A new study on bitcoin calls into question whether the digital currency is truly as decentralised and anonymous as its biggest devotees would have you believe.
Researchers from Baylor, Rice, and the University of Houston analysing the best-known cryptocurrency’s early days found that, among other things, the “wealth, income, and resources [during that period] in the bitcoin community were highly centralised,” and that new data analysis techniques have the ability to “de-anonymise” users.
While the study has yet to been published in a peer-reviewed journal, it has seen significant support from a number of prominent academics and technologists, including VR guru and longtime Microsoft researcher Jaron Lanier, who wrote an op-ed in Coindesk on Tuesday in support of its findings. Here’s a quick rundown on what the new study has to say.
“Bitcoin seems to have, in sharp contrast to its common reputation, become something of a perfect tool of state surveillance,” Lanier wrote.
Surprise #1: Decentralised Finance Is Actually Pretty Centralised
Cryptocurrency is supposed to be decentralised. The idea is that a “trustless,” peer-to-peer network of anonymous users, tied together by blockchain technology, are able to securely trade digital assets without the need for a mitigating third-party like a bank or a financial agency. Crypto evangelists promised an egalitarian, democratised financial system divorced from traditional gatekeepers, allowing people who wouldn’t otherwise be able to access financial systems to gain and accumulate wealth. Crypto hype men also promised an alternative to the accumulation of wealth by a small minority. This is the utopian view of what crypto is supposed to be.
However, by looking at data on the blockchain from bitcoin’s early days, the researchers found that, when it launched, it was less a truly decentralised network than it was a system propped up by a small minority.
To uncover this, researchers looked at “mining” activity between the period when the currency first launched in 2009 and when it reached parity with the U.S. dollar in 2011. Mining is the critical process by which new tokens are created using complex maths equations. In contrast to the myth of bitcoin’s “democratising” effect on finance, the study found that only 64 owners were responsible for a vast majority of the bitcoin mining that occurred during these early years. Together, those 64 “agents” mined 2,676,800 bitcoin, equal in present-day value to some $US84 billion (around $120 billion).
The study shows that while bitcoin was supposed to be a decentralised network from the get-go, it was effectively propped up by a small group of these agents. The early adopters of the digital currency — a coterie who controlled a majority of the “computational resources” that supported the network — largely accounted for its initial success. Researchers found that it would have been advantageous for these early adopters to take advantage of the network for their own financial benefit using financially exploitative attacks, but that those attacks would have effectively doomed bitcoin’s reputation and its future. Instead, the early adopters restrained themselves from indulging in avaricious and destructive behaviour, even though it would have been quite easy for them to do so.
The research casts a slightly new perspective on bitcoin, chipping away at the myth that digital currency is the freewheeling financial medium its acolytes claim it is.
Granted, a lot of people have been saying that crypto isn’t actually decentralised for quite some time. In 2018, researchers at Cornell University put out their own peer-reviewed study noting that bitcoin wasn’t nearly as decentralised as users had been led to believe. Researchers observed a high concentration of mining activity in the hands of a very few. Meanwhile, other commentators in the techie and academic spheres have routinely made note of the fact that Web3 decentralisation is more ideology than reality, and that users ultimately have to rely on an assortment of Web3 institutions, be they exchanges, DAOs, or whatever new trendy entity is currently having its DeFi glow-up.
“We all kind of knew that mining was fairly centralised,” said Sarah Meiklejohn, a University College London cryptography expert, in an interview with the New York Times about the study. “There aren’t that many miners. This is true even today, of course, and it was even more true at the beginning.”
Surprise #2: ‘Anonymous’ Crypto Actually Probably a Really Good Vehicle for Surveillance
Another thing you’ve probably heard about bitcoin is that it’s supposed to be an anonymous system of exchange. But the new study shows that there are a host of data-parsing techniques that can now be used to all but totally unmask the people trading the currency.
Specifically, researchers used what are called “address-linking” techniques, that look at networks of crypto addresses and try to tie them back to the people using them. The study notes that these analyses can “potentially facilitate deanonymisation.” By using these complex data-sifting techniques, the researchers were actually able to untangle the web of addresses and transactions associated with specific individuals who were prominently involved in bitcoin between 2009 and 2011. The paper doesn’t say who those people are, with the exception of two who have already been publicly outed and convicted of crimes: Ross Ulbricht, also known by his dark web pseudonym “DreadPirateRoberts,” who ran the notorious Silk Road darknet market until his arrest in 2013, and Michael Mancil Brown, or “Dr. Evil,” a Tennessee man who attempted to extort Mitt Romney in a bizarre bitcoin-related plot in 2012.
Again, the notion of de-anonymising crypto users isn’t exactly new — though the public seems to be slowly waking up to the fact that police can now use blockchain analysis tools of the kind sold by Chainanalysis to track down crypto-using e-criminals.
In his Coindesk op-ed, Jaron Lanier writes that it seems highly likely that intelligence agencies have previously exploited security and privacy deficiencies to track the activities of crypto users.
Lanier said bitcoin had, in fact, been “revealing activities that many users believed to be protected by pseudonymity to sophisticated state security agencies while hiding transactions from communities of peers such as other developers, friends or community credit unions that would have been better placed to monitor them in context,” Lanier writes.
Lanier notes that it is “plausible that organisations like the National Security Agency, China’s Ministry of State Security and Israel’s Unit 8200 have long had access to this information and chosen not to reveal this capability to preserve the mystique of pseudonymity and the assumed-private financial records it gives them access to.”
In other words, a system that was designed to provide anonymity and privacy may have actually been used for government surveillance of the highest order.