Blockchain doesn’t mean trustable

Blockchain has a few characteristic that lower the cost of value exchange:

  1. distributive system
  2. immutable record
  3. traceable transaction

And because of these features, every transaction stored on blockchain must be true and no one can change the stored record.

In the simplest way to explain this, every time when anyone want to make a transaction, that person has to broadcast this transaction to all people in the same network, some people will validate that if this is a valid transaction. After the validation, the transaction will be recorded into a database and all other people will copy a set of the updated database. If someone wants to change the database, they have to change everyone’s copy to make sure there is no contradiction.

And therefore, in most of the cases, all transaction must be true. But,

IT DOESN’T MEAN THAT EVERYTHING MUST BE TRUE!

Let’s take a look at the following example:

  1. Peter created a record that he has USD $100
  2. Peter transfer USD $50 to Sam
  3. Mary validated the transaction making sure that there is no double spending and Peter account has more than USD $50
  4. The record is validated and recorded into a database
  5. Now everyone know Peter has USD $50 and Sam has USD $50

The tricky part is that, what if Peter doesn’t have that USD $100 at the very beginning?

Blockchain works perfectly with cryptocurrency, because not like USD $100, 1 Bitcoin is recorded into blockchain from the point it has been created, but when we need to apply blockchain technology to physical asset, it has to digitalize the physical asset into some token on blockchain first, and then the transaction can be done at a very low cost. And all the transaction after the digitalization must be true.

A lot of people are doing stuff like putting certification of University on blockchain to solve the fake certification issue, putting the copyright of photos on blockchain to solve the intellectual property issue. After reading this, do you think they make sense? Do you think blockchain technology can really help?

And to answer the very first question, why Blockchain can lower the cost of value exchange?

It is because the cost of value exchange is mainly contributed by:

  1. the cost for search for information: the cost for determining the ownership and condition of the asset
  2. the cost for policing and enforcement: the cost for ensuring the transaction is completed
  3. the cost for administration: the cost for validating the transaction from one end to the other
  4. the cost for regulation: the cost for compile to government laws

The above costs varies depends on the type of asset, whether it is a piece of gold, or money or a bitcoin? And blockchain can only help with cost no.3 when the asset is in the physical world, (e.g. a property). And to me, it is not a perfect solution, it may not be a better solution either because the cost for policing and search for information takes the most significant part in the cost of value exchange in the case.

But it is a different story when it comes to cryptocurrency, blockchain can lower all four costs. Because there is no condition to be determined, the ownership is clear, and the completeness of a transaction can be seen by everyone. Most importantly, if the transaction is just cryptocurrency from one end to another, there is no regulation.

What about money in the real world?

I believe, cost of 1,2,3, will be lowered by a lot, and the cost of 4 is hard to say. Theoretically, the cost for regulation is introduced to the organizations to solve the problem of uncertainty, people don’t trust people or organization, so governments introduce laws to make them trustable. But since every transaction on blockchain is valid and trustworthy, the law for regulating financial institutions on blockchain should be less rigorous and hence, the cost should be lower.

The only thing that is uncertain is that a disruptive innovation will always effectively resisted by the supporters of existing solution, in this case will be those who own the traditional financial institutions. And are they strong enough to stop the disruptive technology replaces the outdated institutions.

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