It is January 2014 and at least 400 people are packed into a conference hall in Miami Beach. High-profile journalists stand against the walls. Powerful venture capitalists crouch in the aisles. Banking and finance gurus crane their necks from the back of the room. They’re waiting for one of the most anticipated presentations of the 2014 North American Bitcoin Conference. A massive surge in interest from the media has just pushed the price of a single Bitcoin to around $900, up nearly 800 per cent in three months. Bitcoin Miami is the largest ever conference of its kind. In this moment, the possibilities for Bitcoin seem limitless.
What appears to be a teenage boy mounts the stage. The crowd goes quiet. In fact, Vitalik Buterin – all acne-splotched face, spidery fingers and shining eyes – is just a few days shy of 20. He surveys the audience nervously for a moment, then kicks off his presentation by lauding the benefits of the Bitcoin payment network – its speed, security, economy and autonomy.
All of Bitcoin’s strengths, Buterin reminds his listeners, are underpinned by the ingenious distributed security protocol known as the blockchain, and by the network’s thousands of voluntary hosts, known as miners, who are paid in Bitcoin to maintain it.
‘In order to have a decentralised database, you need to have security,’ he says. ‘In order to have security, you need to – you need to have incentives.’
For Bitcoin, security creates value and, in turn, value creates security. But currency, Buterin continues, is far from the only use for blockchain-based distributed security. What if, he asks, a decentralised system of hosts could guarantee the trustworthiness of other kinds of financial instruments? Such as, say, insurance policies, or rental agreements, or futures contracts?
Buterin stumbles, stutters, repeats words and emits strange frog hiccups as he speaks. But his voice pulses with conviction. In his mixture of awkwardness and passion, he recalls a long line of tech wunderkinder – Bill Gates, Steve Wozniak, Sergey Brin.
Finance underpinned by a blockchain network, and linked to fully digital currencies, would be secure against both hacking and dishonesty. Banks, brokers and lawyers – whose main role in many such transactions is to keep everyone honest – could become afterthoughts.
The Bitcoin network is designed to specialise only in payments. It is difficult, and in many cases impossible, to program more complex transactions into it. But Buterin’s Toronto-based company, Ethereum, is building a new kind of blockchain system that would make these more complex transactions easy to design and execute.
‘Instead of specialising for each individual application,’ Buterin continues, ‘you come up with a programming language, and then that programming language is so powerful that you can build any application on top of it.’ Ethereum’s language is so flexible that it is, in the jargon, ‘Turing complete’. And so its distributed network will (in theory) be able to host and administer anything from asset-trading platforms and escrow services to the sale or rental of any resource connected to the internet, such as hosting, data or processing power. The terms of every sale, trade or agreement would be encoded into the system, their trustworthiness ensured by the swarm of hosts running it.
Transactions would be paid for using Ethereum’s own Bitcoin-like cryptocurrency, called Ether, which would also be used to pay the system’s hosts. And just as with Bitcoin, the ability of these constructs to securely cross national borders and attract a mutable swarm of hosts means that no one – not hackers, not competitors, and not governments – will be able to shut them down. Code will be the new financial law. We are talking about companies that run themselves, at the very limits of human oversight.
Out of time as his 30-minute talk draws to a close, Buterin rattles through a final slide which lists functions that could be built using his tools: reputation systems, crop insurance, gambling. The final point on the list reads: ‘Skynet?’ – the murderous rogue artificial intelligence of the Terminator films.
The audience laughs, then rises to applaud. When Buterin steps off the stage and out of the conference hall, he is instantly surrounded by a scrum of bodies. Reporters and investors pump him for more details. Recorders are thrust into his face.
Startling as it sounds, Ethereum merely represents the convergence of some long-running trends in business. In The Zero Marginal Cost Society (2014), the US social theorist Jeremy Rifkin analyses current patterns in computerised management. He describes how, through the ever tighter merging of communications, energy and logistics, distributed peer-to-peer networks are making it cheaper and easier to start new companies.
Rifkin’s favoured examples are outfits such as Airbnb, Uber and Kickstarter, which smooth the ‘crowdsourcing’ of everything from vacations to financing. The premise of these companies is that they cut out the middleman, letting people provide services directly to each other at prices close to the cost of production. In many cases – such as the repurposing of unused rooms – that cost could be nearly nothing. And as everything from refrigerators to cars start to be accessed and controlled through the internet, those efficiencies will mount up. Rifkin calls the resource-rich, low-profit economy that seems destined to emerge ‘the Collaborative Commons’.
And yet, on reflection, Rifkin’s examples turn out to be anything but collaborative at their heart. Companies such as Uber and Airbnb are fiercely profit-driven, taking large cuts from all the exchanges they facilitate. They are middlemen themselves, albeit somewhat more efficient and open than their predecessors. What’s more, the digital payment systems that underpin their services are also highly centralised and very expensive. Rifkin unintentionally highlights this when he claims that the ‘web-facilitated scaling of financing brings the marginal cost of lending to borrowers to near zero’, only to clarify that Kickstarter takes 5 per cent of all funds raised on its site, with another 3 to 5 per cent going to Amazon Payments. Those costs are not even close to zero. They represent (to borrow a phrase) a vampire squid attached to the face of the Collaborative Commons.
The root of the problem is that a true digital currency – one that travels the network fast enough to enable decentralised sharing – is very difficult to implement. An effective currency requires trust, both between the members of the community who use it and in the technology that implements it. The US dollar has remained the world’s reserve currency not only because of the robustness of the US economy, but also thanks to its various anti-counterfeiting measures and the relative caution with which the US reserve bank issues it. Meanwhile, the very open nature of the internet – its lack of deep identity controls and its vulnerability to manipulation – makes it a challenging environment in which to establish a standalone currency.
That’s why Bitcoin, which offers a clever solution to the digital cash problem, is such a significant achievement.
When everything from your alarm clock to your car is managed remotely through the global network, autonomous cloud robots will run free
Bitcoin is a single body of code, cleverly designed to generate its own distributed hosting network. The code is public, to ensure the trust that underpins its functionality as money. The system’s hosts receive transactions from anywhere on the internet and, by sharing them with their fellow miners, compile a collective record of all Bitcoin transactions. This is the blockchain. Tens of thousands of miners check their copies of the blockchain against one another every 10 minutes, agreeing collectively on the balances of every Bitcoin user. Why do they do it? Because the code itself pays them in Bitcoin currency. (They also collect transaction fees, though these are generally tiny: as little as a few cents for transactions of up to tens of thousands of dollars.)
Bitcoin, or a system like it, will be vital if Rifkin’s truly open and decentralised economy is ever to come about. But Bitcoin can’t do much more than record the transfer of value, and it seems clear that there’s a lot more that a blockchain-style system can offer. Hence the emergence of Ethereum, along with an entire class of systems that build more complex business functions into the same frictionless, decentralised framework. In the allegedly imminent world of the Internet of Things, where everything from your alarm clock to your car is managed remotely through the global network, these autonomous cloud robots will be able to run free. They will execute contracts, manage supply chains, even open new markets. And though they will do all these things according to a logic designed by human creators, they need not be under direct human supervision. Buterin calls such constructs Decentralised Autonomous Organisations. More commonly, they are known as Distributed Autonomous Corporations, or DACs.
It’s an unassuming name, isn’t it? And yet, perhaps alarm bells are already ringing.
Back at the Miami Beach Convention Center, around the corner from Buterin’s packed hall, a rather different presentation is underway. In a lounge area scattered with empty tables, a thin man in his mid-20s is talking about something called Bitshares. He’s dressed in a black buttondown shirt, a skinny black tie and black slacks. He is flanked on one side by banners touting his company, and on the other by a prize table, manned by young women handing out branded T-shirts and USB sticks to conference attendees.
This is Daniel Larimer, CEO of a Virginia-based company called Invictus Innovations. Invictus’s main product is BitShares (since adopted as the name of the entire company). It’s a stock and commodities trading platform that will circumvent the middlemen of the finance industry – and, Larimer wants everyone to know, let them ‘earn 5 per cent returns on anything’.
When he speaks, Larimer frequently pauses to lean in, peaking his fingers as if making sure that you’ve absorbed not only the meaning of what he’s saying but the deep importance his words have for you personally. If Buterin’s hesitant passion suggests a nervous nerd messiah, Larimer’s relentless commercialism is more reminiscent of late-night TV pitchmen such as Billy Mays. Nevertheless, both men were in Miami to sell DACs.
Well, there are some differences. Instead of providing a framework for other projects, as Ethereum does, BitShares is largely planning to build the DACs itself. Its distributed trading platform, BitsharesX, launched in August 2014. It also plans DACs for a decentralised music sales service, and Larimer has written a whitepaper on how a DAC could help content creators get paid without the aid of publishers. Users of BitShares DACs pay with the system’s native cryptocurrencies, which are also used to pay hosts.
That brings us to one of the current limitations of DACs – the infrastructure connecting them to the larger economy. Though retailers and service providers adopted Bitcoin en masse in 2014, financial servicers have been much more cautious. What this means is that there are still very few ways for users to convert Bitcoin or other cryptocurrencies into traditional currencies or commodities.
Partly in order to work around this, the BitShares trading platform offers participants no ownership of the commodities they’re nominally taking positions on. Instead, Larimer describes it as a ‘predictive market’, in which participants set commodity prices by taking positions – or, put more directly, by placing bets. BitShares is, for now, a digital version of the 19th-century bucket shops where the working classes would go to bet on stock‑market moves. This form of speculation is illegal in most US states, including Washington, California and Mississippi. But that could change quickly. As digital cash becomes integrated with more and more services, DACs such as BitShares will almost certainly find ways to interface with real-world markets for gold, dollars and goods of all kinds. If those connections expand, the possibilities of DACs will expand with them.
Imagine, for instance, a bike-rental system administered by a DAC hosted across hundreds or thousands of different computers in its home city. The DAC would handle the day-to-day management of bikes and payments, following parameters laid down by a group of founders. Those hosting the management programme would be paid in the system’s own cryptocurrency – let’s call it BikeCoin. That currency could be used to rent bikes – in fact, it would be required to, and would derive its value on exchanges such as BitShares from the demand for local bike rentals.
Guided by its management protocols, our bike DAC would use its revenue to pay for repairs and other upkeep. It could use online information to find the right people for various maintenance tasks, and to evaluate their performance. A sufficiently advanced system could choose locations for new stations based on analysis of traffic information, and then make the arrangements to have them built.
One of the most intriguing parts of such a system is that it allows the crowdfunding of large-scale projects without the centralisation and fees of either stock exchanges or platforms such as Kickstarter. The DAC platforms themselves are models – in the year since Bitcoin Miami, Ethereum has raised about $14 million, and BitShares around $6 million, solely through the direct sale of the digital currency that will allow people to run programs or make exchanges on their networks.
Bitcoin’s transparency has in many cases made it easy for authorities to track and seize currency held and used by criminals
Our hypothetical bike-rental system could do the same. Once a core group of developers had outlined their mission and promoted the project in public, interested parties could buy BikeCoins in advance of the system’s deployment. Sufficient demand would fund the scripting of the DAC’s source code, and then the BikeCoins could be used to buy its services. And of course, BikeCoins could also be re-sold. Indeed, once the system is in place and successful, their value would increase substantially, a prospect that will incentivise early investors.
The same appreciation is widely anticipated in the case of Ethereum and BitShares themselves, and speculators have piled into their offerings – though both projects, clearly leery of financial regulators, have framed their sales as closer to crowdfunding than investment efforts.
Yet DACs are structured like investments in another crucial way. Both Ethereum and BitShares plan to make entities whose code can be changed through a distributed democratic process. DAC hosts could vote to alter their operating principles, just as the boards and voting shareholders of corporations work to alter corporate structure and strategy. DACs, though, would have vastly lower barriers to entry and participation than corporate boards.
Because of their more democratic technical structure – and, at least for now, their apparent invisibility to regulators – these systems would need to emulate Bitcoin’s open-source ethos in order to be trusted. Despite its reputation as a tool for criminality, Bitcoin’s transparency – the blockchain record of every transaction is entirely public, though pseudonymous – has in many cases actually made it easy for authorities to track and seize currency held and used by criminals. For a time, in fact, the FBI was a major holder of Bitcoin, thanks to criminal seizures. By the same token, DACs could be totally transparent corporations, their principles and actions open to scrutiny by both participants and outsiders.
Open-source principles are a major point of distinction between DACs and the existing, overwhelmingly proprietary systems used for logistics, management and trading. Recall our hypothetical bike-share DAC, a body of business logic in the form of code. Not only would it be entirely open to analysis by the public and investors, but it could be transplanted to a new city at nearly zero cost. What was deemed effective in one system could be copied instantly in others. This democratic proliferation of automated management systems would massively accelerate the journey towards Rifkin’s Collaborative Commons.
That all sounds like good news. And yet the true economic significance of automated systems and robotics remains troublingly unclear. While they make our daily lives easier by increasing the productive efficiency of each input unit of human labour, they displace jobs; automated factories need far fewer workers. John Maynard Keynes saw this coming 85 years ago, when he coined the term ‘technological unemployment’.
Technologists (and many economists) argue that workers who lose their simple or repetitive jobs to machines are thereby set free to perform more complicated tasks. One former factory worker might supervise his robot replacement, another might design them, and still others move into entirely new sectors of the economy. Until 2008, that logic seemed to largely hold true – automation increased efficiency without dramatically reducing employment.
But automated logistics and financial systems aren’t just putting rivets into holes. These robots, whether DACs or more centralised systems, are now able to move money around an economy programmatically. They therefore threaten to replace the humans who once made the day-to-day decisions required to run businesses and organisations. Would that be so bad? The machines have already come for the manual and clerical workers; perhaps there’s a certain kind of grim satisfaction in watching them close in on the executive class, too. And yet it would be hasty to predict a broadly egalitarian outcome. The US economist Paul Krugman sees the broader risk: that we will end up ‘a society that grows ever richer, but in which all the gains in wealth accrue to whoever owns the robots’.
it is still possible to imagine how DACs might contribute to the cause of global justice through economic development
Who will own the DACs, who will profit from them – and whether ownership or profits are even the right terms – are still open questions. Larimer, from his tone to his pitch, seems relentlessly fixated on the idea that the funders of DACs will reap profits. The investment-like structure of DACs, funded by cryptocurrency, means that those who establish them, back them early and host them will benefit when their associated cryptocurrencies rise in value. Such enviable roles are reserved largely for the technically savvy, resource-rich, and well-educated: in other words, the already privileged.
On the other hand, the open nature of DACs might allow those who were excluded from traditional entrepreneurial channels to gather capital support for their ideas. Imagine startups in developing countries, frictionlessly funded by international backers in roles somewhere between investors and philanthropists. Whatever ominous developments the new technology portends for the managerial classes, it is still possible to imagine DACs contributing to the larger cause of global justice. After all, if they don’t care about borders, who is to say they won’t work to flatten the huge inequalities between nations?
In a sense, though, we have only scratched the surface of the disquieting possibilities that DACs hold out. Their most profoundly strange feature – the thing that makes them both amazingly powerful and more than a little disturbing – is their capacity to take on lives of their own.
While holders of cryptocurrency are easier to track and trap than many realise, the same can’t be said for the underlying distributed programs. Because these programs pay their hosts, who operate as a distributed swarm, the shutdown of one host would not only leave a perfectly operational network – it would create an incentive for another host to quickly pick up the slack, and be rewarded for it. Attacking the hosts of a DAC or cryptocurrency network is an unending game of whack-a-mole.
And legally, it has proven difficult for governments to prosecute the creators of programs that do illegal things if they’re not the ones actively committing or directly facilitating crimes, or to stop the distribution of those programs. It’s the difference between Napster – centrally hosted, prosecuted, shut down – and BitTorrent – a decentralised protocol that’s still alive and kicking.
Taken together, these technological and legal hurdles mean that even DACs engaged in illegal activity could require Herculean efforts to stop. Proponents tend to see the positive side of this. In an interview on the Let’s Talk Bitcoin podcast recorded during Bitcoin Miami, a spokesman for Ethereum named Charles Hoskinson cited WikiLeaks as one of the best examples of a service that could benefit from operating as a DAC – it would be difficult for, say, a hostile government to trace it across potentially thousands of hosts, and very hard to shut down even a significant fraction of them.
Bitcoin insiders… postulate the quite literal ‘killer app’ for DACs – a distributed assassination brokerage
The example aligns with the strong libertarian bent of many Bitcoiners. Invictus, the now-abandoned name for Larimer’s company, is Latin for ‘unconquered’, and Larimer’s fairly radical libertarianism typifies the culture surrounding Bitcoin and DACs. He sat with Hoskinson in the same Let’s Talk Bitcoin interview and declared approvingly that ‘decentralised technologies will make governments entirely irrelevant, ineffective and unable to do anything’.
But unregulatable commerce is a double-edged sword. Bitcoin’s earliest adopters used it on the infamous Silk Road black-market site, the lesser-known controversial gambling operation Satoshi Dice, and the Pirate Bay BitTorrent site, a channel for millions if not billions of dollars in stolen intellectual property. Adding the Internet of Things and the financial capabilities of DACs to the mix has led Bitcoin insiders to postulate the quite literal ‘killer app’ for DACs – a distributed assassination brokerage.
Even setting that somewhat sensationalistic use case aside, DACs present profoundly disturbing possibilities. Buterin’s declaration that Ethereum will be ‘Turing complete’ refers strictly to its status as a fully developed programming language. And yet Alan Turing’s name also evokes the Turing Test, the standard for evaluating artificial intelligences. In an era of rapidly advancing computer science, it’s easy to imagine a DAC empowered to evaluate and modify its own operating parameters, evolve new capabilities, and grow in reach and power. For example, while humans are currently needed to maintain servers and install software, a self-improving DAC in a fully connected and cryptocurrency-fuelled world could presumably figure out how to do those things by itself. It might even be able to carry on its business without anyone noticing what was happening. Buterin made his offhand joke about Skynet, the omniscient computer system that eventually chooses to exterminate humanity in the Terminator films. Maybe DACs really do put this possibility into play, distant but distinct.
And yet, much more than killer cloud robots, DACs should make us think about the immediate consequences of the rapidly accelerating automation of our economic system. If we choose to believe Buterin’s doe-eyed prognosis, DACs could make our economy even more egalitarian than Rifkin was able to imagine. They could become utopian tools for liberation from big government, corporations, exploitation and want. On the other hand, Larimer’s tantalising promise of ‘5 per cent returns on anything’ suggests another, more familiar path: one that simply furthers the economic domination of the many by the savvy few.
Which vision will win out? That will depend less on the specific capacities of the technology than on the ability of governments and electorates to grasp what it is and what it means. One way or another, it looks like RoboCorp will be able to look out for itself. In the meantime, we need to get our own house in order.