Trusted Third Parties are Moral Hazards

Yesterday an exchange called Coincheck got hacked and lost $400 million worth of NEM, a token I’d never heard of. Woops! That sounds like a lot of money, but it’s just another line item in the long list of crypto hacks.

Cryptocurrencies get a bad rap for being susceptible to theft. Bitcoin &co function as bearer instruments, where transactions are pseudonymous, irreversible, and potentially quite valuable. But people get unduly worried about assets where the holder bears the consequence of loss. Cryptocurrency is no more prone to theft than any other item of value, like a bicycle or wallet or social security number. That’s why we try to protect these things.

You know what’s worse than an irreversible transaction where the holder carries the risk of loss? A reversible transaction where the holder doesn’t carry the risk of loss.

I’ve had my credit card info stolen. A lot. Sometimes it’s my fault, sometimes it’s the fault of JP Morgan Chase, Equifax, Home Depot, Target, the gas station, or the asshole who stole my wallet. Maybe I should be more careful about where I swipe my card, but the onus isn’t on me to do so. The card issuer offers fraud protection, which insulates me from the consequences of being a dumbass.

$190 Billion. That’s how much US merchants lose each year to credit card fraud. Risk doesn’t ever disappear; we just push the liability on to someone else.

When it comes to credit cards, the issuing bank wants me to swipe with reckless abandon, because they make money off interest on my outstanding balance. Intermediaries work for the customer. That’s why Ebay always sides with the buyer in the event of a dispute. There’s no such thing as a trusted third party that serves as an impartial arbiter of justice.

The creators of NEM have come up with a clever solution for Coincheck’s situation. They’ll update the software to flag any account that receives stolen tokens! Ordinarily, users would be hesitant to adopt a modification that ruins the token’s functionality as a bearer asset, but NEM can get away with it because the software is closed source and centrally maintained. Coincheck will come away from this disaster with the same lesson Ethereum learned from the DAO: Socialism for the rich and capitalism for the poor! Trusted third parties are great when they’re on your side.

See Also:
Stop calling Bitcoin hacks, “Bitcoin hacks”

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