A Philosophy of Blockchain: Is Secrecy a Danger?
Proof of stake could endanger the equality of the blockchain and hidden centralizations could endanger its trustlessness. However, there’s another innovation that may endanger both…
written by Shannon Appelcline
Upon inventing Bitcoin, Satoshi Nakamoto created an open ledger that anyone could write to as long as they followed the consensus rules. This design revealed two crucial elements of blockchain design. First, it declared the equality of the blockchain: anyone could see anything on the blockchain thanks to its permissionless design; and anyone could add any valid transaction to the blockchain thanks to its censorship resistance. Second, it demonstrated the trustlessness of the blockchain: anyone could verify that both the blocks and their transactions were validly constructed.
But the founding principles of a community are constantly endangered as it grows and evolves. As we’ve written in past philosophy articles, we feel that proof of stake could endanger the equality of the blockchain and that hidden centralizations could endanger its trustlessness. However, there’s another innovation that may endanger both: secrecy.
A Confidential Possibility
There has been a bit of secrecy in Bitcoin from the start, as Satoshi Nakamoto states in the original paper: “The necessity to announce all transactions publicly precludes [traditional privacy, which limits information about an exchange to the parties involved and a trusted third party], but privacy can still be maintained by breaking the flow of information in another place: by keeping public keys anonymous.”
However, the blockchain is not truly anonymous. At best, it’s pseudonymous and even that’s quite fragile. It depends on strict key hygiene, where everyone constantly creates new keys, and even then there’s the danger of correlation if someone can detect clusters of addresses and connect any of them to a real-world identity.
The quest for privacy beyond Nakamoto’s pseudonymity has loomed large as Bitcoin has matured. In 2013, Greg Maxwell proposed CoinJoin as one of the first solutions; it simply mixed together bitcoins, making it harder to correlate them. That same year Adam Back detailed “bitcoins with homomorphic value”, which would eventually become the Confidential Transactions of Blockstream’s Elements Project. Back took a different tack by blinding the contents of a transaction, so that people outside the transaction could only see that it occurred (and what the mining fee was). The fact that later non-Confidential Transactions could leak information about previous Confidential Transactions is probably what led to the creation of fully privacy oriented blockchains, such as Monero in 2014 and Zcash in 2016, each of which took different approaches to secrecy.
Obviously, there is interest in increased blockchain privacy: it’s been one of the driving forces for cryptocurrency adoption. This transactional secrecy has a variety of advantages, the most crucial of which is fungibility: with true privacy, it becomes impossible to trace the provenance of an individual transaction, which is crucial for working currency; without it, the cryptocurrrency in individual transactions could be censored if the network did not like who used it or how it we used.
However, we must balance this growing philosophical desire for complete secrecy with the philosophies that have been a developed part of the blockchain from the start. Secrecy may actually enhance some of the blockchain’s core ideals, such as its censorship resistance. And, it doesn’t hurt others, such the blockchain’s trustlessness: protocols like Blockstream’s Confidential Transactions were explicitly designed to balance out the inputs and outputs of a transactions, allowing verification by anyone.
But that’s not to say that secrecy doesn’t have problems of its own.
The Dangers of Cryptocurrency Secrecy
One of the original goals of Bitcoin (and other cryptocurrencies) was to give power back to the people. In the physical world, we’ve lost agency to corporations, government, and plutocrats. The blockchain gave that back to us in part due to its transparency. It suddenly became possible to require that transactions of public entities be public in a way that we never could have considered in traditional financial systems. We could require that proxies publicly reveal their votes, that elected officials detail their contributions, and that corporations declare transactions related to their advertisements, their guarantees, and their certifications — and many of these revelations could be verified through the blockchain itself.
But now, as a shroud of secrecy is spreading across blockchains, expectations of transparency are rapidly fading. If cryptocurrency becomes as opaque as traditional currency, then the opportunity to demand transparency, to truly change the rules of the game, will evaporate.
Confidential transactions and privacy-protecting digital currencies are being advertised as a way for us to have privacy, but it’s them, the rich and the powerful, who will make the greatest use of this power. We already see this in the opaque finances of the physical world, at places like Deutsche Bank, which is facing legal action as the result of laundering twenty billion dollars of Russian money. If the transparency of the blockchain becomes opaque, it’ll happen there too. The rich and the powerful will hide their transactions so that they can maintain the influence and authority they’ve gathered in the physical world and extend it to the digital world — using the very tool that’s supposed to reverse those trends.
In addition, secrecy may turn cryptocurrencies into what people fear. There has long been concern over criminal uses of the blockchain but the transparency and pseudonymity of most blockchains have worked against that — and in fact have made criminals vulnerable when they mistakenly thought they were safe. Cryptocurrrency secrecy could let them in.
Perhaps we, as a blockchain community, will assess these costs as acceptable given the privacy gains for the common person. Or perhaps not. But the problems become even greater when moving from cryptocurrency to the wider world of digital assets, a topic that’s dear to us at Bitmark.
The Dangers of Digital Asset Secrecy
Bitmark defines and defends digital property through the Bitmark Property System, which allows people to register their digital assets and data, then to license, sell, loan, or otherwise leverage that digital property for the good of both themselves and our society. KKBOX’s use of the Bitmark blockchain to record royalties for the use of digital music shows how this system can help individual musicians, while UC Berkeley and Pfizer have demonstrated the benefits of recording health data permissions to support health studies and clinical trials that could contribute to the whole world. But for digital assets to have value, it’s vitally important that ownership records be public, not secret.
Last year we wrote about the case of Shepard Fairey, whose famous “Hope” stencil portrait of Barack Obama became the source of a legal dispute because Fairey didn’t license the original photographic source. That case study demonstrates our need to know who owns something so that we can license it (or purchase it or borrow it): secrecy works against the interests of both asset holders and hopeful licensees. The music industry offers another use case: rights information should be stored in electronic data, but it’s often wrong, which has left artists unable to collect billions of dollars in royalties.
This problem of determining asset ownership is so large that it became a major focus of the US Copyright Office in the ’00s. As corporations like Google tried to turn physical assets into digital assets, they ran into a major problem with “orphan works”, where they couldn’t discover who the rights-holder for an asset was, and so were unable to attain permission (or refusal) to use the work. The Copyright Office was thus tasked with determining whether these orphaned works still served to “promote the progress of Science”, one of the major purposes for copyright in the United States. Their conclusion was:
“Both the use of individual orphan works and mass digitization offer considerable opportunities for the diffusion of creativity and learning. Too often, however, the public is deprived of the full benefit of such uses, not because rightsholders and users cannot agree to terms, but because a lack of information or inefficiencies in the licensing process prevent such negotiations from occurring in the first place. As countries around the world are increasingly recognizing, these obstacles to clearance are highly detrimental to a well-functioning copyright system in the twenty-first century. The Office thus agrees that a solution for the United States is ‘desperately need[ed]’ …”
In other words, the US Copyright Office recognized that society and its institutions needed to be able to discover both the attributes and ownership of assets, so that it could better itself and reach its full potential.
Obviously, having ownership information easily available could have helped Shepard Fairey and Google, who each wanted to reuse existing assets. It could have helped musicians, who desired to receive payments for their music. But it goes far beyond that and far beyond these cases of accidental secrecy. By knowing who owns resources, a society can find those resources when it needs them — whether it be iron ore required for construction or health data needed to solve a medical problem. By knowing who owns items, a society can contact the owners of those items — perhaps because those items are surprisingly dangerous (due to a recall) or perhaps because they’re surprisingly valuable (due to a need). Finally, as the US Copyright Office noted, registration of ownership can allow negotiation, a necessary element to resolve negative externalities related to a marketplace, as discussed in Coase Theorem. Having purposeful secrecy would directly contradict all of these use cases, which is why it’s even more problematic for digital assets than for simple cryptocurrency.
The US Copyright Office suggested legalistic methods to solve this problem. But there’s another, better solution, one that can avoid works being orphaned or misplaced in the first place: technology. It’s the solution offered by the Bitmark Property System, which organizes and codifies the ownership of digital assets on a property rights blockchain for the good of both the rights holders and our society. By maintaining these deeds in the public eye, not in secrecy, we can enable all of these use cases: Fairey’s artistic reimagination of a photo, Google’s digitization of classic works, and our society’s ability to locate, recall, or purchase items of importance.
Many people laud the privacy of the blockchain, something that was possible once upon a time when transactions depended on cash in the physical world, but which is becoming increasingly difficult in a world of electronic banking on the internet.
But, we should be aware that secrecy of this sort has very real consequences. Some people might value their privacy enough to empower the plutocratic powers of the physical world in cyberspace, though we think there’s real weight to both sides of the argument. But when we delve into the wider world of digital assets, we think this position becomes increasingly dangerous.
Which is why the Bitmark Property System is open and transparent, just as Bitcoin was in its original design.
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