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Blockchain is a solution looking for a problem

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    Francois Badenhorst

    Francois Badenhorst Business Editor, UKBF & AWEB Staff Member

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    Right, it’s time to talk about Blockchain. The technology that underpins Bitcoin (and other cryptocurrencies) has been hyped ad nauseam. So why hasn’t the technology managed to stick?

    Think about blockchain as a ledger. But instead of one that only you own, it’s open to everyone. As the programmer Carlos Beltran explained, it’s a record of transactions that doesn’t just reside in one central server: a digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly.

    “A copy of it lives on every node of the network,” wrote Beltran. “And every time transactions are added to this record, it’s broadcasted to everyone, so everyone gets the updates. Once something is recorded, it cannot be taken back — it’s permanent.”

    This is nifty in the case of Bitcoin because it prevents people from spending money fraudulently. And in principle, given the cryptocurrency’s anarcho-libertarian ideals, it removes the need for any central busy-bodies to verify and control the network. In other words, it’s decentralised and near impossible to hack.

    (Side note: There’s some debate over whether ‘miners’ are a de facto central authority, voiding this whole concept - but I’ll let you fall down that rabbit hole in your own time.)

    While Bitcoin has struggled to shake its clandestine reputation, blockchain technology was rather quickly recuperated into the mainstream. The financial services industry and venture capitalists have thrown cash at it with wild abandon: $1.3bn has been invested in blockchain and blockchain adjacent startups in 2018 alone.

    But this hype train didn’t start this year: its momentum has been building for some time. But why? Well, the technology can be applied to all sorts of uses. It can create transaction records for anything of value in a decentralized way.

    And there have been all sorts of mooted applications: payments, legal documents, escrow, even voting systems. But still, despite its purported elasticity, nothing substantial has eventuated.

    “The thing is, if you go the whole kit and kaboodle - bitcoins, blockchains, proof of work - you see it’s an absurd waste of energy to replace something that works pretty well anyway,” said Peter Davey, a regulatory and legal advisor to financial sector companies.

    The energy Davey refers to is literal energy: blockchains, like Bitcoins, are grossly inefficient. As the entrepreneur Kai Stinchcombe observed in a widely circulated Medium post: It would take 5,000 nuclear reactors to run Visa on the blockchain.

    And as a payment system, it severely lags behind the systems we already have. “Visa can handle 60,000 transactions per second, while Bitcoin historically taps out at seven,” wrote Stinchcombe. “There are technical modifications going on to improve Bitcoin’s efficiency, but as a starting point, you have something that’s about 0.01% as good at clearing transactions.”

    Basically, blockchain technology has a scaling problem. But according to Davey, it has been useful as a “burning platform” that spurs incumbents to improve their services.

    Case in point: the almighty tussle between Ripple and Swift over inter-bank transfers. Swift is the interbank messaging service that handles half of the world’s high-value cross-border payments. It’s run as a cooperative by 11,000 member banks.

    Bereft of competition the service stagnated, as Swift’s head of banking admitted to the FT: “It is no secret that correspondent banking is a 1998 model and we are busy addressing that, bringing it to a 2018 model”.

    It’s the competition from Ripple, a blockchain startup aiming to revolutionise cross-border payments, that finally spurred Swift into adding improvements to its network. “Blockchain is the stalking horse that leads to people clean up their act,” said Davey.

    It’s a kick up the backside, then - but despite Ripple’s hyped partnerships with over 100 financial institutions, there’s little sign that it can surpass Swift’s muscle.

    Indeed, even if it did manage to surpass Swift, there’s the capacity problem of storing huge amounts of data in multiple places forever. “It doesn’t feel like the leanest solution to data storage, that’s for sure,” Davey said.

    The futurist Roy Amara famously said wrote that we tend to overestimate the effect of a technology in the short run and underestimate its effect in the long run. Maybe Amara’s law will apply here, too.

    Time will tell, but for now it’s rather underwhelming. The tech, it seems, isn’t ready. Each use case, as Stinchcombe wrote, amounts “to a set of contortions to add a distributed, encrypted, anonymous ledger where none was needed”.

    “What if there isn’t actually any use for a distributed ledger at all? What if, ten years after it was invented, the reason nobody has adopted a distributed ledger at scale is because nobody wants it?” If that’s right, then boy, has this been a waste of time and money.

    This article originally appeared on AccountingWEB.

  2. Noah

    Noah UKBF Ace Free Member

    1,249 314
    Thanks - useful overview. You're probably disappointed that the bitcoin fanboys haven't hunted you down yet!
    Posted: Jul 10, 2018 By: Noah Member since: Sep 1, 2009
  3. Inva

    Inva UKBF Regular Free Member

    370 62
    Nice to see there are people who don't believe the hype. Everything is hyped to the max these days, feels like common sense is dying.
    Posted: Aug 13, 2018 By: Inva Member since: Aug 10, 2018
  4. Karimbo

    Karimbo UKBF Ace Free Member

    1,788 188
    hype or not, if you bought bitcoins for pennies and sold them later for tens of thousands later on, it's very real for you.

    Problem with bitcoin (and all other blockchain currencies)
    More expensive than use a bank (5-10% fees for bitcoin)
    easy to lose all your money at the click of a button, or loss of your password, laptop
    A decimal point in the wrong place can put all your money at risk.
    Doesn't replace real world currencies, a business taking bitcoin will want to convert the bitcoin into hard currency, so it doesn't have its only fully enclosed eco system.
    Posted: Mar 6, 2019 By: Karimbo Member since: Nov 5, 2011