In early May, Jorge Stolfi, a professor of computer science at the University of Campinas (Brazil), posted the following tweet in English: “Every computer scientist should be able to see that cryptocurrencies are totally dysfunctional payment systems and that “blockchain technology” (including “smart contracts”) is a technological fraud. Would they please say that out loud?” Stolfi now has 9,400 followers. Back then he had fewer. In the discreet world of computer science, the 2,000 retweets and 7,000 likes his message received were the equivalent of going viral.
Stolfi was saying something that he had repeated before. In fact, he didn’t even see it as controversial. But in today’s so-called “crypto winter,” where the value of bitcoin has dropped from around €60,000 to €20,000 since November, gave his statement new relevance. The tweet was the driving force behind a letter that 1,500 specialists signed and delivered to US Congress: “Today, we write to you urging you to take a critical, skeptical approach toward industry claims that crypto-assets (sometimes called cryptocurrencies, crypto tokens, or web3) are an innovative technology that is unreservedly good.” Among the signatories were Harvard lecturer Bruce Schneier and Kelsey Hightower, principal engineer at Google Cloud.
Every computer scientist should be able to see that cryptocurrencies are totally disfunctional payment systems, and that “blockchain technology” (including “smart constracts”) is a technological fraud. Would they please say that out loud?
— Jorge Stolfi (@JorgeStolfi) May 5, 2022
In a video call from Campinas with EL PAÍS, Stolfi explained why the computer science community feels that bitcoin works like a pyramid scheme and the reasons why it could crash.
Question. Why have you decided to send the letter now?
Answer. The usual attitude from my colleagues is: “Bitcoin and blockchain technology doesn’t interest me, technologically it’s garbage, I’m going to continue doing my own research.” The tweet woke these people up.
Q. It might be garbage, but billions of dollars are invested in crypto.
R. Yes, and that’s why people felt guilty enough to sign the letter. For example, one of the signatories is a professor at Berkeley. In his department, there is another professor who has a blockchain company. I don’t know how the internal politics of universities work, but it is common for professors not to speak in public about what other colleagues are doing, even when it is something really bad.
Q. But the other professor might think that blockchain is useful.
A. Well, she has a company. I don’t know if she believes in it, but she’s making money. That is a problem. There are hundreds of startups doing blockchain technology. For the people involved in those projects, it’s money. It is a motivation to believe in the technology.
These pyramid schemes collapse when there are no more fools to fool
Q. Where is the profit of investing in bitcoin supposed to come from?
A. The only way to get money out of bitcoin is by selling it to someone else. When you do, someone agrees to buy your bitcoin for, say, $2,000 more. If you buy or sell from another investor, that does not change the total money there is: you receive the money that the other guy puts in. But if you buy it from a miner, the money goes out the system and never comes back. You can compute the money that has come out: about $20 billion. It is the difference between what investors have put in and what they have taken out. It is the extent of the losses.
P. Is it possible that as a society we invest millions in something we don’t understand?
A. This is exactly what is happening in the crypto industry. Very few people seem to know that there is money coming in from investors and money going out to the creators of various schemes and miners. These pyramid schemes collapse when there are no more fools to fool.
P. That’s why he says bitcoin won’t exist in 20 years.
A. I wouldn’t dare to predict when the supply of foolish people will run out. I would not know how to put a date for its end, but it will come. It can’t go on like this forever, because it depends on more people putting money in than taking it out. That will never change.
Q. Bernie Madoff’s pyramid scheme lasted 25 years. That was concealed, but here everyone can see how it works.
A. Yeah, it’s brilliant, nobody is hiding anything. The information that it is a pyramid scheme is out there, but most people who invest don’t know about it. People say it’s not a pyramid scheme because there’s no central figure and nothing is hidden, but scheme definitions don’t require those two things. The only requirement is that the profits for investors come only from new investors.
Q. What advice would you give to people who have money in crypto?
A. Sell if you can and don’t look back. I personally know people who have sold their home to invest in bitcoin.
Q. What do you tell them?
R. I don’t tell them anything. Do you want me to go and tell them, I heard you invested in bitcoin and you’re stupid?
Q. The letter to Congress said that the technology doesn’t help ordinary people.
Bitcoin has six pools that control 80% of the mining power. Therefore, they can control what goes into the blocks
A. Like all pyramid schemes there is no way of knowing when it will crash. It will happen before most people realize it. They are the ones who will lose money. Usually smaller investors are the last ones to find out, and they will be the losers. There are maybe 10 million people who have invested and continue to invest in bitcoin, according to some estimates.
The reasons for the original tweet
Q. In the original tweet you said two things. First, that cryptocurrencies are no good for payments. Why?
A. They are not comparable to payment systems such as credit cards or Paypal. Bitcoin has a limit of four transactions per second. Visa makes 10,000 per second. Bitcoin does not reach 400,000 in a day and there are four million people using it: that implies a payment per user every 10 days. It cannot be a significant commercial payment system.
Q. And second: blockchain is a technological fraud.
R. Because it promises to do something it can’t really deliver, and even if it could, it’s not something that’s useful for building real systems. It promises a decentralized ledger where multiple organizations can contribute input data and supposedly it will be tamper-proof in the sense that you can’t delete or change the data, only add to it. But this has been used forever. Any large bank or a critical system has to have such a log for several reasons: if the system crashes, you have to go back and see what happened and rebuild the databases. So this is nothing new, people have known how to do distributed databases in a reliable manner for years.
Q. What about decentralization?
A. It is the only thing that blockchain could contribute: the absence of a central authority. But that only creates problems. Because to have a decentralized database you have to pay a very high price. You must ensure that all miners do “proof of work.” It takes longer, and it is not even secure because in the past there have been occasions where they have had to rewind several hours worth of blocks to remove a bad transaction, in 2010 and 2013. The conditions that made that possible are still there and that’s why blockchain technology is a fraud: it promises to do something that people already know how to do.
Q. But it allows you to avoid a government or central bank.
A. Bitcoin has six pools that control 80% of the mining power. Therefore, they can control what goes into the blocks. That is not what [Bitcoin creator] Satoshi envisioned, which was that power would be distributed among hundreds of thousands of anonymous and independent miners and therefore they could not collude.
Q. Wasn’t Satoshi that smart?
A. In the early 1990s, computer scientists already showed that you couldn’t have a decentralized payment system. His idea was that a network of volunteers would bear the costs. They proved that there could not be a decentralized payment network because if half of the volunteers were dishonest it could sabotage the system and prevent consensus on the state of the accounts: half of the network could think that Alice had paid Bob and the other half that Alice had paid Charlie. But the cyberpunks, the community that dreams of building an internet society beyond the reach of governments, were still excited about something like this because it was essential for their society to work: a way to pay without depending on banks that could be controlled by governments.
Q. And Satoshi showed up.
A. Satoshi thought he had found a solution. It was brilliant in a way because he said let’s try to build a network out of greedy selfish bastards who only care about money. So anyone who wants money will want to play by the rules. If a miner tries to sabotage, he will not gain anything.
Instead of a currency, [bitcoin] became something to invest and hold. That’s terrible for money
Q. What did he miscalculate?
A. Two things. One, that mining instead of being distributed among thousands of anonymous volunteers would end up in a group of huge pools. He didn’t envision those pools at first, they appeared in 2010 or so. The situation we have ended up with is that all cryptocurrencies are alike: a small group of miners control networks and most of the power. The second thing is that Satoshi believed that inflation was bad. He set a limit so that there would be no inflation. But already in 2009 the first bitcoin user after Satoshi saw that it was best to keep it because it would be more valuable in the future if he started hoarding. Instead of a coin it became something to invest and hold. That’s terrible for money. If people keep the money under the mattress, there is less in circulation, the value goes up. But if someone decides to sell a handful, the value plummets. It is what we have seen since 2009, it goes up and down, which makes it useless as a trading currency. You can’t sell something in a currency that loses 10% of its value a few hours after receiving it.
Q. Couldn’t it be like gold?
A. Gold also goes up and down, but on scales of years. Not as fast as bitcoin. Gold is a metal that has a fixed demand for jewelry and other applications. Even if nobody invested in gold, it would have a certain price. Bitcoin does not have this type of demand.
Q. Crypto doesn’t work well as a currency unless you’re not a criminal. Without crypto, there would be no ransomware?
A. It is the only digital system that does not follow customary money laundering laws. That’s why criminals use it. Once you have paid a ransom, there is no way for the victim to cancel the payment and get the money back, not even the government can do it easily. It is anonymous and when a hacker encrypts your data, they do not have to enter your system directly, where they would leave a trace. He has botnets, computers that he has already hacked, so tracking him down is difficult. With bitcoin you only pay to a certain address on the blockchain and nothing links it to the hacker. The payment can stay there for years. The criminal does not have to interact with the system and can hide from the police.
P. How about Web3?
A. Web3 basically tries to use blockchain to do all kinds of things that the internet already has: social forums, mail, other services. Since blockchain technology has nothing new to offer, nor does it deliver what it promises, Web3 is quackery, a technological fraud just like blockchain. There is nothing new.
P. And the famous NFTs?
A. One way to think of NFTs is as a cryptocurrency that has only one coin that you cannot divide. Thus, the NFT market is the same as the crypto market, only there is only one seller and a handful of buyers. The price of an NFT is undefined because there is no market for it. The owner of an NFT can say that he sells it for $1 million. If someone buys it from him, the price will be $1 million. But after that we won’t know the price anymore because we don’t know if there will be a second guy willing to buy it for $1 million. The idea is that each NFT is attached to a digital file that is a work of art. But it doesn’t make much sense because you can’t own a digital file in the same sense as a painting or a house or a physical object. The physical object may only be in one place. Instead, the digital file can be in a thousand places and the copies are not copies, they are exactly the same as the original.
Q. What are the dangers?
A. The problem with copyright in digital files is that it doesn’t work the same. NFTs include a hash which is a kind of numbering that serves as a unique ID of the file. But that doesn’t establish your copyright, rather it gives you ownership of that specific file. But if you change a single bit in the image you get a different hash and then you don’t have any automatic way of telling that one is just a copy of the other. You copyright a general image, but any image sufficiently similar to the original is considered copyrighted. Who decides that two images are equal enough?