Sedition, Subversion, Sabotage
In the last article, Part 3, I ended with a discussion of Subversion.
Obviously, subversion can be dangerous for your health. For example, if you try to provide medical services without a license (which is issued by the Medical Association in your State) you may end up in Jail. Try to provide legal advice and the same thing might happen to you. This is because the State has delegated its powers to these ‘Associations’ (AMA, ABA etc, which are nothing of the sort), while backing them with its power to punish, i.e. its monopoly on violence. I’ll spare you the discussion of all other services, but the template is the same.
I’ve already mentioned the fact that some early pioneers of blockchain and Bitcoin based finance (Ross Ulbrich, Roger Ver, also notably Samourai Wallet and Tornado Cash developer) have gone to jail over their work. If Satoshi Nakamoto is not Hal Finney, they are probably wise to keep their identity a secret. Under the pretense of protecting people from theft, scams and deceptive investment vehicles, the government insists that you use the US Dollar which it can extort from you in taxes, steal from you by inflation, invest for you in its Social Security Ponzi scheme, and sell back to you in the form of Treasury Bonds it has no intention of repaying, even with your own money.
But blockchain also allows the execution of smart contracts in a decentralized way. The first such system was Ethereum (ETH) whose success gave rise to others, Solana, Hedera, Cardano and others. This idea is just an extension of the concept of an unforgeable, uncensorable decentralized ledger. If you consider that Bitcoin is a global ledger of valid transfers between unique addresses, it should be fairly straightforward to see that ‘more complicated transactions’ could be ‘executed’ on the final state of the ledger.
In other words, Subversion got an upgrade as this technology opened new opportunities, with a long list of revolutionary innovations, or so it seems.
Non-Fungible Tokens (NFTs) (2017) The introduction of the ERC-721 standard on Ethereum moved digital assets from being purely fungible (like Bitcoin) to uniquely identifiable and ownable. They have been applied to many domains, but essentially can be used to unequivocally prove that something is yours without revealing your identity, but of course this could also include your identity. This is was an amazing first blow to government’s ever present need to insert itself as the final authority in determining who someone really is and who owns a particular property.
Decentralized Autonomous Organizations (DAOs) (2016) This innovation introduced the concept of “code is law,” allowing for collective decision-making where proposals and voting power were transparent, immutable, and executed automatically without a central management layer. The innovation was a much needed response to the constant doubt over simple question such as “how many shares are outstanding” or “how many people voted?” and again the important removal of trusted parties and the inevitable vetting and adjudication that seems to always be necessary.
Prediction Markets (2016) Early on, protocols like Augur utilized smart contracts to create decentralized betting markets on future events. This innovation established a mechanism for aggregating collective intelligence and pricing risk, allowing users to trade on the outcome of real-world events with the settlement occurring automatically upon the event’s conclusion. Augur is now mostly replaced by Kalshi and Polymarket.
It is also worth noting that Augur was the first Initial Coin Offering (ICO) consisting of the issuance of Coins or Tokens, ownable privately by anyone on the internet. This was also a blow to the Wall Street machinery of regulations which had for decades prevented most of the population from participating in Initial Public Offerings while the rich and connected could profit.
Decentralized Market Makers (AMMs) (2018) and Algorithmic Stablecoins (2017) and Liquid Staking Protocols (2020) Uniswap introduced the first Automated Market Maker model, replacing traditional order books with a mathematical pricing algorithm. This innovation enabled 24/7 trading without a centralized exchange. This innovation was a blow to the arbitrary limits imposed by Wall Street and the Federal Reserve System on the purchase of currencies, shares and the movement of money, which to this day are still only occurring Monday through Friday from 9:00 EST to 4:00 EST. Decentralization made this possible because the incentive mechanisms of the system could be demonstrated to never require human intervention and therefore no trust.
I won’t go into Liquid Staking Protocols, because I don’t really understand how they work, but you should know that they have solved the same problem that the invention of banking did for the world in the last millennium.
No, banking isn’t about just storing your money, the true innovation was to solve the double coincidence of wants in time. Money was the invention that solved the problem in space, and banking solved it in the time dimension: matching someone who has assets and no income (because they are old) with someone who has income (ideas and potential), but no assets (because they are young) . Banks became the matchmaker and clearing house for such transactions, the same way that futures markets were the clearinghouse for people who had goats in one place and needed fish in another. For more information on this, please consult Dr Keith Weiner’s writings on this, as well as his Doctorate Thesis. Re-inventing the lending that was well understood for hundreds of years so it could work without trusted parties took several years, because Blockchain is a completely different world. Keep that in mind.
Oracle Networks (2019) Decentralized Smart Contracts need an accurate view of the world, and doing so without trusting anyone became the obstacle to real-world applications of the blockchain. Chainlink and similar networks solved the “oracle problem” by creating decentralized networks that provide smart contracts with off-chain data sources (APIs, IoT). This innovation was critical for enabling smart contracts to interact with the real world, allowing for automated insurance payouts, DeFi lending, and supply chain tracking based on external data. Prediction Markets also needed this too and were quick to implement the principles that were adopted here.
This may seem abstract, but it doesn’t take much effort to see that whoever controls the information can manipulate people. For many years people have known that stock prices, real-world events and other data were manipulated. Governments have even admitted, to manipulating the news. This isn’t surprising to those familiar with The Dawn of Everything since secrecy is one of the pillars of domination, and lying is just around the corner from this.
The remaining innovations are all more technical and in a way incremental. We still need to talk about them because they address serious problems these early pioneers faced.
Government didn’t just watch this all happen without trying to stop it. Because Bitcoin transactions are on a public ledger, it’s fairly simple to see all the addresses where funds go. Companies like Chainalysis provide government the tools they need to trace transactions. It’s all in the name of protecting people from scammers, of course, but when it comes right down to it, which crimes do you think will be punished more severely, those that defy the State apparatus or those that have actual victims ?
Well, we don’t need to guess too much, because the State has already made an example out of Software Engineers , who simply wrote code that allowed Ethereum owners to send transactions to a contract that mixed their transactions with those of others, so that the government can’t really accuse the users of exchanging with any particular individual (or address) directly.
Other issues surfaced early in the implementations of Peer-toPeer applications on Ethereum: Privacy became a big deal. Protecting from scams went to the top. To make this concrete, do you want someone who knows your ethereum address to know you took a bet on a prediction market ? Do you want them to know your balance ? Real world applications would demand this. (Pavel Durov the founder of Telegram recently mentioned there had been crypto-related 43 kidnappings in France).
One of the truly exciting things about blockchain is the inversion of control it brings about. With no central authority to control and abuse processes, suddenly the user is in charge. Inversion of control requires a level of responsibility most people are not prepared to handle. This is my favorite example: it could allow you to own your medical history and record. When you go to a surgeon for a knee surgery, you grant the doctor access to your X-Rays but not your psychological evaluation. Better yet, if your smart contract medical records - which can anonymously generate decentralized proofs that you belong in a certain subset of individuals with a genetic makeup, match those that a researcher needs across the world for a medical study, you may even get paid to have those records shared for statistical analysis, in a way that no ‘trusted party’ is needed to anonymize records.
In order to bring this revolution around, more than just decentralization was needed. In other words, cryptography on a public ledger suddenly became important. The blockchain ecosystem needed encryption.
Researchers went in all kinds of directions, but here I’ll just mention two:
Threshold Encryption Networks (2020) were invented to allow the distribution of shares of a decryption key among a set of anonymous but staked participants. My favorite example is Threshold Network with their NuCypher technology with allowed embedding a blockchain decryption condition. Lit protocol is another example of this.
At a high level, you can encrypt something and publish it on-chain while a set of nodes have partial decryption key. They will only decrypt with their share if the embedded condition is true, and that condition can be whether a contract returns a certain value, a balance or a date has passed. This is incredibly powerful, because the threat of collusion amongst nodes is very low as a result of staking incentives and the security is similar to that of a blockchain. It’s near impossible to know which nodes around the world hold a key share, where they are and therefore the decryption is assured, uncensorable, private and unbreakable.
Protocols like Keep Network and Aztec did something similar with the off-chain storage of private keys or sensitive data.
Another innovation, Zero-Knowledge Rollups (ZK-Rollups) (2021) allowed other chains to handle the ‘load’ of transactions away from the Ethereum mainnet, by simply providing a cryptographic zero-knowledge proof that the state changes rolled-up to the mainnet are valid. Zero Knowledge refers to the concept that no secret is revealed in the process, in this case, no third party is ever able to forge a false proof, even given the full detail of past proofs.
These Zero Knowledge proofs gave rise to many new compilers, languages, techniques for combining many proofs into more proofs and so on. New applications came to light:
Following the U.S. Elections in 2020, much research was published on IACR (the biggest repository of Cryptography Research papers) regarding Voting protocols that could allow votes to be counted anonymously, or allow someone to check that their own vote was actually included in the total, all without revealing private information.
The second, and important cryptographic innovation I want to mention is Account Abstraction (ERC-4337) (2021). This innovation transformed digital wallets from simple key holders into programmable smart contracts. This was in part a response to the complexity of crypto wallets and lack of safeguards but also needs in the industry to foster on-boarding of new users. It enabled advanced features like gas-less transactions (where the app pays fees), social recovery (where friends can restore access), subscriptions and batched transactions, removing the technical friction barrier that previously prevented mainstream adoption.
Notice that this is a market driven innovation in the face of real problems, new problems. There is no subversion here, government was never offering to handle our crypto subscriptions and I don’t think I would trust it to recover my wallet, even if that was possible. Before this, there were no safeguards.
Inversion of control also implies that identity gets upgraded. If you can suddenly own your complex medical records, it’s a really simple matter to apply this to the rest of your life. Your drivers license for example is a trivial example. It’s a subversion with soft teeth. The State, in its insatiable appetite for control, will want to implement this too and force you to use it.
I think I’m going to stop this overview of how Blockchain and Crypto have challenged the State and threatened to subvert its services.
In the next article, we’ll take a look at why none of it worked so far.