A report commissioned by the Pentagon’s Defense Advanced Research Projects Agency (DARPA) found that blockchain – the technology behind cryptocurrencies like bitcoin – is not as decentralized as commonly thought, while also being vulnerable. to attacks.
“The challenge with using a blockchain is either (a) accepting its immutability and believing that its programmers haven’t introduced a bug, or (b) allowing for evolving contracts or off-chain code that share the same trust issues as a centralized approach,” according to the report (pdf) released in June.
Every widely used blockchain has a “privileged set of entities” that have the ability to modify the semantics of the blockchain and potentially alter past transactions.
For a blockchain to be optimally distributed, there must be a “Sybil cost”. Currently, there is no way to implement Sybil costs in a permissionless blockchain like bitcoin without using a centralized trusted third party (TTP). Unless Sybil costs are enforced without TTP, it will be “almost impossible” for permissionless blockchains to achieve “satisfactory decentralization,” the report says.
The vast majority of bitcoin nodes have not participated in mining activity. A dense subnet of bitcoin nodes was found to be largely responsible for communicating with miners and reaching consensus. The vast majority of nodes do not “contribute significantly to the health of the network”. Sixty percent of all bitcoin traffic passes through just three IP addresses.
Node operators face no explicit penalties for dishonesty, the report points out. Stratum, the standard protocol used for coordination within the mining pool, was found to be unencrypted. Traffic on bitcoin is also unencrypted, allowing anyone on the network routes between nodes to “watch and choose to drop any messages” they want.
US digital currency
The Pentagon report comes amid talk of the US issuing a central bank digital currency (CBDC). Democratic Representative Jim Himes of Connecticut is a major proponent of issuing a CBDC.
“The longer the United States government waits to adopt this innovation, the further we fall behind both foreign governments and the private sector. … It is time for Congress to consider and move forward with legislation that would authorize a US CBDC,” Himes saidaccording to CoinTelegraph.
During a monetary policy meeting on June 23, Federal Reserve Chairman Jerome Powell revealed that a CBDC is something that needs to be explored.
However, a Federal Reserve CBDC is opposed by three Republican senators — Ted Cruz (R-Texas), Chuck Grassley (R-Iowa), and Mike Braun (R-Ind.) — who are pushing a bill to amend section 13 of the Federal Reserve Act.
The amendment proposes to add the following wording: “No Federal Reserve Bank may offer products or services directly to an individual, maintain an account in an individual’s name, or issue central bank digital currency directly to a particular.”
The three senators argue that US digital currency policy must be based on protecting financial privacy. Allowing the Fed to leverage into a retail bank will allow the agency to collect personal information about users and track their transactions, they pointed out.