I Can't Believe It's Not Butter

A Pointless Task

So it's the third time this happens and this time IBM is reported to work on a fiat based blockchain technology.

This time, let's be more specific and think hard on how a fiat blockchain could work, and as I'll show you, no matter what you come up with, it will eventually collapse.

Blockchain vs. fiat

In the bitcoin blockchain new money is created through coinbase, which is included at every block and its validity is part of the blockchain itself. Any node in the bitcoin network can validate a coinbase through simple programmatic rules. Presumably, a fiat blockchain means that the entire process of coinbase should be hoisted and put outside of the blockchain itself. Technically, when we trace through the transactions' history we'll end up at the first transaction for which no further validation can be done in the blockchain itself; some other mechanism is required to determine whether that first transaction (coinbase) is valid or not.

So this falls back on some central sever / authority for which we can validate the coinbase. Having solved Byzantine General's problem and then revert to a central server, what's the point of using a blockchain in the first place? Instead, a standard distributed database where everything is stored would suffice; no proof-of-work is necessary.

Nevertheless, let's facepalm further and continue this insane thought experiment.

The Central Server

So, we have some central server that validates coinbases. Presumably, a central bank will need to issue a lot of digital notes so the server needs a huge coinbase lookup table. At any time a customer wishes to withdraw cash from its checking account, the private bank may have to get the equivalent amount from the central bank. (In today's fiat system, each private bank has a central bank account with the fiat the bank owns at the central bank; this is the red vs. green money I talked about in my earlier article.)

Hacking the Server and Consequences

Let's say the coinbase is just a database with numbers. What happens if this database gets corrupted by either an insider or hacker, or perhaps both? This would mean that an enormous amount of fiat can be created and put into the blockchain. Let's do this thing under the radar and for a long time. At some point, the central bank will discover that someone has produced unauthorized notes. The question is: What happens now?

  1. The unauthorized notes are withdrawn. Basically, the unauthorized coinbases are removed from the database, but then you get a Lehman Brothers effect as these notes now can be anywhere and invalidate them would make it extremely dangerous for banks to own digital cash. This is precisely what happened with the securitization industry.
  2. Let it be. But this can happen over and over again and eventually the public will lose faith in central banks (for those who already haven't done so.) For physical cash the weapon the central bank can use is to make it harder to counterfeit, but with digital money it just requires numbers and knowledge to counterfeit; something that requires no advanced equipment such as color printers, special paper, ultraviolet tags, etc.


So in both scenarios people will lose faith in fiat currency and bitcoin wins.

Of course IBM understands this. People who work there are smart people. Therefore, the only conclusion I have is that the reporter was misled. Yes, IBM is researching blockchain technology, but they are not working on a fiat blockchain, because that would be a meaningless task.

Perhaps IBM would like to comment?


EDIT: What about that picture? Something I encountered when I used to live in the U.S. Replace Butter with Bitcoin and phrase the product as FEDcoin and you'll get the point :)