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!”)