There have been many proposed use cases for blockchain technology; some of them logical, some of them harder to justify. Fortunately, the most legitimate use case for blockchain is quite simple and applicable in every business scenario — facilitate digital transfer of value better than current systems.
Let’s start out by understanding where we are at in terms of transferring value, how we got here, and the issues that are in need of solutions that blockchain can provide.
A trade is a simple thing. You want something, I have that something, we can make a deal. Before mail, phones and the Internet, we’d do all these trades in person. One-to-one, peer-to-peer. We would physically exchange goods, and those trades were final. You would physically possess what you traded for, no reversals (unless otherwise agreed).
We quickly learned that making fair trades was a lot easier if we had a way to numerically represent value. After all, there was no guarantee that both traders had physical assets of approximately equal value, or an equal desire to trade them in the first place. Originally, due to its scarcity, sturdiness and general appeal, we used precious metals for this purpose.
There was a general agreement on the value of these metals, and everyone had demand for them. I could pay for some bread with a few coppers and the baker could then spend those coppers on whatever they pleased. An economy is created because everyone is able to trade with everyone through the use of a common asset.
Because these precious metals are physical assets, these trades are easy to finalize. One person hands over the coppers or gold, the other provides the goods or service, and business is completed. No messing around. You can’t physically undo the transaction (without theft at least).
A few people wised up and realized that with exclusive access to precious metals, they could create more ‘value’ and have the power to buy whatever they wanted. If everyone has already agreed that 3 coppers are the standard price of a loaf of bread, you’ve got an easy future ahead of you if you can just make 3000 new coppers.
Eventually, we replaced cumbersome precious metals with legal tender, cash in the form of banknotes and coins, on account of it being easier to carry around and calculate value with. Since cash is still a physical asset, trades using cash still provide finality. Unfortunately, this transition introduced an even more accessible exploit for those with the power to create more of this asset.
Keep in mind that cash is only representative of value, it lacks intrinsic value. When you print more banknotes, you do not actually create additional value. Value is determined by demand, so increasing supply without an equivalent increase in demand simply makes everyone’s money worth less.
In this process, called inflation, the missing percentage of value is shifted to those that control the newly created supply. Since the new supply is still accepted as legal tender, this mechanism — when left unfairly controlled — siphons real value from those without control and hands it to those that do.
This is the first problem that blockchain provides the tools to solve. By decentralizing control over the creation of new supply, we can prevent inflation from being exploited to extract value from those without that control.
The next leap for our economy was to go digital. If you are already transacting with something that is only representative of value, it’s not too much of a stretch to think this can be done without an actual physical asset. Out of necessity in such a case, there needs to be a condition that the supply of the digital asset is safeguarded, alongside the record of transactions.
Let’s examine how this process happens today. I want to place an order with a company for a product. My bank has a record of my balance. I request that an amount is sent to the retailer to pay for the product. The bank deducts the value plus a fee from my balance, and the product’s sale price is sent through the system to be added to the retailer’s bank balance. They send me the product, our business is concluded.
This is quite a few additional steps from where we started. Instead of being able to hand over the product’s value in cash and physically finalize my trade in a peer-to-peer manner, I was required to do a few new things. These things introduce new drawbacks.
Firstly, the trade is no longer peer-to-peer. If I require the use of digital infrastructure to send a digital payment, I need to use the services of the private entities that have the required infrastructure. A bank or payment processor can facilitate the transaction, but we need to pay for that privilege. Fair enough, though it should be considered that limited competition means these fees tend to be exploitative by nature.
Secondly, it is impossible for me to make that payment without the stamp of approval from the entity responsible for processing it. If they freeze my account, claim I have no balance, or just decide to prevent a specific transaction from happening at all, there is little I can do about it.
As we progress further into a digital age, more payments happen digitally, and this becomes a substantial risk. This risk is present regardless of malicious intent; the centralized entity acts as a single point of failure. Human, hardware, network or any other errors can still prevent an individual from being able to make payments. It doesn’t matter how urgent a payment is to that individual, the consequences and user experiences are the same.
This is the second problem that blockchain can be used to solve. By making the ledger publically verifiable and decentralizing control over the validation of transactions, we can, in essence, return these transactions to a peer-to-peer level. In effect, there is no single point of failure, no trust is required, and fees can be minimized.
In our jump to digital value transfers, we also created a new issue. There is no way to know or trust that any given payment was really finalized. No physical asset changed hands, so there is no physical ownership or subsequent verification.
I do not have access to my bank balance directly, nor does the other party in a trade. The infrastructure is outside of our control. Reversing or manipulating transactions is a simple matter; like changing numbers in a spreadsheet. This reliance on a centralized entity is what creates the trust component. As is the case with inflation of supply, consumers are required to trust a system that is stacked against the consumer.
Without the guarantee of transaction finality, there is always the risk that a transaction may fall through or be undone entirely. Perhaps you sold an item, received payment, dispatched the item for delivery, and then the payment was negated. You are now dependent on third-party arbitration or goodwill to see a fair outcome. No guarantee of finality results in an unstable and often unfair system. It can be summarized that a fair digital economy cannot be sustained on a centralized platform.
This is the third and final problem that blockchain may be leveraged as a solution for. Until this point, digital payments required third-party infrastructure, which negates finality due to the possibility of transaction reversal. If we can decentralize control over a public ledger of transactions and prevent that ledger from being tampered with, we create an environment in which finality can be guaranteed in a digital form.
Over the last few years spent learning about blockchain and cryptocurrencies, one thing has become rather apparent. Lots of blockchains are trying to solve the former two problems, but have failed to even consider the third. Finality is often an afterthought, sacrificed in favor of misleading scalability.
It is my belief that decentralization is necessary, valuable and beneficial to every participant of any economy. It prevents a minority group of corrupt or selfish actors from being able to influence or manipulate the system. It’s hard to place a value on such a thing, though by nature it is more valuable to the average consumer than it is to these entities.
On the other hand, the value of finality is known. There is a clear and defined benefit to a finalized transaction. It removes substantial risk, the kind of thing you usually need insurance or legal support for. At the very least, the value of finality is equivalent to the value of those expenses designed to negate risk; a substantial sum.
The most noteworthy and world-changing thing that blockchain can do to disrupt and replace our existing economic infrastructure is not to simply reduce the trust component; it is to decentralize so that the finality of a physical, peer-to-peer transaction may be mirrored in a digital form.
For this reason, it is my perception that a blockchain that fails to provide finality has failed right out of the gate. Without absolute finality, there is no guarantee that a transaction is irreversible, so any blockchain without it is essentially unfit for purpose as a tool for transferring value digitally.