Blockchain: Coming to terms with its virtuous and nefarious capabilities

Mariusz Nowostawski, 25 Jan 2017

The world is on the brink of an important socio-technical revolution involving freedom advocates, FinTech, as well as dark markets customers and drug dealers. The criminals, as well as the academics, are an important part of the revolution. Or more precisely, an evolution, as it may take a while for us to fully understand the implications of the technology's wide-ranging capabilities. The single keyword for this new evolution is the blockchain. From the technical standpoint, blockchain technology is relatively simple, although it required a number of breakthroughs in peer-to-peer technology, cryptography, as well as the existence of the Internet itself. We still have many technical issues to resolve. And in fact, it is the dark side that drives some of the innovations forward.

Blockchain defined

In a nutshell, blockchain is a fully decentralised, distributed and replicated public database that everyone can read from, and everyone can write to. The write operations must follow a set of predefined rules, and they need to be accepted by the majority of participating nodes. The database stores facts that need to comply with a set of specific consistency checks. For example, in the case of Bitcoin blockchain, the write operations are simple currency ownership transactions. For example, X amount of money from account A, is transferred to account B. After the transaction is accepted, account B owner can spend the money. The participating nodes provide a so-called consensus, which is necessary to validate the write operations. The validation does not need to have all the information about the transaction, just the minimal necessary information for validating the operation. This is why, the account owners can remain anonymous, and the nodes can still validate the correctness of a given transaction.

One can use this type of database to store financial transactions, asset ownership proofs, or any other facts that can be stored in a digital database. Compared to the traditional databases, the blockchain is slow, inefficient and cumbersome to use. However, this new socio-technical model has certain characteristics that make it uniquely suited for a certain type of use case. First and foremost, the blockchain is not owned by any single entity, and therefore, it cannot be controlled or manipulated by a single entity or government; it provides democratic, unbiased and indiscriminate access to anyone that wants to participate; and it can offer anonymity. The first successful deployment of the technology is known as Bitcoin blockchain. Bitcoin database stores information about ownership of digital tokens, ie cryptocurrency.

A walk on the dark side

To fully understand the complex landscape of the blockchain technology, we will make a thought experiment. Assume, that you turned to the dark side, and from now on, you have to hide what you do from law enforcement and government officials. However, your business partners, your employees, and your customers are also criminals. Or imagine, that you work in an oppressive regime, and you cannot trust your government, police or anyone, as you expose yourself to potentially serious risks. All of the people around you can cheat you, snitch on you, fail to deliver on their promises, and fail to fulfil their obligations. You cannot trust anyone. Can you imagine running a business in such a hostile environment? Is it even possible? Through the blockchain, we are learning if it is, and how this can be achieved.

First and foremost, you need to have a mechanism to accept payments and to be able to pay others in a way that is untraceable, yet verifiable. Obviously, you want to remain anonymous. Most of the required properties are fulfilled by cash; however, cash also has many drawbacks. Due to the fact that the physical money needs to change hands, literally, retaining anonymity is difficult. This means that someone somewhere needs to meet someone else. Even if you do use elaborate intermediaries to pass cash, it requires a certain level of trust in third parties, and it does leave a trace of who knows whom and who has transferred value in the system. Transferring larger amounts of cash requires space, and unsolicited transfers cross-border are hard.

To overcome cash limitations, the modern financial systems utilise digital technology and digital money, but this is heavily regulated, and hence, not anonymous. You need something that represents value digitally, but, at the same time, offers anonymity and fungibility. The cryptocurrencies offer just that.

Pros and cons of cryptocurrencies

For example, Bitcoin [1], as a cryptocurrency is cheap and easy to transfer. It offers anonymity and allows cross-country transfers. Bitcoin was launched as a response to the financial crises and subprime mortgage failure in 2008 [2]. Some of the early commercial adopters of the technology, besides simple currency speculators, operated on the dark web [3], where Bitcoin is used as a primary payment mechanism. The use of Bitcoin offers a number of advantages, but, as it turns out, true anonymity for Bitcoin users is not easy to achieve [4]. Flaws in anonymity protocols gave rise to research on how to break and de-anonymise Bitcoin transactions, as well as on how to improve the protocol such that transactions have higher levels of anonymity. Due to the fact that the transaction chains remain in the Bitcoin blockchain forever, Bitcoins obtained from illegal activities will leave the trace that even years later, may lead law enforcement back to you. You need to exchange your "dirty" Bitcoins for "clean" Bitcoins somehow. One can combine coins with other users in specially crafted CoinJoin transactions [5]. Alternatively, you can mix your coins with other coins in a service called coin mixer or coin tumbler [6]. Those money laundering services mix multiple sources of coins in such a way as to obfuscate whose coins belonged to whom. Another method used to hide your tracks and obfuscate the currency flows is to exchange Bitcoins for another digital currency, and then back to Bitcoin. One digital currency exchange that operates anonymously is ShapeShift [7]. It is important to note that not only criminals use those services to try to hide their tracks. Law enforcement agencies and state-sponsored cyber-warfare also need to use them.

An important development in currency anonymity is the recent release of a new Bitcoin side-chain called ZCash [8]. ZCash is an improved anonymity-centric effort that extends and improves upon earlier work of ZeroCash. Both are examples of technology that utilise Zero Knowledge Proofs. Compared to Bitcoin, both provide superior anonymity. The computational model for crypto proofs known as zk-SNARKs have been developed last year, and the release of ZCash happened at the end of October 2016. This is an important innovation that provides much-hardened anonymity in the cryptocurrency space. Zero Knowledge Proofs allow a person to prove to someone the ownership of an asset or transaction in the blockchain, without revealing their own identity, or any transaction details. What it means is, that unlike Bitcoin, where all the transaction details are explicitly visible to anyone, the verification of compliance in ZCash can occur without revealing any information about the transactions themselves. The proofs can be automatically validated, yet, they do not leak any transaction details to the outside world.

Blockchain as a mechanism to build trust

Let us get back to our use case: we want to be able to operate in a hostile environment, in which we cannot trust anyone, and anyone can fail to deliver. The first issue that we have discussed above is focused on the financial settlement mechanism. The bare capabilities of an anonymous cryptocurrency address that aspect. Bitcoin alone, as an anonymous cryptocurrency, has attracted a vast number of criminal use-cases [9]. Among them: money laundering, tax evasion, drug dealing, child pornography, arms sales, human trafficking, and even murder-for-hire – and, on the state level, sanction busting, state-sponsored terrorism, and cyber warfare through the use of "black budgets".

But the use of blockchain is not limited to cryptocurrencies. The blockchain is capable of helping us much more than being just an anonymous remittance subsystem. We will use two important properties of blockchain that go well-beyond blockchain as anonymous crypto-currency to address our thought experiment. The two additional properties are the third party trust without a trusted third party and the codification of contractual agreements. Let us look at the latter. Various blockchain technologies are able to express contractual agreements in the form of autonomously executable code. This is due to the fact that the blockchain needs to be able to conduct computational checks on the submitted transactions. Bitcoin, for example, is capable of expressing a range of contractual agreements. Not everything can be expressed as on-the-blockchain code. Ethereum computational capabilities are Turing complete, which means it can compute any computable contracts, yet, there is a fee attached to computations conducted on the chain. This means that contract complexity is constrained. Nevertheless, expressing logical rules, or agreements is generally available.

In modern society, we heavily rely on trusted third parties. Those can be formed as financial institutions, such as banks or clearing houses, and government registrars. As a society, as businesses, as universities, we simply cannot function without trusted third parties. The election systems, the property ownership registers and financial institutions must comply with laws. To make sure that they do, we as a society, create yet more institutions that enforce compliance.  Each of those institutional verticals represents inefficiencies, and unnecessary intermediaries, that exist exclusively to establish trust. Yet, these structures provide an opportunity for social engineering, for human error, and for corruption.

Blockchain technology can change the status quo. Blockchain has the capabilities to function as a trusted third party. It can substitute the trusted third party without a human-driven third party. For example, we can have payment clearing done automatically, without the need for a trusted third party. We can have car registry and land ownership registry done so that no human management is involved. The registry operates autonomously and certifies, accepts and validates the transactions. Not only will it be more efficient than the current, often bureaucratic administrative systems, it is non-corruptible. An excellent example of this type of new model for the socio-technical system is ShapeShift, the digital assets exchange, which uses the blockchain itself for the core exchange operations. The exchange locks digital assets in a blockchain in such a way that compromise of the exchange servers has very limited effect on the state of funds of ShapeShift customers.

This property of blockchain allows us to build structures, including social institutions, which do not rely on human-level trust [10]. We can build institutions that are non-corruptible, that are impossible to infiltrate by social engineering, bribes or force. With blockchain, we have a social instrument, that can be used for social good (or for nefarious purposes) and deliver a non-corruptible, trusted, anonymous, yet a verifiable solution to a number of business use cases.

A technology that is reliable even when humans are not

Coming back to our thought experiment, we are able to use three building blocks based on blockchain technology, namely, anonymous currency, third party trust, and codified contracts. With these, we can now create institutions that can function in our extremely hostile environment. Even though no involved party can trust anyone, the participants can trust the underlying technology to enforce compliance. We can create a new institution, or a criminal operation, that provides us with an autonomous and anonymous workflow, which law enforcement agencies are incapable of taking down, that is not owned by anyone, and that facilitates the necessary payment, subcontracting, work and goods delivery tasks for us. We can engage sub-contractors, vote, purchase assets, and so on, all anonymously and autonomously. Is it really possible? Can we really build a system like that?

Well, we are not there yet. As demonstrated by The DAO [11] experiment, the technology still needs fine tuning and innovative thinking, but we are on the way to realise the outlined vision. The DAO was the first large-scale experiment that utilised the autonomy and codified contracts properties. It has attracted over USD 150 million in funds from anonymous donors. The experiment goal was to create an autonomous organisation that could pursue the vision of the Ethereum network, as well as commercial side-projects. It wasn't created for nefarious purposes, but one can imagine the possibilities on the dark side. And the truth is, we are not quite sure how many of those operate on the dark web already.

Parallel to potential abuse, many virtuous use cases are being investigated. Some countries are pushing the idea of land and property ownership to be backed up by a public ledger system based on the blockchain technology. This for one might be the best mechanism to combat corruption in governmental institutions in those countries. The use of blockchain can be a fundamental instrument in the future of user-centric privacy, or data protection, for example, in the medical records domain.

Technology and science, in general, and mathematics, in particular, are not ethical or unethical, criminal or legitimate. It is the use of technology that can be viewed as criminal or unethical. A knife is a useful tool, and we use knives every day for various tasks. The same applies to cars. They are very useful inventions. Yet, a knife or a car can be used to commit a crime or to take someone's life. The same applies to the Internet and other digital technologies. The Internet as a network can be used for good and noble causes. It can be used for education and entertainment. It can also be used to facilitate many criminal activities.

Innovation in mathematics cannot be stopped or reversed. Once something is discovered and becomes known, it remains known, and new knowledge and systems are built on top. The early adoption of various blockchain technologies by criminals serves two useful purposes. On one hand, the adopters are testing and bullet-proofing the new technologies, such that they achieve the highest possible levels of security, anonymity, and resilience to attacks. Often, the technologies are applied in highly hostile environments, and this helps to improve and harden the proposed techniques. The interesting example of that was the initiation process of the ZCash side-chain, which involved multiple individuals participating in the chain initialisation, yet, none of them individually has been considered trusted.

On the other hand, the technologists and scientists must work out new socio-technical mechanisms to eliminate specific forms of abuse and limit the abuse of the technology for nefarious purposes. Both sides are necessary to push the limits of the technology and to provide us with truly robust, secure and safe solutions.

References

[1] Nakamoto, Satoshi (2008). Bitcoin: A peer-to-peer electronic cash system.

[2] Altman, Roger C. (2009). The great crash, 2008: a geopolitical setback for the West. Foreign Affairs, 2-14.

[3] Rudesill, Dakota S., Caverlee, James, & Sui, Daniel (2015). The Deep Web and the Darknet: A Look Inside the Internet's Massive Black Box. Woodrow Wilson International Center for Scholars, STIP, 3.

[4] Herrera-Joancomartí, Jord (2015). Research and Challenges on Bitcoin Anonymity. In Data Privacy Management, Autonomous Spontaneous Security, and Security Assurance (pp. 3-16). Springer International Publishing.

[5] Maxwell Gregory (2013-08-22). CoinJoin: Bitcoin privacy for the real world. http://bitcointalk.org.

[6] Sat, Diana Mergenovna, Grigory Olegovich Krylov, Kirill Evgenyevich, Alexander Borisovich Kasatkin, and Ivan Aleksandrovich Kornev (2016). Investigation of money laundering methods through cryptocurrency. Journal of Theoretical and Applied Information Technology 83(2):244.

[7] ShapeShift, https://info.shapeshift.io/

[8] Hopwood, Daira, and Sean Bowe, Taylor Hornby, Nathan Wilcox (2016). Zcash Protocol Specification. https://raw.githubusercontent.com/zcash/zips/master/protocol/protocol.pdf

[9] Engle, Eric. (2016). Is Bitcoin rat poison? Cryptocurrency, Crime, and Counterfeiting (CCC). Journal of High Tech. Law. 16:340-522.

[10] Nowostawski, Mariusz and Frantz, Christopher K. Blockchain: The Emergence of Distributed Autonomous Institutions. The Sixth International Conference on Social Media Technologies, Communication, and Informatics (SOTICS) 2016, Rome. http://papers.christopherfrantz.org/pdf/NowostawskiFrantz2016_Blockchain_DAI.pdf

[11] Peck, Morgen (2016-05-28). Ethereum’s $150-Million Blockchain-Powered Fund Opens Just as Researchers Call For a Halt. IEEE Spectrum

Author

Mariusz Nowostawski

Associate Professor, Norwegian University of Science and Technology

Mariusz Nowostawski is a Programmer, Computer Scientist, and Teacher who is an Associate Professor at the Norwegian University of Science and Technology. He was previously an academic lecturer at the University of Otago, New Zealand. The focus of his MSc studies was artificial intelligence (AI) and machine learning, while the focus of his PhD research was autonomous systems and computational modelling of the biological process of life. Mariusz is passionate about self-organising systems, adaptive and autonomous computation.

Mariusz has worked on high-end networking applications on GPUs and multicore systems with Sun Microsystems and Oracle. He is currently involved in forensics research with Europol, Bitcoin anonymity, and Cryptocurrencies. He teaches game and graphics programming, mobile, peer-to-peer and blockchain technologies. A hardcore explorer and thinker, Mariusz also enjoys rock climbing, paragliding and long distance running.

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