Why the ByBit Hack Counterintuitively Proves the Utility of Public Crypto Networks Like Ethereum
The $1.5B theft of ETH from ByBit and the calls for Ethereum to roll back the chain to undo the hack is a great teaching moment on why public blockchains are immutable ledgers. The fact that a theft of this magnitude — one of the largest in human history — can happen and allowed to stand is a feature of the technology, not a bug.
Why? Because the irreversibility of what happens on a chain like Ethereum is one of the greatest trust-building mechanisms in the world today. It insures the scarcity of native assets issued on top of it, like ETH, and the predictability of smart contracts that facilitate important activities, like DeFi.
Scarcity and predictability are important building blocks for a more resilient and global digital economy. We know this because they were foundational to the physical economy for millennia. Without scarcity, there are no objective stores of value like gold. There are only subjective ones like fiat currency. Fiat money has its benefits, but there is a reason why almost every fiat currency that’s ever existed is now worthless and gold is trading at an all time high. Gold abides by the laws of nature while fiat money follows the laws of man. Nature is more infallible.
It’s also a lot more predictable. This is going to sound a little absurd, but one of the best things about nature is how the laws of physics and chemistry don’t change. Hydrogen and oxygen combine to form water and gravity causes objects to accelerate at 9.8 m/s2 at the earth’s surface. Without that predictability, there’d be no skyscrapers, airplanes or iPhones. There’d be no advanced civilizations or economy.
Today, the economy is increasingly digital. But digital has both a scarcity and predictability problem. Bits of data are the opposite of scarce. They can easily be manipulated, copied, changed, or deleted. This malleability is highly convenient — credit card payments are easier than cash and Google Docs is friendlier than a typewriter. But it’s problematic from a trust-building perspective. Card payments can easily be blocked or reversed. Digital documents — like an important news headline — can be edited, forged, or deleted.
So what to do? One solution is to put the digital economy in the hands of large corporations and governments and hope they do the right thing. Hope that governments don’t print too much money, even though doing so with digital money is trivially easy. Hope that corporations don’t discriminate against certain users, censor payments (or news articles) they don’t like, and charge excessive fees, even though doing all of those things is both easy and profitable.
The other option is to invent a technology that gives digital items, be they units of money or words, physical properties such as scarcity, censorship-resistance, and predictability. This is what Bitcoin achieved. The fact that it’s now a $2T asset and gaining adoption at the geopolitical level proves these features are desirable.
Other chains like Ethereum have expanded this functionality to a broader range of assets and activities. A natively issued cryptocurrency like ETH and a properly written smart contract like the ones used by Aave allow for a kind of predictability that doesn’t exist elsewhere in the global economy. The more predictable the financial infra, the more we can tie other types of activity to it. You wouldn’t want to make a billion-dollar sale using a payment method that could easily be reversed after the deal goes through, in the same way you wouldn’t build a skyscraper on a planet with unreliable gravity.
Crucially: scarcity and predictability have their downsides. They can result in bad things happening to good people and there being little to do about it. Gold can be lost or stolen. Some significant amount of all the gold that’s ever been mined lies at the bottom of the ocean, and an innocent victim is having their jewelry stolen right now. The same is true for other universally accepted stores of value like fine art. But nobody ever said “The fact that stolen gold can’t be replaced by making a phone call is a fatal flaw” or that “we should stop treating Michelangelos as valuable because they damage easily.”
Nobody ever said those things because saying them would be stupid. Gold being irreplaceable and fine art being vulnerable is what makes them valuable in the first place. We accept the bad because it’s a precursor to the good. But smart people, including experts in the crypto industry, are saying similar things about the stolen ETH. They are saying Ethereum should roll back the chain and undo a portion of its recent history because innocent people were hurt (and North Korea the likely beneficiary). They are further saying “if public crypto networks don’t have an “undo” button they’ll never get major adoption.” They are saying these things because they still think of blockchains as the evolution of financial networks like credit cards.
What they should do is start thinking of them as an evolution of the physical world, a marriage of the best of nature (scarcity, predictability) and the best of man (programmability and innovation).
Ethereum should not roll back the chain. The fact that a hack like this has happened but nothing will be done about it at the infrastructure layer is the best advertisement for why a lot more human activity should move on chain.
Lastly, while Ethereum itself should be maximally irreversible, other assets issued on top of it, like stablecoins, and infrastructure tied to it, like Layer-2 networks, don’t have to be. Skyscrapers have elevators, and an L2 for certain types of activities could have an undo button. But such a button is only useful if the underlying network is as predictable as the laws of gravity.
