Group Co.
Cryptos as Market for Data Immutability
Traders Magazine Online News, April 24, 2019
Data Immutability is the basis of all functioning cryptocurrencies. Bitcoin aims to become digital store of value and a decentralized currency that competes with central banks. This will never happen if bitcoin’s transaction data can be easily altered on its blockchain. Ethereum was designed as a decentralized computing platform for executing smart contracts. It won’t work if its blockchain data specifying those contracts can be changed without permission.
In addition to functional transaction data, cryptocurrencies’ blockchain can also keep immutable “metadata”, data that is not related to blockchain functions. The most famous example is Satoshi Nakamoto’s metadata message in the Genesis Block of Bitcoin: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” (https://en.bitcoin.it/wiki/Genesis_block).
Of course afterwards people saved a lot of fun stuff to Bitcoin blockchain (www.righto.com/2014/02/ascii-bernanke-wikileaks-photographs.html). And Chinese netizens are using Ethereum metadata to fight state censorship (https://www.theverge.com/2018/7/24/17607690/chinese-internet-users-blockchain-share-censored-news-article-vaccines). We can also view “regular” functional transaction data in the blockchain as immutable metadata about crypto ownership.
Market price of a cryptocurrency reflects the cost of saving data into its blockchain. Taking Bitcoin as the example, the transaction fee users paid in Bitcoin for saving data, both functional and metadata, is about $3,500 per block (https://fork.lol/reward/fees). As each Bitcoin block saves about 1,200KB of data (https://fork.lol/blocks/size), the market price of data immutability of using Bitcoin’s blockchain is about $2.92 per KB at the time of writing. But how immutable it is after all? Fortunately market prices also reveal the cost of attacking crypto’s immutability.
“51% Attack” is the technical term of unilaterally rewriting blockchain data through gaining and maintaining a majority hash power of a cryptocurrency that relies on proof-of-work (mining). The cost of pulling off a 51% attack depends on the total network hash power of a crypto, the cost and efficiency of mining hardware, and the cost of energy in terms of electricity. It is estimated that excluding hardware and other fixed cost, the current daily electricity cost of 51% attack on Bitcoin is close to $6M (https://gobitcoin.io/tools/cost-51-attack/). In January 2019, a 51% attack was launched against Ethereum Classic (ETC): https://blog.coinbase.com/ethereum-classic-etc-is-currently-being-51-attacked-33be13ce32de
When demand for data immutability raises, users will acquire more cryptocurrency to spend on transactions that save their data into the blockchain. This will raise the price of the crypto, attract more mining activity, increase the cost of 51% attack, and make the crypto more immutable, which may further increase demand. On the other hand, higher crypto price increases the per KB cost of data immutability, which will naturally reduce the demand.
Market equilibrium is achieved when the price of data immutability clears demand and supply, and this price regulates which data becomes immutable. Data with relative high value-to-size ratio will be prioritized. For example: metadata containing important scientific results, international treaty files, high-profile financial and legal documents; and functional data related to issuing digital assets and high-value crypto transactions. Sensitive private data can be encrypted first and then saved as immutable data in the blockchain.
Data with relative low value-to-size ratio will be saved after high value-to-size ratio data, if any blockchain space left, or find a way to reduce its size before being saved as immutable. For example, supply chain data tracking your organic ribeye can be compressed by a trusted third party to make its immutability economical. By doing this, users trade off cost with immutability as the third party may negatively affect immutability through the data compressing process.
The long-run equilibrium of cryptocurrency as market for data immutability may look like the market of cloud infrastructure services, but with higher concentrated market share in the biggest cryptocurrencies due to the higher degree of incompatibility between crypto ecosystems. Although costly, you can move all your data and the related business activities from AWS to another cloud. But because immutable data cannot be deleted, they cannot simply be moved from Bitcoin to Ethereum, you have to pay again for a complete duplication on the second blockchain, which may stop users from switching platform in the first place.
Zhong Zhang is a Senior Economist at Bates White Economic Consulting specializes in market microstructure and cryptocurrency
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