The promise and impact of blockchain. Shortly analyzed.
We’ve heard a lot about Bitcoin and smart contracts lately. “Blockchain” more generally has been widely hailed as a “game changing” technology: Venture capital has poured 100s of million into start-ups providing services that either directly interface a certain blockchain (e.g. wallet services) and their interplay with the rest of the world (e.g. currency exchanges, payment services), or that pursue novel applications of blockchain-based solutions. As investment has grown, it has become apparent that blockchains can do so much store much more than just financial ledgers, and a number of industries are bracing for disruption.
And yet: only a very small circle at the center of the trend has any clear idea of what this disruption might end up looking like. Without a clear path forward for most people to begin to apply blockchain technologies to their own businesses, what is to say that blockchain isn’t overhyped? Maybe blockchain is the next Segway, rather than the next smartphone.
All indications point to eminent widespread disillusionment with blockchain, as has happened with other technologies. In fact, the trend of building hype followed by a disillusionment “crash” is a near-universal phenomenon in the modern developmental trajectory of technologies. According to the best predictions we have of this “tech hype cycle,” blockchain is just about to peak, before falling into the valley of despair.
While wildly optimistic predictions of the potential of blockchain technologies will soon be disappointed, the long term potential for blockchain, while un-sexy in comparison to the current hype, remains a good bet. Research and development investments will, overtime, be rewarded — even if perhaps not in the way we expect.
So where is the hype coming from, and what is the real potential behind it? Why do people attribute such disruptive potential to the blockchain concept? What are barriers to blockchain’s potential? What is the most likely path forward?
From my point of view: Initially, a huge part of Bitcoin’s appeal as the first successful blockchain system, was focused on the lack of government oversight in the system. For many, this was a Wild West of hassle-free work-flows: No know-your-customer rules, no transfer limits, no tax automatic withholding, etc.. Interested parties could pioneer new, easy ways of conducting business online. This new unregulated realm of possibility, however, did not last for very long. Regulators pursued money laundering and a number of other shady transactions as quickly as they could; regulations followed fast on the heels of the initial prosecution. For the law-abiding, this meant that their opportunity to experiment without regulatory restrictions had been effectively spoiled by a few bad apples. This is the new world of blockchain we find ourselves in now: a post-regulatory intervention middle phase. While these interventions, like the non-approval of the Bitcoin-ETF, have dampened the initial excitement many had about Bitcoin, it has not snuffed out enthusiasm for blockchain generally. In fact, interest in blockchain has — despite new regulations — continued to grow. This indicates that it was never just the carte blanche of the regulation-free system that lead to blockchain’s appeal. There must be something more.
Perhaps then, it is one of the inherent attribute of blockchain systems that makes them so appealing: it’s a persistent (i.e. tamper-proof) append-only database, running on an open, distributed network, that does not require trust, but rather establishes its consensus on the fly. Each of these attributes, taken on their own, have been available for long. But their unique combination in blockchain systems lead to the emergence of a new wave of solutions for old problems. This enables anonymous network participation and guarantees a baseline of transparency in the system. Such a network has an inherent “grassroots” appeal, emphasizing inclusiveness, openness, and equality. In our world of shadowy transnational corporations and government secrecy, such a network system has a latent subversive cultural and even political appeal. This is only one of the reasons why some people have looked to blockchain as an opportunity to entirely bypass middlemen. This promises less friction and with it, lower costs, as well as faster systems. But as with the case of Bitcoin circumventing burdensome regulations: we must expect eventual government or legal intervention. We likely cannot have decentralized services operated by anonymous and trust-less middlemen on some globally distributed network without running into problems with the state — at least not with current rules and regulations which obviously can be changed.
Finally, a lot of recent proposals of blockchain systems actually drop some of the properties that originally made blockchain so appealing in the first place, e.g. permissioned and private blockchains which are no longer free for participation and which store encrypted and non-verifiable data, or are centralized using trusted nodes or a central operator.
So what is left to be excited about? Isn’t it essentially technology to create trustless middlemen for all types of services, ranging from payment and clearing over to automated execution of instructions via smart contracts, and beyond?
I argue that a major impact of blockchain technology is not just the promise of trustless middlemen, but the fact that new, re-thought solutions to old problems often either seem or promise to work better than existing solutions and early adopters flock around them. Just think of the ease of Bitcoin’s transactions over international money wires, or the promise of automatic contract clause execution in Ethereum, and the promise of sub 1-day property transfer using a blockchain-based title registers and transparency in health services.
This leads to two things: Firstly, it attracts serious talent around the new opportunities, bringing in new ideas and approaches to old problems. People who never would have ventured into e.g. storing health records or land titles contribute to clever solutions in industries they would have never touched before blockchain. Secondly, and I think at least equally important, it disrupts the space of existing players in the market: The wave of blockchain technology not only promises to bring new technological solutions, but has an equal promise to re-think and re-standardize existing processes, remove friction and lower costs, involving talent from outside the sector. In the end, most customers do not care what type of database their data is stored on, as long as they are happy with the service provided. Blockchain provides the direly needed food for thought for traditionally slow-moving industries — and in the end, some services provided from a central entity might still end up using a blockchain-inspired mechanism under the hood.
What do you think? Leave your comment and recommend my story. If you or your organization need support to get your head into the blockchain game, check out our webinars and consulting services over at alatus sigma consulting.
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Special thanks go to Sara Messelaar for helping me to sort through my thoughts.