Verified Identity is a Dagger in the Black Heart of Crypto

I realized this way back in 2017, when I finally looked into crypto. KYC is the correct and best answer to preventing Sybil attacks while also proving decentralization. It doesn't even have to be good KYC. Just half-good. However good your consensus algorithm needs it to be.

You need identity, deduplication (one account per user), a legally enforceable contract with participants (not a smart contract, a real contract, the kind lawyers write), and, maybe, some kind of anonymity. Which isn't that hard. This is the way the world already works. Go form an LLC in Delaware, Wyoming, Montana, or wherever, and you'll see. You'll have a registered agent to accept service if you get sued, but otherwise, you are anonymous, even as the entity you form can enter into enforceable contracts.

The claim that AI has effectively ended KYC is hooey. Bullshit cooked up by crypto exchanges as plausible deniability while they continue to fail to comply. "But your honor, bad actors used fake identities created by AI to fool our KYC! There was nothing we could do!"

The exchanges are probably the ones who built those fake ID services. Same for all the ZK-proofed "your identity on a blockchain" nonsense.

Identity, and I mean legal identity, real identity that you can use to sue someone or throw them in jail, comes from the State. That's it. Without a credible chain of witnesses willing to take on the liability of verifying your identity, there is no identity. To have an identity, you need an authority to identify you. Exactly like a certificate authority, but for you as a private individual.

And no, your retina is not a legal identity. A network of trust is not a legal identity. The endorsements of friends are not a legal identity. If you want to know your legal identity, go look in your wallet. See that card there? That's your identity. Or a good part of it. In the eyes of the State, you only have one identity, and with supporting documentation and maybe your physical presence, it can be verified, with a margin of error well below 50%.

So why not use identity for consensus? Why not ask would-be participants in a mining network to get verified by a certificate authority? Then, instead of solving a hash or tying up stake, why not distribute blocks to verified participants by simple lottery or round-robin?

Using identity as a consensus proof is superior in every way. There is no need to consume a forest of energy, melt an iceberg, or tie up capital as stake. You can have a perfectly, provably, and enforceably distributed ledger, limited to as few participants as needed to decentralize.

You can have many such ledgers operating independently. A thousand little purpose-built ledgers scoped to a specific problem domain, each operating for the total energy cost of a refrigerator. No need for one ledger to rule them all. No need for a global, decentralized computation platform. Save your hashpower. Save your stake. If you can legally identify every individual participant in your ledger, you don't need those things.

The reason crypto protocols don't use identity to prevent Sybil attacks is that the overtly stated goal of crypto is to facilitate crime.

Crypto was created for laundering money, financing terrorism, and paying for sex, drugs, and human trafficking. So crypto can't use identity for consensus. Anyone operating a network would be prosecuted and unmasked.

Crypto shills like to sing the praises of crime by dolling it up in civil libertarian terms. What if you need to send money to your granny in Pakistan? What about privacy? What about free speech? What if you live under an oppressive, totalitarian regime? What if you're unbankable? What if you're LGBTQ in a country where the penalty is death? What then?

I have bad news for you, civil libertarians. Transferring large sums of money without a license is a crime. Speech where speech is illegal is a crime. Paying for drugs where drugs are illegal is a crime. Paying for sex is usually a crime. Paying for murder is always a crime.

So crypto cannot use verified digital identity to prevent Sybil attacks, do consensus, or authorize transactions. And crypto exchanges pretending to do KYC to control user access to blockchain protocols operated by lawless, anonymous strangers is absurd. Thus the dog-ate-my-KYC of AI identity fraud.

Anyone buying crypto as a speculative investment, or trying to build a lawful service on top of a crypto protocol, is paying a tax on crime, even if they don't benefit from crime.

So any non-crime use of crypto must fail, simply because the cost structure doesn't support it. Crypto cannot do micro-transactions. It cannot do games. It cannot do e-collectibles. It cannot be a communally operated ledger of licensing rights. As long as crypto is useful for crime, you'll pay the same transaction fee whether you're laundering money or opening a booster pack. The network doesn't care if you're ordering a hit or leveling up your Cryptomon. You'll pay the going rate for the most illegal thing the network can do.

Digital identity is the obvious solution to preventing Sybil attacks.

Digital identity exists now.

Crypto protocols that eschew proof-of-identity in favor of proof-of-waste do so to facilitate crime, which comes at an elevated cost to users, whether they benefit from crime or not.

Digital identity collapses crypto's usefulness for crime.

It's a dagger in the heart. A direct bridge to the very State, the rule of law, and regulatory compliance that crypto was explicitly designed to defeat.