the applicability of blockchain for everyday transactions increases.
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Are cryptocurrencies damaging the environment?
Before we dive into this issue, one thing to note is that most blockchains use a Proof-of-Stake mechanism, which does not consume more energy than other decentralized computing processes, only A network of computers is required to operate. Currently the most active blockchain, Ethereum, has recently switched to proof-of-stake, reducing energy usage by more than 99%, so we don’t need to say much about that.
Only Bitcoin, the largest cryptocurrency by market capitalization, uses Proof-of-Work, which requires miners to expend energy to gain the right to build the next block. However, Bitcoin's environmental impact is often exaggerated and misunderstood by critics, and the proof-of-work mechanism can incentivize grid stabilization, investment in renewable energy, and methane reduction. Considering that Bitcoin stores about $600 billion in value and processes $10-20 billion in settlements per day, it makes more sense to look at its energy usage as a whole than to dismiss the technology entirely because of energy consumption.
A brief recap of why Proof of Work consumes energy: Computational work is a cost to miners, ensuring they cannot control more than 51% of the hashrate (which would allow them to alter the network's history and double spend) , and give them no incentive to validate malicious blocks, since those blocks would be rejected by other nodes. Bitcoin's energy consumption is related to block production and increases as the price of Bitcoin rises because mining becomes more profitable as the price rises. Therefore, even if a block is empty, it will still be mined. Additionally, off-chain scaling solutions such as the Lightning Network mean that one on-chain transaction can represent thousands of smaller transactions. This means that the oft-cited metric of energy consumption cost per transaction is not a practical way to measure the efficiency of the Bitcoin network, since adding or removing transactions does not change energy usage.
Overall, Bitcoin only consumes about 0.4% of global energy (this is an annualized figure based on data from October 2022, estimates vary widely with hash rate). However, to better understand Bitcoin's environmental impact, it makes sense to look at its energy mix (sustainable vs. non-sustainable energy), since energy consumption does not necessarily translate into emissions. Estimates of Bitcoin’s energy mix vary widely, with the Cambridge Center for Alternative Finance (CCAF) estimating sustainable Bitcoin mining at 37.6% and industry estimates represented by the Bitcoin Mining Council at about 59.5%, which is better than the average U.S. sustainable energy share of 40%. With mining increasingly relocated out of China due to a government crackdown, Bitcoin's energy mix is improving and already far superior to the vast majority of other industries.
Determining Bitcoin's energy mix is not easy, however, because miners are highly mobile and often operate in remote locations with cheap energy. Nonetheless, Bitcoin’s energy mix has been improving and is already much better than most other sectors. It is important to note that energy consumption does not necessarily mean high emissions, as the use of sustainable energy can reduce carbon emissions. Therefore, when assessing the environmental impact of Bitcoin, it is not enough to focus on energy consumption alone, the sustainability of the energy mix and the overall emissions of the industry also need to be considered.
Another important nuance to Bitcoin’s environmental impact is the incentivizing effect of proof-of-work on the energy industry. Mining incentivizes grid baseload building in underserved areas where energy companies are reluctant to invest, by providing demand for electricity demand. For example, Gridless Compute used Bitcoin mining as a buyer of last resort to monetize micro-hydro plants in Kenya. Bitcoin miners can also subsidize intermittent renewable energy by dynamically shutting down mining rigs when demand surges and turning them on when there is excess capacity. An example of miner mobility is the movement of Chinese miners from Xinjiang province, which uses coal to generate electricity, to Sichuan province, which uses cheap hydroelectric energy during the rainy season. In general, non-contending or stranded energy tends to be cheap, and Bitcoin miners are likely to seek it out. However, this can also have a negative effect, as in some cases the cheapest option turns out to be a defunct coal-fired power plant. Finally, Bitcoin mining can capture and utilize waste methane that would otherwise be flared or vented, which is net zero in terms of emissions but also subsidizes underlying industrial processes.
Comparing Bitcoin’s energy consumption to other activities that draw energy from the grid provides a better understanding of its energy usage. Technically, in the traditional global banking system, settlements in dollars are ultimately enforced by the US military and police, the former one of the largest polluters in the world, and Bitcoin using 7 times more energy. Additionally, the U.S. dollar is legitimized through the U.S. government’s taxation and fines on individuals and businesses. Bitcoin seems like a better option, both from an ethical and energy standpoint. We can reasonably estimate that gaming consumes 46% more energy than Bitcoin mining, and its energy mix is also less sustainable. Still, no one is complaining about the collective energy consumption of professional Twitch game streamers, who use power-hungry gaming equipment. Similarly, home tumble dryers, which are often used by choice, consume 1.6 times as much energy as Bitcoin mining.
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Segmentation—NFT
For Bitcoin and the left in general, no study of cryptocurrencies is complete without an analysis of the NFT (non-fungible token) phenomenon. An NFT is a unique token stored on the blockchain that can include an optional metadata extension, which can include a Uniform Resource Identifier (URI). NFTs have various uses, as a tool to compensate artists, or as another speculative asset that people trade.
Buy"Buy"These works of art can be seen as donations to encourage artistic creation. Finally, they can be used to represent or communicate group membership in a trustless manner, providing relevant context through linked content.
Beyond these generalizations, however, there are some methodical criticisms of NFT use cases, such as their use to signify ownership of referenced information. The definition of ownership is to allow the holder to use it exclusively, and NFT cannot do this. In essence, people are paying a token that points to something they don't actually own and can be freely copied by anyone. Therefore, one might argue that these tokens are worthless outside of a speculative context. The most common manifestation of this is the purchase of tokens associated with artwork by speculators. Many in the cryptocurrency industry openly acknowledge this, referring to NFTs as “shitcoins” (tokens that serve no purpose other than speculation) with pictures attached. Recent innovations in this space such as Sudoswap, a platform that implements NFT liquidity pools, allows users to buy and sell NFTs instantly on-chain.
In NFT games, NFTs are used to represent in-game items. Unlike artistic NFTs, games create a stable background for them to hold value, not just speculate. People who play games may purchase in-game items to enhance their gaming experience, and there is a cost to the effort required to acquire these items. A criticism of this paradigm of economic rent minimization applies to nearly all video games today, that developers and game companies accumulate artificial scarcity rents by selling information that is not in fact scarce despite being given certain the value of. Therefore, the only way is to compensate content creators without relying on scarcity rents, either by charging users for their services or through voluntary donations from users.
In this framework, it would be inconsistent to blame NFTs alone without blaming Netflix, Spotify, games that sell in-game items, and every other service that puts users' access to digital content as a payment barrier. In games, one of the great advantages of NFTs is to redistribute scarcity rents to users instead of centralizing them in the hands of game companies, by creating an economy of in-game items; think of it as a decentralization of Counter Strike skins market.
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Are cryptocurrencies decentralized?
Whether cryptocurrencies are truly decentralized is an important question for those who value their attributes. Many people dishonestly claim that cryptocurrencies are centralized and therefore insecure, and this is an important issue to discuss. On the face of it, most major cryptocurrencies are clearly decentralized, as they are coordinated by many nodes maintaining a distributed ledger. Bitcoin has 15,161 nodes at the time of writing and Ethereum has 8,068 nodes. However, the degree of decentralization of a blockchain is a continuum, and we can ask how decentralized a given blockchain is, and how to measure decentralization. For this, we can look at the decentralization metrics of Bitcoin using PoW and Ethereum using PoS.
The decentralization of a PoW network (such as Bitcoin) can be measured by computing power and computing power distribution. As more nodes join the network, computing power increases, making it more decentralized, but whoever controls the nodes also affects decentralization and security. The distribution of hashrate among miners is one way to see this. At the time of writing, Foundry USA, the largest Bitcoin mining pool, controls about 28% of the hash power, which is less than the 51% needed to carry out the attack. Mining pools represent many individuals and groups that own their own hardware and can exit the pool if they believe the operator poses a threat to the network. The incentives of PoW mean that mining pools are unlikely to collude, but such an attack would require the top five mining pools controlling 52% of the computing power. Another potential attack vector is state coercion, which is why the geographic distribution of hashpower matters - no single country currently controls more than 37.84% of hashpower. The degree to which Bitcoin's supply is dispersed does not determine the decentralization or security of the network, but reflects the dynamics of external speculation and internal accumulation. One thing to note is that since exchange wallets represent millions of users and asset custodians, the supply appears to be more concentrated than it actually is.
The decentralization of a PoS network (like Ethereum) depends on the number of validators, the number of nodes, and how tokens are distributed among those validators. The number of validators in Ethereum is roughly calculated by dividing the amount of ETH staked by 32, which is the minimum amount that must be staked to become a validator. Currently, there are 441,747 (this is previous data) validators maintaining the security of the Ethereum network. However, not all of these validators run their own nodes, instead 60% of staked funds are hosted by staking pools like Lido, which stake staked ETH against a set of node operator validators. Since the hardware requirements for running a validator are very low, a single node can run multiple validators, and a node does not necessarily have to run as a validator. The distribution of staking tokens across nodes or staking pools can provide a better understanding of how decentralized the network is. Currently, Lido, the largest staking pool, holds 30% of all staked ETH, down from 51%. Also, similar to mining pools, users can exit staking pools and choose elsewhere. Staking pools distribute ether among many independent nodes, mitigating their threat to decentralization.
While cryptocurrencies like Ethereum have trustless and distributed consensus mechanisms, centralization creeps in through other avenues. Much of the cryptocurrency space relies on centralized infrastructure providers like Infura and Alchemy, which allow decentralized applications to query the underlying blockchain remotely through APIs, since running a full node (which involves storing the entire blockchain) on its own is possible is not feasible. The problem with this approach is that infrastructure providers can censor and misrepresent information on the blockchain. This is a bug in the ethereum software stack, but does not compromise the underlying blockchain itself. There are also solutions to this problem, such as light clients, which are nodes with low resource requirements that can be embedded in desktop applications and wallets, allowing users to trustworthily verify information from infrastructure providers.
Another ongoing risk facing the Ethereum network (which Bitcoin has never faced) is regulatory risk from the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), which sanctioned Tornado Cash. Validators are free to exclude and reorder transactions in blocks, which means they can perform compliance operations individually. Roughly 53% of Ethereum blocks (as of this writing) are currently OFAC compliant because they use Flashbots, a Total Maximum Extractable Value (MEV) Gain Relay built in due to regulatory requirements Censorship.
MEV is the practice of including, excluding, and reordering transactions to capture on-chain arbitrage opportunities. Flashbots are middleware stacks that allow a competitive market of Seekers and Builders to build and send blocks to Proposers (Validators), which prevents the market from being monopolized by a small number of MEV-savvy Validators. Builders using Flashbots cannot include sanctioned transactions. The remaining 49% of validators did not, so the network is currently uncensored. However, if these validators refuse to confirm sanctioned blocks via the consensus client, that would constitute a 51% attack on the network.
Summarize
Summarize
For skeptical anarchists, exploring why cryptocurrencies are threatened by surveillance states is a good way to help them understand why. Tornado Cash is a currency mixing service deployed on many blockchains that allows users to conduct private transactions. More recently, the U.S. government imposed sanctions on it and arrested a contributor in Belgium, setting further precedents for banning technology that threatens the nation. The U.S. Department of Homeland Security recently signed a contract with centralized exchange Coinbase to track as much as possible the movement of funds on the blockchain. Many countries have also passed anti-encryption regulations and made anti-encryption rhetoric, sometimes even enforcing blanket bans.
In each case, the state sought to sanction cryptocurrencies because it enabled people to circumvent regulation, evade financial surveillance, and undermine fiat currencies, all of which strengthened the power of the state and the existing levels and distribution of rents. Especially for countries with high inflation, such as Turkey, the central bank has moved to ban cryptocurrencies because it can be used as a vehicle for capital flight, further weakening the value of domestic currencies. Some other countries, such as Nigeria, prohibit the trading of cryptocurrencies because it directly competes with domestic currencies and operates outside of government regulation.
Due to the decentralized nature of cryptocurrencies, crackdowns often have little effect. For example, the Tornado Cash smart contract on Ethereum cannot be removed or changed, and remains available through a decentralized front-end interface, despite being desupported by the platform by service providers and blacklisted by centralized exchanges. Additionally, some of the countries with the highest PPP-adjusted adoption rates, such as Vietnam, Turkey, and China, are hostile to cryptocurrencies, but they have a hard time keeping people from using them. Given this resistance, many anarchist organizations are using Bitcoin addresses as a fundraising option, which is useful for donors who wish to maintain some anonymity and do not have access to mainstream fundraising platforms, and it also facilitates funding for illegal activities. convenient.
Against the backdrop of these factors, negative narratives on the left about cryptocurrencies’ environmental damage and “scams” are ignorant, overreacting, and repeating government concerns. Although cryptocurrencies can be used as speculative assets, people also value them because they are permissionless, trustless, secure, decentralized, and open up spaces that are difficult for countries to understand. More broadly, we should acknowledge that usefulness is subjective, and that how and whether people use a technology is a matter of choice.
