Theft and anonymity as it relates to Gridcoin

As an investor in Gridcoin, I want to point out a few things that may not directly be apparent about the project, but are important for other investors to know. To start with, Gridcoin is not a genuinely anonymous currency, there will always be other cryptocurrencies that offer much greater anonymity. Blockchains can have certain properties that happen to conflict with each other. The question who is allowed to validate transactions is answered in Gridcoin through proof of stake: Those who have a stake in the currency are allowed to validate transactions. This is how most human economic arrangements tend to function, because it’s both fair and cost-effective in most circumstances. We allow share holders in a project to decide on its operational activities, either directly or through representatives.

However, if you have to prove you own a stake in the currency, you sacrifice a degree of anonymity in the process. The address you use to prove your stake and the balance on the address become known to everyone who possesses a copy of the blockchain. In coins like Monero that obfuscate the blockchain to make every coin truly fungible, the blockchain thus can’t be used to prove you have a stake in the currency, as to do so would defeat the purpose of blockchain obfuscation. The desire to let stake holders verify transactions and allowing stake holders to maintain full anonymity are thus two conflicting desires.

If we accept that Gridcoin will probably never develop the degree of complete fungibility a coin like Monero happens to possess, the next question we find ourselves faced with is what we would want to do in the scenario where Gridcoins have ended up in the hands of the wrong people. The most likely scenario in which this would happen would be theft. Because Gridcoin isn’t designed with anonymity and fungibility in mind as a central goal, we don’t have to worry much about coins being used to fund terrorism, child abuse or other criminal activities, as Gridcoin is a terrible medium for such activities compared to some other cryptocurrencies out there.

We do have to worry however, about scenarios in which people gain access to Gridcoin through unfair means. Someone might hack an exchange, steal a regular user’s balance, or abuse a flaw on BOINC to receive more coins than would be fair. To the best of my knowledge, this is a question that hasn’t received much consideration yet in regards to Gridcoin. The irreversible nature of transactions on blockchain based cryptocurrencies means that flaws and exploits can lead people to lose vast amounts of money.

In some cases, these thefts occur on a sufficiently large scope, that the credibility of a currency as a whole is affected. As an example, ten percent of the cryptocurrency Nano is now owned by one or more hackers who robbed an exchange. This is lethal to the credibility of a cryptocurrency as a reliable payment method with a net beneficial impact on society. In case of some cryptocurrencies, scandals like these are addressed through forks. Developers and participants in the currency agree to change the system’s code, to move forward and negate transactions that were fraudulent.

This is a controversial phenomenon, as there are some users who claim this undermines the idea of cryptocurrency as a reliable decentralized payment method. They wish to have absolute certainty that a transaction is definitive. To me personally, this is an unhealthy dogmatic attitude. In every cryptocurrency I’m aware of, transactions that are legitimate are definitive. The fact that fraudulent transactions are irreversible is a flaw that prevents widespread adoption, reinterpreted as a feature by its proponents.

I don’t want my grandmother to live in a society where she could lose her life savings if she clicks on a wrong button. I expect that your grandmother might one day want to contribute to a decentralized financial incentive that rewards volunteer scientific research to fight childhood cancer and other problems. I don’t think she’s willing to devote money to a billion dollar bug bounty for anonymous computer hackers. To me, rules and protocols exist to serve human beings, not the other way around.

Not everyone is going to agree with me on this topic, which is perfectly fine. For this reason, it’s valuable to discuss the topic, as this means the question doesn’t have to be hurriedly addressed once something happens that suddenly raises the question. As an example, what would we do if a whale who owns 10% of the supply suddenly loses control over his coins? What would we do if a major exchange had its balance stolen? These are questions that have to be considered and for which an answer will need to be found.

My personal vision for the future of cryptocurrency involves the development of institutions that hold control over people’s balance, possibly in exchange for a small fee. It should be possible for people to maintain control over their own balance, but for most people, this carries no genuine advantage. Our society is designed in a manner that allows us to pass on responsibility over certain domains of our lives, to other people. If we cause a car accident, our insurance helps us pay for the damage. If we bet on the wrong horse in the stock market and lose our life savings, a social safety net exists that ensures we don’t die of hunger. When it comes to cryptocurrency, most people would similarly benefit from the existence of institutions able to carry most of the cost for them if something happens to go terribly wrong.

These institutions in turn, may also make mistakes, that lead to the loss of all their funds. This is unavoidable, as human beings inevitably make flawed decisions from time to them. If such an institution were to make a mistake that leads to the transfer of a significant number of coins into the hands of a criminal, I would expect the code to be changed in such a manner as to reverse such a transaction. My expectation is that over time, most people outside of the core demographic that first began using cryptocurrencies will prefer to use cryptocurrencies that have implemented clear agreements on how to deal with accidents, as well as unethical and illegal activities. The costs and disadvantages to using such a currency will be much lower for these people. It will never be possible to eliminate all theft, theft may always remain more common than in the conventional financial system, but the current rate of theft, which has seenĀ 14 percent of all Bitcoin and Ethereum stolen, will hopefully seem absurd to us in the future.

My own modest suggestion to the Gridcoin community is that once this question becomes directly relevant to Gridcoin, the community should look towards a “technology exists to serve people” approach to cryptocurrency, rather than the “code is law” approach that seems to be dominant among cryptocurrency aficionados. Cryptocurrencies are evolving digital social arrangements that gradually adopt to different economic niches. To people who believe that code is law, various alternative cryptocurrencies exist that seek to fulfill such a niche. If a disaster like the failure of an exchange were to occur, I would personally be supportive of efforts that would serve to reverse the outcome of the situation. In the long run, the theoretical reversibility of transactions is less damaging to the kind of project we are collectively building, than a situation in which our project would be owned by hackers and criminals.

2 Comments

  1. What do you think about Golem? It looks like Gridcoin’s use case has a slicker, better funded and better marketed competitor

    • The big difference to take into consideration of course is Golem is valued by the market at half a billion, whereas Gridcoin is valued at ten million or so.

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