Introduction
Cryptocurrency is a form of digital currency that verifies and records transactions through the use of decentralized cryptographic systems, rather than through centralized authorities. While cryptocurrency is often used as a tool to weaken state power, it has sparked controversy among anarchists.
The left generally views cryptocurrency negatively due to its function as currency (some seek to abolish money), price volatility, potential harm to the environment, lack of so-called decentralization, fraudulent behavior, and association with right-wing libertarianism. These views lead many left-leaning anarchists to irrationally criticize cryptocurrency. This conclusion lacks careful analysis, ignores cryptocurrency’s real-world applications, stems from misinformation, and ultimately reflects a conservative attitude towards technology. In this article, I will explore the potential of cryptocurrency as a tool of liberation, refute many of the left’s misconceptions about it, and explain why it is useful in both capitalist and non-capitalist environments, while also analyzing its shortcomings.
How does cryptocurrency work?
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- How to profit from shorting the market of altcoins?
Before directly addressing the left’s arguments, it is first necessary to understand how cryptocurrency works and why it is designed this way. Cryptocurrency typically uses a blockchain, which is an immutable distributed ledger that anyone can access but cannot unilaterally modify to record transactions. No single entity can seize assets, reverse transactions, or change the set of rules governing a given blockchain. This ledger is stored on a decentralized computer network that must reach consensus to verify transactions, as at any given moment, the ledger has only one valid state.
Blockchains use consensus algorithms to eliminate transaction intermediaries that centralized payment processors rely on. Abstractly, in physical space, consensus is based on trust between individuals or enforced by governments. The costs of centralized consensus include global police and military spending used to enforce government decisions. In a stateless society, the cost of consensus is the labor put into establishing relationships, deliberation, and compromise to reach agreements. In physical space, consensus becomes increasingly difficult to scale without overthrowing anyone, as not everyone can agree on a course of action. However, in cyberspace, algorithms can be used to achieve distributed consensus on a large scale.
Blockchain provides a trustless, permissionless, open, and anonymous infrastructure for conducting transactions. These properties are achieved by introducing cost through artificial scarcity, which incentivizes miners and validators and prevents 51% attacks and malicious block validation. A 51% attack refers to a situation where an attacker controls at least 51% of the hash power or stake in the blockchain, allowing the attacker to scrutinize transactions, reverse blocks, and change the order of transactions. The nature of these costs depends on the consensus algorithm used.
In proof-of-work mechanisms, miners gain the right to construct the next block by solving a hash function (a computationally intensive process that consumes energy). Thus, for miners to perform a 51% attack, they would require massive capital and energy inputs, which are almost impossible to achieve. The energy consumption also makes miners unwilling to validate malicious blocks, as other nodes also have copies of the ledger, and these nodes will reject these malicious blocks. Therefore, incentives revolve around obtaining block rewards and/or transaction fees. In proof-of-stake (POS) mechanisms, tokens are staked, and nodes that validate malicious blocks will have their tokens deducted. For attackers, it must be impossible to control most of the tokens to perform a 51% attack, so the tokens must retain their value. In all these examples, cost is created through artificial scarcity, which in turn creates incentives to help ensure the underlying network’s security.
Therefore, there is a certain path dependence, as early adopters accumulate tokens and power in their respective networks, resulting in different degrees of economic rent, which are income in excess of costs (including labor costs). This situation can be mitigated by trying token economic models such as increasing issuance or consensus protocols such as delegated proof of stake. Delegated proof of stake mechanisms used by blockchains such as Cosmos allow all users to stake their tokens to validators without running any hardware. Technically, Ethereum can also achieve this by staking through staking aggregators such as Lido, but this is not part of the consensus protocol. There are also cryptocurrencies like Nano, where there are no transaction fees, although this brings some trade-offs such as a large amount of spam on the network. Throughout the cryptocurrency ecosystem, transaction fees are continually reduced through second-layer scaling solutions and competition in a multi-chain ecosystem.
In our current economy, the cost of trust often far outweighs the scarce rents paid to miners and transaction fees, which is why many people use blockchain technology for transactions. When using centralized payment processors, transactions are verified through services such as ACH, Fedwire, and SWIFT, which are monitored by the state for “illegal” activity and require us to trust banks and governments, which is not a choice for many. ACH and wire transfers often take several business days because transactions are “processed” or audited by the nation, with the Federal Reserve System playing this role in the United States. By using regulated services, people are actually trusting corporations and governments. These services limit people from using the service under specific conditions such as location, occupation, legal status, etc., while blockchain is permissionless and the only trust required is the incentive created by the consensus protocol, or as some say, “math.”
Cryptocurrency as a Tool of Liberation
For most on the left, cryptocurrency is primarily viewed as a financial speculation tool rife with fraud. Indeed, many early adopters gained vast wealth under the influx of artificial scarcity and speculative capital, resulting in exponential growth in cryptocurrency prices. The cryptocurrency space is also rife with various frauds, some obvious and some not. However, these facts do not diminish its benefits, only covering a small part of the overall picture. Similarly, the internet is also rife with fraud and has created many billionaires. These facts do not mean that we should give up on the internet but rather think about how it is designed and organized.
Cryptocurrency allows people to conduct unauthorized transactions, protect their assets from government seizure, and avoid financial surveillance, challenging several important aspects of state oppression. Its permissionless nature means people can buy drugs, remit funds, provide funding for illegal activities such as protest activities, and evade taxation without going through state-controlled channels. For example, undocumented individuals can use cryptocurrency to remit funds without using a bank, which may be inaccessible to them and may expose them to state monitoring. Unlike the banking industry, a sufficiently decentralized cryptocurrency network is not restricted by international sanctions and does not require identity verification. Sex workers use cryptocurrency for payment after being banned from using banks and platforms like Blockingtreon, Cashapp, and Ko-fi, which also have arbitrary KYC (know your customer) requirements. In Nigeria, cryptocurrency is used to fund anti-police brutality movements banned by the banking industry. It is also used to purchase entertainment and life-saving drugs such as HRT (hormone replacement therapy in the transgender field) on the black and gray markets.
Recently, a study by Chainalysis showed that “grassroots-level cryptocurrency adoption” is very common in emerging markets and countries with unstable financial conditions and relatively high levels of currency suppression, such as Vietnam, Nigeria, and Ukraine. Cryptocurrencies also enable people to bypass foreign sanctions. For example, in Afghanistan, a non-governmental organization uses the stablecoin BUSD to circumvent US sanctions, the Taliban, and bankrupt banks that cannot use systems such as SWIFT to provide emergency food funding during the post-withdrawal turmoil. As cryptocurrency adoption increased, the Taliban eventually banned cryptocurrencies to force people into the banking system, where their activity is more easily monitored and funds are not easily transferred overseas, but given its nature, these bans are difficult to enforce.
Cryptocurrencies are widely adopted as a means of combating inflation. In Turkey, where the government continues to devalue the lira, bitcoin exchanges have appeared on the streets. Similarly, many Lebanese people turned to cryptocurrencies after banks stopped withdrawals and the Lebanese pound collapsed. The same trend appeared during Venezuela’s hyperinflationary period. Although many cryptocurrencies are volatile, they still maintain better value relative to many global currencies. In addition, cryptocurrencies achieve global access to the US dollar through stablecoins. By the way, although many people claim that bitcoin is not a hedge against inflation due to its recent performance in the face of extreme inflation, a closer look will reveal that the global market has not reacted to inflation over the past year, but rather to the increasingly hawkish attitude of the US Federal Reserve, especially since November 2021, when Fed Chairman Jerome Powell acknowledged that inflation is no longer a short-term phenomenon. This is a signal that they will stop devaluing the dollar. In the subsequent period, inflation hedging tools such as gold and growth-type stocks have depreciated, while the real yield of bonds has increased with the appreciation of the dollar. Uncontrolled inflation reduces the real bond yield and reduces the purchasing power of fiat currency.
Cryptocurrencies also serve as useful tools for anonymous digital transactions, which is not possible in the banking industry. Cryptocurrency networks provide varying degrees of privacy protection; first, wallet addresses are randomly generated strings and do not require Know Your Customer (KYC) identity verification. Transactions on traditional blockchains are public, but external observers cannot identify the participants unless they are linked to bank accounts through a legal gateway like centralized exchanges. Tools like LocalCryptos allow users to transfer funds on-chain and off-chain without going through centralized exchanges. However, most cryptocurrencies do not hide transaction amounts and wallet addresses by default, but privacy can be achieved by using mixing services like Tornado Cash and Blender, which pool deposits from multiple addresses and allow users to withdraw later to unassociated addresses, providing probabilistic privacy protection. There are also “privacy coins” like Monero and Zcash that have privacy features built into the underlying layer. The former uses ring signatures to group transactions for probabilistic privacy protection, while the latter uses zero-knowledge proofs to hide transactions, with only the proofs being published on the chain. There are also many new privacy protocols with smart contract capabilities, such as Penumbra, Secret Network, DarkFi, and Aztec. Some argue that cash can achieve the same function, but this overlooks the fact that we live in an increasingly digital world. Unlike cash, cryptocurrencies do not require physical carrying and storage, allowing people to conduct transactions remotely and free from government monetary policy restrictions. Given the use cases we have discussed, it is clear that privacy makes cryptocurrency networks more resilient to government intervention while enabling marginalized users to achieve their goals.
A good way to evaluate the utility of cryptocurrencies is to consider whether they are solving existing problems or creating hypothetical use cases. For example, cryptocurrencies are being used as an incentive layer in P2P protocols such as decentralized wireless networks, seed sharing, and decentralized file storage. Helium introduced the Helium token as an incentive for users to run hotspots and provide service for low-bandwidth P2P wireless networks aimed at the Internet of Things. The project currently has low demand in a niche market and needs to compete with large national subsidized Internet service providers, so it has achieved little success. Similarly, decentralized file storage protocols like IPFS and Arweave use Filecoin and Arweave tokens, respectively, to calculate storage costs. Another example is Bittorrent, a communication protocol for peer-to-peer file sharing that introduced tokens for downloaders to pay uploaders, incentivizing others to upload neglected files and providing extremely fast download speeds for others, which is very useful for users.
Decentralized finance (DeFi) is another important use case for cryptocurrencies, offering intermediary-free financial services such as loans, insurance, and stablecoins provided on-chain through smart contracts. It competes with traditional banking services and sometimes offers greater product advantages. For example, the Liquity protocol allows users to obtain zero-interest loans on Ethereum collateral with as low as 0.5% one-time fee and at 110% collateralization ratio (you can borrow up to 90% of the value of your provided collateral). The protocol issues its own stablecoin backed by the underlying collateral, meaning it has no associated capital costs, making borrowing costs significantly lower than any product in traditional finance. The main disadvantage of Liquity compared to offline (traditional) lending is that collateral is required, which depending on the level of trust between parties, can have lower or non-existent collateral requirements.
To summarize, many who benefit from cryptocurrencies do not hold unstable currencies, but are instead considered criminals because of their existence, living under authoritarian governments that prohibit all forms of protest, or are illegal immigrants barred from the banking system. Cryptocurrencies also create incentives on decentralized networks, such as seed sharing and mesh networks, thereby weakening the authority of nation-states. From the perspective of anarchism, cryptocurrencies can be a tool for today’s subversion and circumvention of the state. In this context, absolute opposition to cryptocurrencies ignores the lived experiences of those who benefit from them and further marginalizes them.
Cryptocurrencies in the context of anarchism
Despite the difficulties in achieving consensus on a large scale and the need to pay transaction fees and accumulate economic rents in the context of capitalism, cryptocurrencies are still very useful for some individuals. But what about in the context of anarchism?
In the absence of state monitoring of transactions and top-down rules and regulations, individuals may be more inclined to trust the cheap and immediate transactions provided by centralized services that are accessible to everyone, and market competition will encourage credibility and good risk management. However, there are no absolute guarantees, and centralized platforms can essentially do anything they want with the funds they are entrusted with, including blocking transactions, freezing funds, and leaking information. Centralized platforms also suffer from single points of failure, making them more vulnerable to attacks.
Cryptocurrencies provide an alternative to trust itself, which was the only basis for mutual social relations before the invention of blockchain. Even attempts to combat trust, such as using systems like third-party custody, require the use of trusted intermediaries. Trust is scarce and therefore has a cost, as it requires a certain amount of labor to maintain, and labor always has a cost, although in many cases the cost can be negligible. In other words, there is no friction at the social level, and our daily interactions generate transaction costs.
Trust is also closely linked to social capital, and the path dependence of social capital accumulation is somewhat similar to the artificial scarcity on the blockchain, both of which lead to the accumulation of scarcity rents. Although the market is relatively competitive, the institutions that people trust may become fixed, and trustless modes of interaction provide a way for the entire social capital to exit and verify. For any individual, the choice of using a trust-based or trustless system depends on which method has higher transaction costs. This may vary greatly between different transactions and is unlikely to be completely dependent on one of them. It should be noted that transactions that cannot be fully mediated by smart contracts are untrustworthy, which means that they have a limited range at the current level of technology and may be limited to scarce digital commodities such as P2P storage and processing power. However, as things become more digital and automated, the applicability of blockchain in everyday transactions is increasing.
Trustless infrastructure provides a more economical alternative by allowing people to get rid of local backgrounds, compete with offline trust, and reduce the cost of trust. Therefore, when conducting remote transactions, people must trust all corresponding parties, and trustless infrastructure is a possible alternative that may not require due diligence. Therefore, even in an anarchist context, blockchain is still an extremely useful transaction tool. It can also be used to track commodities in the supply chain, establish token-based governance structures (DAOs) for organizations, especially when members cannot coordinate face-to-face, and so on.
Is cryptocurrency harmful to the environment?
Before we delve into this issue, it is important to note that most blockchains use a proof-of-stake mechanism, which does not consume more energy than other decentralized computing processes and only requires a computer network to run. The most active blockchain, Ethereum, has recently switched to a proof-of-stake mechanism, reducing energy consumption by over 99%, so we don’t need to say much about this aspect.
Only Bitcoin, the largest cryptocurrency by market capitalization, uses Proof-of-Work, which requires miners to consume energy to gain the right to construct the next block. However, Bitcoin’s environmental impact is often exaggerated and misunderstood, and the Proof-of-Work mechanism can incentivize grid stability, investment in renewable energy, and methane reduction. Considering that Bitcoin stores about $600 billion in value and processes $10 to $20 billion in settlements every day, it is more reasonable to view its energy usage in the context of the whole rather than rejecting the technology entirely due to energy consumption.
A brief review of why Proof-of-Work requires energy consumption: computational work is a cost for miners, which ensures that they cannot control more than 51% of the hash rate (which would allow them to alter the network’s history and conduct double-spending), and it makes them disincentivized to validate malicious blocks, because these blocks will be rejected by other nodes. Bitcoin’s energy consumption is related to block production and increases with the rising price of Bitcoin, as mining becomes more profitable with higher prices. Therefore, even if a block is empty, it will still be mined. In addition, off-chain scaling solutions such as the Lightning Network mean that one on-chain transaction can represent thousands of smaller transactions. This means that the often-cited energy consumption per transaction cost metric is not a practical way to measure Bitcoin network efficiency, as adding or removing transactions does not change energy usage.
Overall, Bitcoin consumes only about 0.4% of global energy (this is an annual calculation based on data from October 2022, and the estimate varies greatly with hash rate). However, it is meaningful to look at its energy mix (sustainable vs. non-sustainable energy) to better understand Bitcoin’s environmental impact, as energy consumption does not necessarily translate into emissions. There is a wide disparity in estimates of Bitcoin’s energy mix, with the Cambridge Centre for Alternative Finance (CCAF) estimating sustainable Bitcoin mining at 37.6%, while the industry, represented by the Bitcoin Mining Council, estimates it at around 59.5%, which is better than the US average of 40% sustainable energy. Due to government crackdowns, mining activity is increasingly moving out of China, and Bitcoin’s energy mix is constantly improving and is already far better than that of most other industries.
However, determining Bitcoin’s energy mix is not easy, as miners are highly mobile and often operate in remote areas with cheap energy. Nonetheless, Bitcoin’s energy mix has been continuously improving and is already much better than most other industries. It should be noted that energy consumption does not necessarily mean high emissions, as the use of sustainable energy can reduce carbon emissions. Therefore, when assessing the environmental impact of Bitcoin, it is not enough to focus solely on energy consumption, but also on the sustainability of the energy mix and the overall emissions of the industry.
Another important subtlety of Bitcoin’s environmental impact is the incentive effect of the proof-of-work mechanism on the energy industry. Mining incentivizes the construction of base load for the electricity demand by providing demand where energy companies are unwilling to invest in underserved areas. For example, Gridless Compute monetizes micro-hydro power plants in Kenya by using Bitcoin mining as the ultimate buyer. Bitcoin miners can also dynamically shut down mining equipment during demand surges, and start mining when there is surplus capacity, thus subsidizing intermittent renewable energy. An example of a miner’s mobility is Chinese miners moving from Xinjiang province, which uses coal-fired power, to Sichuan province, which uses cheap hydroelectric power during the rainy season. Generally, non-competitive or stranded energy often comes at a cheaper price, and Bitcoin miners are likely to seek out this kind of energy. However, this can also have negative effects, as in some cases the cheapest option is actually a decommissioned coal-fired power plant. Finally, Bitcoin mining can capture and utilize waste methane that would otherwise be flared or emitted, which is net-zero in emissions but also subsidizes foundational industrial processes.
Comparing Bitcoin’s energy consumption to other activities that draw energy from the grid can provide a better understanding of its energy use. Technically, settling in USD in the traditional global banking system is ultimately enforced by the US military and police, the former being one of the largest polluters in the world, and Bitcoin consumes 7 times more energy. Additionally, the USD is legitimized through US government taxation and fines on individuals and businesses. Both morally and in terms of energy, Bitcoin seems like a better choice. We can reasonably estimate that gaming consumes 46% more energy than Bitcoin mining, and its energy mix is also less sustainable. Nonetheless, no one complains about the collective energy consumption of professional Twitch streamers, who use energy-intensive gaming equipment. Similarly, household tumble dryers are typically used by choice, and their energy consumption is 1.6 times that of Bitcoin mining.
These comparisons aim to reveal that a large portion of the criticism of Bitcoin’s energy consumption stems from a view of its wasteful nature, which ultimately depends on subjective opinions of the usefulness of Bitcoin’s security model. However, many still believe that this model is useful. From a practical perspective, it doesn’t make much sense to complain about how individuals use the electricity grid as long as they internalize the cost of doing so. Instead, we can focus on achieving the goals of decarbonizing the grid and making proof-of-work more sustainable.
Subfield – NFTs
For Bitcoin and the entire left, research into cryptocurrencies is incomplete without an analysis of the phenomenon of non-fungible tokens (NFTs). NFTs are unique tokens stored on a blockchain and can include optional metadata extensions that may contain a uniform resource identifier (URI). NFTs have various uses, including as a tool for compensating artists and as another speculative asset traded by people.
Firstly, a common mistake is to conflate NFTs with tokenized art, when in reality they can be used for many different purposes (none of which require the use of a blockchain). NFTs can be used to represent anything for sale on the market. Although this could be technically implemented on various platforms, the properties of the blockchain mean that people can showcase goods for sale without permission, even though the actual transfer of goods still requires trust. They can also be used as public, trustless work provenance interfaces, where third-party platforms can connect to the blockchain and reveal the authors of specific media works, as seen with NFT avatars on Twitter. Today, in the cryptocurrency space, NFTs are frequently used for attendance proof, where participants in an event can receive a POAP (Proof of Attendance Protocol) to incentivize them to attend future reward events. As far as references to art works go, NFTs can be used to commission and support artists, where many of the pieces sold on platforms such as Foundation have no speculative resale value, “buying” these pieces can be seen as a donation to encourage art creation. Finally, they can be used to represent or convey group membership identity in a trustless way by linking content to provide relevant background information.
However, beyond these generalizations, there are some systematic criticisms of the use cases for NFTs, such as their use to represent ownership of the referenced information. Ownership is defined as allowing the holder exclusive use, which NFTs do not achieve. Essentially, people are paying for a token that points to something they don’t actually own and that can be freely copied by anyone. Therefore, some may consider these tokens worthless outside of a speculative context. The most common manifestation of this is speculators buying tokens related to art pieces. Many in the cryptocurrency industry openly acknowledge this and refer to NFTs as “shitcoins” (tokens with no use other than speculation), just with pictures. Recent innovations in this field, such as Sudoswap, further cement this view, as the platform implemented NFT liquidity pools, allowing users to instantly buy and sell NFTs on-chain.
In NFT games, NFTs are used to represent in-game items. Unlike art NFTs, games create a stable background for them, allowing them to hold value beyond speculation. Players may purchase in-game items to enhance their gaming experience and pay a cost to obtain them. Criticisms of this paradigm’s economic rent minimization apply to almost all video games today, where developers and game companies generate artificial scarcity rent by selling information, although in reality, this information is not scarce, although people give it some value. Therefore, the only way to compensate content creators without relying on scarcity rent is either by charging users for services or by voluntary donations.
In this framework, it is inconsistent to single out NFTs without criticizing Netflix, Spotify, games that sell in-game items, and all other services that make user access to digital content a paywall. One of the big advantages of NFTs in games is that they redistribute scarcity rent to users rather than concentrating it in the hands of game companies by creating an economic system for in-game items; it can be seen as a decentralized market for Counter-Strike skins.
Nevertheless, people still view NFTs as speculation or a form of ownership within games. If people want to participate in a zero-sum game of speculation or pay rent to each other, that is their right. A similar phenomenon is people paying for Netflix, despite almost no legal consequences for piracy, and pirated content can be obtained through things like the uTorrent network player, streaming websites, and applications like Popcorn Time. In this case, persistent market failures seem to be caused by asymmetric information about how to pirate media, moral values that support copyright, relatively seamless interoperability, misguided concerns about legal action, and so on. Some economic rent is inevitable, and if people are not forced to pay by authorities, it is ultimately compatible with anarchism.
Is cryptocurrency decentralized?
Whether cryptocurrencies are truly decentralized is an important question for those who value their properties. Many people dishonestly claim that cryptocurrencies are centralized and therefore insecure, and this is an important issue to discuss. At first glance, most major cryptocurrencies are clearly decentralized because they coordinate and maintain a distributed ledger through many nodes. Bitcoin has 15,161 nodes at the time of writing, and Ethereum has 8,068 nodes. However, the degree of decentralization of a blockchain is a continuous range, and we can ask how decentralized a given blockchain is and how to measure decentralization. To do this, we can look at the decentralization indicators of Bitcoin, which uses PoW, and Ethereum, which uses PoS.
The decentralization of PoW networks, such as Bitcoin, can be measured by hashing power and its distribution. As more nodes join the network, the hashing power increases, making it more decentralized, but also subject to the influence of node controllers, affecting decentralization and security. Hashing power distribution among miners is one way of understanding this. At the time of writing, the largest Bitcoin mining pool, Foundry USA, controls around 28% of hashing power, below the 51% required to perform an attack. Mining pools represent many individuals and groups with their own hardware, and can exit the pool if they believe the operator poses a threat to the network. PoW’s incentive mechanism means that mining pools are unlikely to collude, but for such an attack to occur, the top five mining pools controlling 52% of the hashing power would need to work together. Another potential attack vector is state coercion, which is why the geographical distribution of hashing power is important – no single country currently controls over 37.84% of hashing power. Bitcoin’s supply distribution does not determine network decentralization or security, but reflects the dynamics of external speculation and internal accumulation. It should be noted that, since exchange wallets represent millions of users and asset custodians, the supply appears more concentrated than it actually is.
The decentralization of PoS networks, such as Ethereum, depends on the number of validators, the number of nodes, and the distribution of tokens among these validators. The number of Ethereum validators is roughly calculated by dividing the amount of Ethereum staked by 32, which is the minimum amount required to become a validator. Currently, there are 441,747 (this is the previous data) validators securing the Ethereum network. However, not all of these validators operate their own nodes. Instead, 60% of staked funds are held by staking pools like Lido, which stake the Ethereum and validate with a set of node operators. Since the hardware requirements for running validators are very low, a single node can run multiple validators, and nodes do not necessarily have to run as validators. The distribution of staked tokens among nodes or staking pools can better illustrate the degree of decentralization of the network. Currently, the largest staking pool, Lido, holds 30% of staked Ethereum, below the 51% threshold. Additionally, like mining pools, users can exit staking pools and choose elsewhere. Staking pools distribute Ethereum to many independent nodes, reducing their threat to decentralization.
Although cryptocurrencies like Ethereum have trustless and distributed consensus mechanisms, centralization creeps in through other means. Much of the cryptocurrency space relies on centralized infrastructure providers like Infura and Alchemy, which allow decentralized applications to remotely query the underlying blockchain via APIs because running full nodes (which involve storing the entire blockchain) may be impractical. The problem with this approach is that infrastructure providers can censor and misrepresent information about the blockchain. This is a vulnerability in the Ethereum software stack, but not a threat to the underlying blockchain itself. There are solutions to this problem, such as light clients, which are low-resource nodes that can be embedded into desktop applications and wallets, allowing users to cryptographically verify information from infrastructure providers.
Another ongoing risk that the Ethereum network faces (which Bitcoin never has) is regulatory risk from the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), which sanctioned Tornado Cash. Validators are free to exclude and reorder transactions in blocks, meaning they can individually perform compliance operations. Currently, approximately 53% of Ethereum blocks (at the time of this writing) are OFAC compliant because they use Flashbots, a maximal extractable value (MEV) gain relay that includes a censorship regime due to regulatory requirements. MEV is the practice of including, excluding, and reordering transactions to capture on-chain arbitrage opportunities. Flashbots is an intermediate software stack that allows a competitive searchers and builders market to construct and send blocks to proposers (validators), preventing the market from being monopolized by a few MEV-savvy validators. Builders using Flashbots cannot include sanctioned transactions. The remaining 49% of validators have not done so, so the network is currently uncensored. However, if these validators refuse to confirm blocks containing sanctioned transactions via consensus clients, it would constitute a 51% attack on the network.
The community is aware of these risks and has reached consensus on a range of solutions, including protocol-level proposer-builder separation, better privacy features to obfuscate whether transactions are OFAC-compliant, and platforms like EigenLayer that allow validators to attach MEV bundles to blocks, enabling them to still include sanctioned transactions. However, there are some differences in how to make the network natively censorship-resistant, beyond just achieving it through its geographic dispersion. Some lean towards further geographic decentralization of validators, accepting diverse validator preferences, while others support introducing additional incentives at the base layer, such as penalizing stake for censoring blocks, to curb censorship behavior. If 51% of validators refuse to confirm blocks containing sanctioned transactions, the simplest solution to restore decentralization is to start punishing staked tokens.
Summary
For skeptical anarchists, exploring cryptocurrency being threatened by surveillance states is a good way to help them understand why. Tornado Cash is a mixing service deployed on many blockchains that allows for private transactions. Recently, the US government sanctioned it and arrested a contributor in Belgium, setting a further precedent for banning technologies that threaten the state. The US Department of Homeland Security recently signed a contract with centralized exchange Coinbase to track funds on the blockchain as much as possible. Many countries have also passed anti-crypto regulations and made anti-crypto statements, sometimes even implementing outright bans.
In each case, states are trying to sanction cryptocurrency because it allows people to evade regulation, escape financial surveillance, and undermine fiat currency, all of which strengthen state power and existing rentier levels and distribution. Especially for inflationary countries like Turkey, the central bank takes action to ban cryptocurrency because it can be a tool for capital flight, further weakening the value of domestic currency. Other countries, such as Nigeria, ban cryptocurrency trading because it competes directly with domestic currency and operates outside of government regulation.
Due to the decentralized nature of cryptocurrency, crackdowns often have little effect. For example, despite being unsupported by service providers and blacklisted by centralized exchanges, the Tornado Cash smart contract on Ethereum cannot be removed or changed and can still be used through a decentralized front-end interface. Additionally, some of the countries with the highest adoption rates adjusted for purchasing power parity, such as Vietnam, Turkey, and China, hold a hostile attitude towards cryptocurrency, but they find it difficult to stop people from using it. Given this resilience, many anarchist organizations use Bitcoin addresses as an option for fundraising, which is particularly useful for donors who want to maintain some anonymity and cannot use mainstream fundraising platforms, and it also facilitates convenience for illegal activities.
Against this backdrop, the negative discourse on cryptocurrency by the left, such as environmental destruction and “scams,” is uninformed, overreacting, and repeating the government’s concerns. While cryptocurrencies can be used as speculative assets, people also value them for their permissionless, trustless, secure, and decentralized characteristics, and they open up space that the state finds difficult to understand. More broadly, we should recognize that usefulness is subjective, and how people use a technology and whether they use it depends on their own choices.
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