My professional opinion as a blockchain researcher: I don’t see the point (yet)

I’ve spent the last 15 months researching the implications and possibilities of blockchains and related “distributed trust technologies” from a business and societal point of view. Sadly, I have to say that I don’t quite get the hype, as much as I’d love to believe in a technological revolution that democratises the world economy.

(NOTE: I’ve edited this text a bit to be clear that I’m talking about public blockchains. Private blockchains are a different matter, and they will have applications in e.g. automating many transactions. That said, the effects are hardly revolutionary, at least in the short term.)

As it stands, public blockchain is very much a kludgy solution looking for non-existent problem, namely lack of trusted intermediaries in finance and accounting.

Unfortunately for this central value proposition of blockchain, there is no lack of trusted enough intermediaries in the financial/accounting sector.

Very few people outside so-called crypto-anarchist community are opposed to trusted intermediaries as a matter of principle, and outside this (admittedly vocal) minority and those who for their own personal reasons want to believe in this scheme, I seriously doubt there is going to be a huge market of people who are willing to pay a premium (in time, effort or actual valuables) just for the sake of avoiding one sort of intermediary, only to trust the transactions to a code that may or may not be transparently accounted for.

For who among us can honestly say “yes, I am capable of reviewing the code behind blockchain applications I’m using and I have personally done so to make sure I’m not being scammed?”

How can the people who are now willing to trust their savings to blockchain technologies  be sure that the code and its underlying governance structures (that is, how it is being developed and modified) are in any way better than at least nominally democratically governed systems – with at least some possibility for recourse if things go sour – they want to replace?

To me, it all seems another gold craze, stoked not only by the usual crowd of techno-babblers keen on latching on the latest buzzword, but also by certified wingnuts from the long-discredited hyper-libertarian Austrian school of economics, kept buoyant by half-baked comparisons to “unreliable” “paper money” (which is nevertheless very effectively backed by the government’s universal tendency to require said paper money for taxes, not to mention the inconvenient fact that if societal trust erodes sufficiently for paper money to lose its value, it’s highly unlikely an arbitrary string of ones and zeros in an arbitrary hard disk somewhere would fare much better), spotty comparisons of current economic system to few exceptions where hyperinflation was allowed to run rampant, and perhaps most of all, by simple wishes that the persons currently propping up the belief in blockchains will not be the last ones who are blinded by the latest buzzword and get-rich-quick scheme.

Please do not get me wrong. I believe that in the long run, crypto-enabled distributed trust technologies could possibly have significant role in enabling micropayments and microinvestments, effectively by reducing transaction costs related to distribution and bookkeeping. There may also be some very interesting applications in governance and organisation of human work, and these initiatives ought to be followed more closely. Furthermore, private, permissioned blockchains are already quite useful for e.g. automating transactions.

However, the crypto-enthusiastic community loudly ignores that 1) there are absolutely no reasons the current banking system couldn’t reduce its own transaction costs enough to compete very effectively in these lucrative sectors, and 2) the bog standard public blockchain with its Proof of Work scheme (e.g. how Bitcoin burns electricity) is certainly not going to cut transaction costs enough, as throughput rates are simply not even within two orders of magnitude from what is needed. Case in point: a Bitcoin developer conference just announced it won’t be accepting Bitcoin as a means of payment, because it’s too slow and the transaction fees are too high. 

So we will inevitably end up with some variation of Proof of Stake protocol – where we will simply have to trust some users more than others – just because Proof of Work, where we don’t have to know or trust other users, is absolutely ridiculous waste of resources and will always have trouble scaling up.

See, for example, how Directed Acyclic Graph (DAG) “tangles” are proposed to work. And once we go down that route, it will become increasingly hard to avoid asking the question: since distributed computing in this sort of record-keeping is always going to be less efficient than centralised computing, what are the precise reasons we should not go the whole route and designate certain nodes as … trusted intermediaries?

So we’ll end up with what is basically a buzzword-enhanced database solution with some redundancy and consensus algorithms built in. These are not new, PAXOS consensus algorithms debuted in 1989 – and there are Reasons why they haven’t been used very much. Namely, performance, and the fact that there is no pressing problem these would solve.

Crypto applications will certainly be useful for verification of various things (again, these are not exactly new ideas) and I could foresee a micropayment and alternative finance systems that could well take off, provided the backbone is something else than blockchain as it is. (My money at the moment would be on DAGs, as both Bitcoin and Ethereum still seem to have grave problems scaling up – but it’s even more likely that someone will come up with something better than current DAGs.) This could develop into a microinvestment vehicle of some sort, and unlocking the investment potential of the world’s poor could well make some people very, very wealthy indeed.

However, there are also Reasons why such “penny stocks” have been regulated everywhere for decades if not centuries: they have always been fantastic vehicles for scamming the credulous. Cryptography is not some magic free lunch that totally changes the rules in investing and finance.

Feel free to call me a luddite or whatever. It’s just that I’ve been studying the possibilities of blockchains for business for over a year now, and while it is certainly possible that I simply lack the imagination (or chutzpah) necessary for bold proclamations, I just don’t see the possibilities the marketers seem to see.’

My advice to all those who are interested in blockchain systems is this: think very carefully whether the problem you are interested in solving will truly be easier to solve, or can be solved better, by distributing the database to the users of the database. If the answer is yes, and if you can also remain fairly confident that the solution will not infringe on privacy or financial regulation, and if you have money to spare, then by all means go ahead and experiment with blockchain technologies – though keep in mind that at this stage, everything is so rudimentary that systems will have to be built from scratch (not a good idea, usually) and that technologies can change abruptly. At this moment, there are already some fairly well established private blockchains, though.

Interesting things are more likely to appear in the smart contracts field, and technologies like blockchain are almost certainly going to be used both to enhance existing systems and to develop new kinds of services that are still hard to envision in detail. Some interesting developments that may point a direction to the future include automating some aspects of insurance markets, such as automating claims processing in more straightforward cases (e.g. when a flight is cancelled and customers need to be refunded) or even selling of insurances automatically based on mutually shared financial data. However, these technologies are still very much immature, and while early adopters could potentially benefit, the risks are also significant.

Very good reads on the topic are becoming more numerous than it is possible to keep track of, but here are some of the best ones I’ve come across lately.

Preston Byrne: The Problem with Calling Bitcoin a “Ponzi Scheme” (“This is no pyramid scheme – our model is the trapezoid!”)

Preston Byrne: The bear case for crypto, part I (the other parts are good too)

Webb Reports: Bitcoin: The world’s first decentralized Ponzi scheme

Someone wants to create “legally binding agreements” for consensual sex, and store them in … blockchain, because of course they would. 

One company found its valuation quadruple simply by adding “blockchain” to its name. No bubbles here, nossiree!

Governments are finally beginning to do something, and it doesn’t bode well for the prices of cryptocurrencies


About J. M. Korhonen

as himself
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20 Responses to My professional opinion as a blockchain researcher: I don’t see the point (yet)

  1. Pingback: New top story on Hacker News: My professional opinion as a blockchain researcher: I don’t see the point (yet) – Tech + Hckr News

  2. Pingback: My professional opinion as a blockchain researcher: I don’t see the point (yet) – posted at February 12, 2018 at 03:00PM by ericdanielski – Startup News 2018

  3. “there is no lack of trusted enough intermediaries in the financial/accounting sector”
    Nice idea, but unfortunately only true for about 15% of the world population, and if you don’t need to cross international borders.
    As soon as you leave these regions you end up with carrying gold – which is hard to get on the one end, and even harder to sell on the other end – in your backpack through an area full of heavily armed bandits, or pirates.

    • Brian Woodring says:

      I agree that this is the most promising avenue of inquiry for blockchain – conducting financial transfers and transactions in places where institutions are weak or untrustworthy on a day-to-day basis (unlike our FI which are untrustworthy in the macro sense, but effectively very trustworthy in a transnational sense)

    • Yes, even Bitcoin will definitely have its uses, and cross-border value transfer is definitely one of them. No argument there.

      However, what might happen in the longer term is something similar to what has already happened with supposedly “leapfrogging” renewable electricity: despite claims that people in poor countries could leapfrog over the electricity grid by installing things like solar panels, in actuality up to 90 percent of people who actually have used such systems now want reliable 24/7 grid electricity.

      • BTW there are already startups focusing on cross-border money transfer with fiat money. The way they do it is simple: they credit you internally from their own funds, and wait for the transaction to occur.

        This gives you instant financial transfers with all the benefits of using actually regulated currencies. Yes, there are transaction fees, but it seems that all blockchain-based services will also have them.

  4. Your argumention on POW vs POS being mutually exclusive is outdated.
    You can stake bitcoin in a lightning channel for fast and scalable transactions, while the POW blockchain provides trustless arbitrage. Layered approach, best of both worlds.

    • Of course they are not mutually exclusive. However, when you begin to increase the percentage of PoW, you are in effect going along the route towards less decentralisation.

      I suspect that this will eventually lead to the emergence of new trusted intermediaries, because people find a trusted third party simply very useful to have simply for throughput reasons if nothing else (and there are other good reasons as well).

      My earlier piece about how I think this might play out is here:

      View story at

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  6. victorriparbelli says:

    The crypto space is definitely a pile of BS at the moment and I’m sure 99% of the current tokens will go to zero.

    But I think this is a very static view of the world. In my opinion you are completely missing the data privacy aspect which I think will be the driving factor behind blockchain adoption. GDPR for example presents many problems that seems almost impossible to solve without some sort of decentralised layer that can enforce itself.

    • Thanks for your comment! Could you perhaps elaborate a bit why do you see data privacy as a central driving factor behind blockchain adoption? So far our research into the impacts of GDPR in particular would suggest the opposite, in that public blockchains will be very hard to square with its demands for special storage of potentially privacy-infringing data and the requirement for people to have the option to exercise their right to be forgotten.

  7. I think there will be a series of shake-outs that will allow a mix of the characteristics* of DLT to filter into different products, as needed for their particular use case.

    Tokenization is a means to an end:
    I think cryptocurrency coins fall into four categories:
    1. Store of value – this is like regular money (fiat currency)
    2.Access to Anonymity – “I have a bunch of fiat that I need laundered or I have a need to skirt currency flight laws in my country or what I’m doing is illegal and most governments have figured out ways to track bank transactions back to me.”
    3. Access to Platform – think of IOTA where the coin exchange is autonomous among network participants (IoT) using coin that the participants have given value as a way of keeping “score” within a finite process using a distributed ledger (doesn’t carry the heavy battery and computing load of constant comm to a centralized server). Also, think of Ether and smart contracts.
    4. Alternate currency – this is like how many underdeveloped countries will transact business in USD as well as their country’s currency. The users want to transact in a true market value currency rather than one that can be manipulated by politicians.
    All the cryptocoins in circulation ( more than 1300 so far ) are subject to speculators. I think of them as people hoping that somebody’s business case for needing one of the above characteristics is higher than the current price.
    Speculators are not likely to buy & hold. The reality is that all tokens will level out to market value over time. Some of the tokens will have a very small “value” once the speculators bail out.

    I like the Access to Platform coins because (if their distribution is capped), the business case value will be pretty good. As more and more entities arrive at the same conclusion, the price at the door to the dance goes up. At some point in the future, its value will rise only when business cases overcome the current price. At some point in the future, its value will fall when holders realize that they don’t need the coin to achieve the benefits they want or don’t get the benefits from the platform they thought they might.

  8. Sir imagine a POS token airdropped over Afrika staking 10% a year on people’s cell phone. It would be revolutionary and any price fluctuations would still be very much prefered over the countries central banks shenanigans and bought off politicians monopoly. A continent crippled by corruption would see it free from its warlords shackles by a few lines of code.

    Once you see it it can not be unseen.

  9. Pingback: Blockchain / Cryptocurrencies | Steven A. Guccione

  10. I was going to write a blog called Leveraging Trust. My take was that if there is a natural owner of a database and we can trust them we don’t need a blockchain. Thank you for saving me the time and writing it for me. In terms of the unbanked referred to in a comment above, we have seen trusted intermediaries in adjacent space facilitate transfer of value. For example Safaricom runs MPesa in Kenya, an added bonus is that it is accessible, has low volatility, low transaction fees and instant transfer of value, no blockchain in sight.

    • Thank you!

      The more I look into this the more I understand why trusted intermediaries have risen in the first place. Immutable ledger is a very poor substitute to trust and legal responsibility, because immutability is not really what people want; they want safety and surety, and particularly for new platforms, that includes assurances that if something goes wrong, they can get their money back – by legal action if necessary.

      Many crypto enthusiasts are not that good at understanding people and their motivations, and tend to assume that everyone is as technologically competent and at ease with technology as they themselves are. They are typical early adopters who see a neat technology and are eager to try it out, even at the risk that their investment will be lost. But the majority don’t think like that and never will. For this majority, having a telephone number for customer service is a must, as they are afraid that if they use the new service, they make a mistake and lose all of their money. These people are never going to wholeheartedly adopt services where there are by design not even a chance of correcting errors and mistakes, no one to complain to, and no legal recourse in the worst case.

      I suggest that everyone interested in designing “trustless” anonymous systems first takes a hard look at any widely used and accepted existing system. Take a look at the eBay web site for example: once you know what to look for, you can’t help but notice the numerous small details the eBay developers have included over the years to assure the potential customers that buying something is a safe experience and you will get your money back if something goes wrong.

      In contrast, in proposed decentralised and anonymous marketplaces like OpenBazaar (which I nevertheless believe to hold some promise after all, if only for drug trade), there are no practical recourses if someone abuses the trust. Before we have human-level and incorruptible AIs, blockchains cannot reliably cross the digital/physical divide if, for example, the seller does deliver something but not what had been promised. And since OpenBazaar users can be anonymous, the feedback mechanism doesn’t really work at all.

      Ironically, this is likely to lead to a centralisation in decentralised world, as no one in their right minds would prefer to purchase from an unknown seller if there is someone with high positive feedback scores selling the same thing. This means that barrier to market entry will be high, and the system will reward early adopters.

      Similar dynamic is likely in other decentralised services as well.

  11. If you want an excellent (although very long and philosophical) article about why blockchains are good, try

    He’s not even a Libertarian, and doesn’t argue from the idea that trusted third parties are necessarily bad.

  12. Pingback: Weekly Links & Thoughts #158 |

  13. Pingback: News: Real Estate, Risk, Economics. Feb. 18, 2018 | PropertyPak

  14. Pingback: 2018, märts – Bitcoinid ja shitcoinid

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