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Why This Computer

Scientist Says All
Cryptocurrency
Should “Die in a
Fire”
UC-Berkeley’s Nicholas Weaver has been studying
cryptocurrency for years. He thinks it’s a terrible idea
that will end in disaster.

Current Affairs filed 13 May 2022 in E C O N O M I C S

D
espite being hyped in expensive Super
Bowl ads, cryptocurrency is now having a
difficult moment. As the New York Times
reports, “the crypto world went into a full
meltdown this week in a sell-off that
graphically illustrated the risks of the
experimental and unregulated digital
currencies.” One of cryptocurrency’s most vocal skeptics is Nicholas
Weaver, senior staff researcher at the International Computer Science
Institute and lecturer in the computer science department at UC
Berkeley. Weaver has studied cryptocurrencies for years. Speaking with
Current Affairs editor-in-chief Nathan J. Robinson, Prof. Weaver explains
why he views the much-hyped technology with such antipathy. He
argues that cryptocurrency is useless and destructive, and should “die in a
fire.”
The interview transcript has been lightly edited for grammar and
clarity.

NATHAN J. ROBINSON:

Here’s a quote by you from 2018:

Cryptocurrencies, although a seemingly interesting idea, are simply

not fit for purpose. They do not work as currencies, they are grossly
inefficient, and they are not meaningfully distributed in terms of
trust. Risks involving cryptocurrencies occur in four major areas:
technical risks to participants, economic risks to participants, systemic
risks to the cryptocurrency ecosystem, and societal risks.

In a 2022 lecture about cryptocurrency on YouTube, you are even

more blunt and harsh:

This is a virus. Its harms are substantial. It has enabled billion dollar
criminal enterprises. It has enabled venture capitalists to do securities
fraud as their business. It has sucked people in. So either avoid it or
help me make it die in a fire.

But perhaps before we get to your justifications for these verdicts,

you could start by telling us what you think is the best way for the
average person to begin to think about what a cryptocurrency is.

NICHOLAS WEAVER:

Well, I’d start with what it’s supposed to be in theory. So in theory, it’s
supposed to be a way of doing payments with no intermediary. So the
idea is that if Alice wants to pay Bob a bet for 200 quatloos…

ROBINSON:

Hang on, you’ve dropped a word that isn’t a real word. Quatloos is a
fictional currency?

WEAVER:

It’s actually specifically a Star Trek reference. So if you want to gamble

with your imaginary currency, there should be no intermediary that is
responsible for executing the transfer. It’s just direct peer to peer
electronic cash. Or at least that’s the idea.
Now the problem is: how do you know who has what balance?
Electronic cash is actually something we’ve had for decades now. If I want
to transfer you money, I use PayPal or M-Pesa or Visa or a wire transfer or
this or that. Those all have a central intermediary. And there’s a
disadvantage of central intermediaries: They don’t like drug dealers. So as
a money transmitter, you are under legal obligations to block a lot of
known bad activity.
With cryptocurrencies, the idea is, let’s eliminate the notion of the
intermediary by making our balances public, but pseudonymous. So you’re
no longer you, you are just some long sequence of random-looking
numbers. And let’s create a ledger in the town square so that everybody’s
bank balance is public in the town square, but only identified by the
pseudonyms.
So for Alice to pay off her wager, she writes a check: “I, Alice’s
Random Pseudonymity, pay Bob’s Random Pseudonymity 200 quatloos.
Signed, Alice’s Random Pseudonymity.” Bob then checks to make sure
that Alice indeed has a balance, and if so, posts that check to the public
ledger. Now everybody knows that Alice is down 200, Bob is up 200.
And that’s how it works.
The problem is: how do you keep somebody from adding to the
ledger and faking stuff ? Well, that’s where the notion of the “mining”
comes in. What the miners are doing is literally wasting tons of electricity
to prove that the record is intact, because anybody who would want to
attack it has to waste that similar kind of electricity.
This creates a couple of real imbalances. Either they’re insecure or
they’re inefficient, meaning that if you don’t waste a lot of energy,
someone can rewrite history cheaply. If you don’t want people to rewrite
history, you have to be wasting tons and tons of resources 24/7, 365. And
that’s why Bitcoin burns as much power as a significant country.

ROBINSON:

So this criticism that you hear about Bitcoin, that it uses the energy of a
small to mid-sized country, that is true? You point out in your YouTube
lecture that there are a number of ways that the enthusiasts of Bitcoin
make excuses for this. They say “Well, it’s actually clean” or “It’s not too
much of a problem.” But it’s actually very, very wasteful.

WEAVER:

Yes. The biggest one is “this incentivizes green power.” Which it does in
the same way that a whole bunch of random shootings would incentivize
bulletproof vests.
But wait, it’s worse! The problem with the Global Public Square is
that it is a single, limited entity, and you have only so much you can add
to it at any given time. So Bitcoin burns that much of the world’s
electricity to be able to process somewhere between three to seven
transactions per second across the entire world.

ROBINSON:

That’s not many.

WEAVER:

It’s not many. And worse, it never could work for payments. So we’ve seen
waves come and go of companies saying “We’ll accept payments in
Bitcoin.” They’re lying. Because they aren’t actually accepting payments
in Bitcoin. They are using a service that allows them to price in dollars,
presents Bitcoin to the customer, transfers the Bitcoin, turns it into
dollars, and so the merchant is getting actual money. Which means if the
system has to balance and you want to buy with Bitcoin and you don’t
have Bitcoin, you have to convert dollars to Bitcoin. And this is, by
design, a horribly expensive process, because Bitcoin and the
cryptocurrencies are fundamentally incompatible with modern finance.
Modern finance has this rule that anything electronic needs to be
reversible for short periods of time. This allows an undo in case of fraud.
Have you had your credit card compromised before? I’ve had my credit
card numbers stolen a couple of times. The amount of money I lost is
zero. Because we have both good fraud protection and good ability to
reverse transactions. That does not exist in the cryptocurrency space. If
your cryptocurrency wallet is compromised, all your apes are fudged.

ROBINSON:

All your what, sorry?

WEAVER:

Your apes are fudged. Because the cryptocurrencies are often used for
buying these “non-fungible tokens” that have pictures of ugly little apes.
They just get liberated. But the result is, you cannot store cryptocurrency
on an internet-connected computer. Because what will happen is, if your
computer ever gets compromised, all your money gets stolen and there’s
nothing you can do about it.
And that’s a fundamental problem. But it just doesn’t work for
payments because of that throughput limit. And the volatility means you
get people converting it to real money. And so what is it good for?
Well, there are classes of payments that the intermediaries don’t
allow. The big ones are drug dealing, child sexual abuse material, and
ransoms. As a consequence, the cryptocurrency actually used for
payments is really only used seriously for: ransomware payments, where
companies have to pay $10 million. Drug deals—drug dealers hate it, but
it’s the only game in town. And we’ve had cases of websites selling child
exploitation material paid with Bitcoin.
And the reason I’ve gotten so sour on the cryptocurrency space is
the ransomware. It’s doing tens to hundreds of billions of dollars worth
of damage to the global economy. And it only exists because people can
pay in Bitcoin.

ROBINSON:

How does ransomware work, for people who aren’t familiar?

WEAVER:

So the way it works is that some bad guys in Russia break into, say,
Colonial Pipeline. They encrypt all the data and say “Hey, Colonial
Pipeline, pay me 5 million bucks or your data’s gone forever.” And
Colonial Pipeline pays the 5 million bucks and is offline for a while
anyway, and there are gas disruptions on the East Coast.
That exists only because there’s the ransomware payment method
of cryptocurrency. Because the alternatives are cash or bank transfers.
The banks will not allow payments of 5 million bucks to known
criminals in Russia. (Gee, I wonder why.) And if the known criminals in
Russia want to pick up a $5 million block of cash, well, that’s a 50
kilogram suitcase that they’re going to have to pick up, and when they go
to pick it up they might just get a .308 caliber gift courtesy of the U.S.
Marines. And so Bitcoin is the only game in town for them.
So it doesn’t work for payments. And it doesn’t work economically
either. It’s effectively a giant self-assembled Ponzi scheme. You hear about
people making money in Bitcoin or cryptocurrency. They only make
money because some other sucker lost more. This is very different from
the stock market.
I’m a savvy investor, and by “savvy investor,” I mean I put my
money into index funds and ignore it for several years. During that time,
there are dividends and share buybacks where the companies put their
profits into me. I then eventually sell it to somebody else. And my gain is
not just the difference between what I bought it for and what somebody
else bought it for, but that plus the benefit of all the dividends and
interest.
So the stock market and the bond market are a positive-sum game.
There are more winners than losers. Cryptocurrency starts with zero-
sum. So it starts with a world where there can be no more winning than
losing. We have systems like this. It’s called the horse track. It’s called the
casino. Cryptocurrency investing is really provably gambling in an
economic sense. And then there’s designs where those power bills have to
get paid somewhere. So instead of zero-sum, it becomes deeply negative-
sum.
Effectively, then, the economic analogies are gambling and a Ponzi
scheme. Because the profits that are given to the early investors are
literally taken from the later investors. This is why I call the space overall,
a “self-assembled” Ponzi scheme. There’s been no intent to make a Ponzi
scheme. But due to its nature, that is the only thing it can be.

ROBINSON:

Is that why you see the pile of Super Bowl ads for investing in
cryptocurrency? Because the people who are the early investors need to
keep finding new suckers and trying to convince people that putting their
retirement savings into cryptocurrency is a sound idea?

WEAVER:

Yep. Because it’s a self-created pyramid scheme, you have to keep getting
new suckers in. As soon as the number of suckers dries up, it collapses.
And because it’s not zero-sum, but deeply negative-sum, there are
actually a lot of mechanisms that can cause it to collapse suddenly to
zero. We saw this just the other day with the Terra stablecoin and the
Luna side token. This was basically another Ponzi scheme implemented
in the larger space of Ponzi schemes.
So the idea is, you had these two cryptocurrencies, “Terra” and
“Luna.” Terra is supposed to be tied one-to-one with the U.S. dollar. Luna
can float around. If Terra costs more than $1, you can turn Luna into
Terra and make a profit, while if Terra costs less than $1 you can turn
Terra into Luna and make a profit. But this only works as long as the
value of Luna is greater than the value of Terra.
Now, why would you use Terra at all? Well, one, this is a stablecoin
and these are necessary for the gambling aspects of cryptocurrency. They
act basically as casino chips, because almost all of the cryptocurrency
exchanges are really cut off from the banking system. But the other
reason is, because you could take your Terra stablecoin, put it in a lending
protocol that was created by the creators of Luna and Terra and get a 20%
rate of return paid for by Luna and Terra, a.k.a. a Ponzi scheme.
And so billions of dollars of notional value went into this Ponzi
scheme. And the backing of Luna just slowly crept down, down, down.
And then all of a sudden, there was a crisis of faith. People no longer
believed that Terra was worth $1. It pegged to 95 cents. The folks behind
Terra and Luna go “Everything’s fine. Nothing to see here.” And then it
collapsed amazingly quickly over the space of two to three days. And
we’re now at the point where the Terra stablecoin that was supposed to
be worth $1 is now worth 10 cents, and the Luna token has basically
gone down by 99.99%. And people keep finding out that just because
something’s gone down 95% doesn’t mean it can’t still go down another
95%.

ROBINSON:

What about the other major “stablecoin,” this “Tether”? Is that subject to
the same kinds of risks?

WEAVER:

Yes and no. It is subject to the same kind of risks, but it’s different. It
doesn’t have this algorithmic collapse model, but it does have the
potential for bank runs causing collapse, because it’s unbacked.
Tether is almost certainly what we’d call a “wildcat bank.” So, back
in the 1800s, we didn’t have the Federal Reserve. Do you ever wonder
why those pieces of paper in your pocket are technically called “bank
notes”? It’s because the original model was not the government issuing
pieces of paper. The government only issued coins. But heavy or bulky
coins are hard to deal with. So you take your coins to the local bank, and
they would give you a banknote, literally an IOU saying “if you want a
$1 gold coin, take this IOU back to the bank and you get this dollar gold
coin.”
What happened is, basically, fraudulent banks sprang up. They
were called wildcat banks because they’d often have animal pictures on
the bank notes. What they would do is take deposits and issue pieces of
paper, completely unbacked. And when state bank regulators would
come along, the wildcat banks would have barrels of coins that were fake.
All but the top layer was just junk, with a top layer of gold coins. Or
they’d cart around a barrel to all the branch offices just ahead of the
inspectors.
And Tether is clearly doing the same thing. Because if Tether was
backed by real money, this would mean that there is some $80 billion
worth of money from institutional savvy investors that wanted to invest
in the cryptocurrency space, but didn’t want to just buy in CoinBase. So
they had to go to this third party that has been caught lying about its
reserves, run by who-knows-who—the CEO is basically MIA. [Slate
reported in 2021 that he “hasn’t been seen in public in years.”] It keeps its
reserves in the Bahamas. Why would you invest that way? It’s just
complete nonsense.
So what’s really almost certainly happening with Tether is Tether
creates new Tether tokens, loans them to their big colleagues in the
cryptocurrency space—so Alameda Research and a couple of others like
that. Alameda Research provides IOUs so Tether says they’re backed by
loans. Then Alameda goes out and buys Bitcoin, driving up the price.
And now the Tether is backed by Bitcoin. And so Tether in the end is
backed by underlying cryptocurrency.
They refuse to get audited. [Bloomberg reported that Tether CFO,
an Italian former plastic surgeon, was “urged … to hire an accounting
firm to produce a full audit to reassure the public,” but “said Tether didn’t
need to go that far to respond to critics.”] They refuse to even do more
than the most basic attestation, which is literally “Here, accountant, sign
this.” We’re honest, Scout’s pledge. It’s just a house of cards. And the
problem is that when these houses of cards fail, they fail so
catastrophically and so swiftly that things go from being worth $1 to
being worth nothing in the space of three days.

ROBINSON:

I want to zoom out again to talk about cryptocurrency in general and go

back to some of the broad critiques you have. Is it accurate to summarize
what you were saying before as, essentially: There is no problem that
cryptocurrency solves, and to the extent that it is functional, it does
things worse than we can already do them with existing electronic
payment systems. To the extent it has advantages, the advantage is doing
crimes. And every other claim made for the superiority of cryptocurrency
as currency falls apart if you scrutinize it.

WEAVER:

Yes. So let’s take the cost of a transaction. The cost of a transaction in

cryptocurrency systemically is the amount being used to protect it. I
could build a system that would have the same throughput as Bitcoin,
three to seven transactions per second, but with a centralized trusted
entity. In fact, not even a centralized trusted entity. Ten trusted entities,
only six of which need to be honest, because I use a majority vote system.
I could do it on ten computers that look like this, that would burn as
much power as a light bulb.

ROBINSON:

For listeners and readers, he is holding up a tiny … uh, what is that?

WEAVER:

I am holding up a Raspberry Pi computer module. This entire computer

is like 50 bucks. So for 500 bucks worth of [computing power], I could
do the same functionality as Bitcoin, with just 10 named entities. Why
don’t I do this? Because those 10 named entities would have to follow
money laundering laws. And apart from getting a structure where the
named entities don’t follow money laundering laws, there’s no advantage
for the cryptocurrencies, despite burning nine orders of magnitude more
power.

ROBINSON:

One of the kind of jaw-dropping moments in your YouTube lecture is

when you show just how wasteful this is, how easily you could do the
exact same thing, and not have this pathetic three to seven transfers per
second all around the world.
You do note that it suggests that Elon Musk—who is touted for
the electric cars that are supposedly going to be an important
contribution to stopping climate change, but has invested billions of
dollars of Tesla’s money in Bitcoin—probably isn’t that serious or
consistent about reducing our carbon emissions.

WEAVER:

Phony Stark over there has a walking talking Dunning-Kruger syndrome

going and his investment in cryptocurrency is clearly one of those. The
cryptocurrency that he often highlights is Dogecoin. Dogecoin was a
literal joke invented in the early days of cryptocurrency about, “Hey, this
stuff is so stupid. Let’s make a coin about a meme of a talking dog.” The