Blockchain Is Broken
Investors and businesses need to look closer; blockchain right now is more of a problem than a solution.
Towards the end of 2016 I tried to help a startup company find a strategic investor and joint venture partner in China. They had perfected a technology that could simulate any native mobile app on another smartphone’s browser, allowing users to test out mobile games and other apps first to decide if they liked it.
The technology was based on an open-source project that begun in the US, and this startup team had spent nearly three years solving the bugs and perfecting it. They won 2nd place at a national startup competition. Now was the time to scale up after having secured US$1.5 million in a series A funding round.
I went to the biggest search engines in China — Baidu and Sogou. They asked their system architects to evaluate the tech and both sides came back with the same answer. ‘No thank you’ because while the tech itself was impressive and very useful, the cost vs return ratio didn’t make sense as the technology was too expensive to run per user vs the potential revenue that each user could generate.
One of the top three gaming companies I spoke to told me quite frankly they could have employed a small team to build the same tech themselves within half a year if they wanted to. So why would they invest millions on something somebody else owned.
The experience taught me a valuable lesson on how to evaluate the commercial and investment viability of even the sexiest new technology.
That startup has since burned up their series A money and is still struggling to pivot today.
In mid 2017 I was invited to join a government delegation’s visit of a global IT vendor’s advance technology prototyping lab.
Well, since it wasn’t everyday that a huge firm like that opens its doors to personalized Q&A, I decided to take up the offer.
What follows in this story is a little embarrassing for that firm, so they shall remain unnamed. Suffice to say it’s a household name.
The lab contained demo’s and prototypes for the most exciting new technologies of our day — VR/AR, AI, blockchain, robotics, IoT etc.
One of the showcases was a conceptual use of blockchain technology. The lab set up a scale model to show how blockchain can be used in a goldmine to track the ore extracted from the mine all the way to the shipping docks.
I asked the executive who ran the lab why this was necessary. He said it was to prevent fraud which sometimes happen because truck drivers or looters may try to steal some of the load.
I probed further and asked why use blockchain instead of a traditional database and centralized server. I pointed out that blockchain itself can be hacked unless it was distributed across a large number of nodes (servers). This made it a costly infrastructure unless it was sitting on the public internet with incentives given to netizens to provide that computing power (like the original bitcoin).
“There is one notable security flaw in bitcoin and other blockchains: if more than half of the computers working as nodes to service the network tell a lie, the lie will become the truth. This is called a ‘51% attack’…”
— What are Blockchain’s Issues and Limitations?, Nolan Bauerle
Given that was the case, I then asked him if a potential customer of theirs were to see this demo and was interested, would they be able to show a cost-benefit analysis to justify the much higher cost of using blockchain?
He pondered silently for a while and then decided to move on to the next exhibit.
The latest fashion doesn’t necessarily look good on you
Blockchain is now hotter among corporates and startups than hot dogs at a baseball game. Not a week goes by when you don’t hear about a new idea for using blockchain.
“…innovations (in the past decade) have been piecemeal and singular in their approach, and have failed to provide a comprehensive solution to the prevailing problems that blockchains and cryptocurrencies face — especially relating to usability and adoption.”
— The 5 Major Problems with Bitcoin and Blockchain Technology, Anthony Black
Blockchain technology as it stands right now, is actually more of a problem than a solution. Many good articles have been written about its issues and challenges, so I shall just briefly summarize here.
Scalability —Low transaction capacity, long processing time. High transaction cost and energy consumption
User management — Password can’t be reset (don’t ever lose it!), cannot deny user access once given, cannot screen out frivolous or spam data
Maintenance — Cost is much higher compared to traditional databases and upgrading is very difficult
The technology itself is more at an experimental and R&D stage rather than deployment at scale. So why are both corporates and startups touting blockchain solutions like a catch-all upgrade to existing systems?
“…a lot of these industries that are being sold on blockchain are really overdue for IT infrastructure upgrades…Blockchain is a way to sell these upgrades and make them a bit more appetizing.”
Sounds to me like a good explanation for that IT vendor’s goldmine solution.
May I also add: in the case of startups, blockchain is so in vogue now it makes their ideas sexier and easier to raise funds from venture capital.
But wait a minute, aren’t corporate honchos and venture capital fund managers smart and savvy? Well, I am in agreement with Jimmy when he said, “Very few people actually understand what it is…”
“…the actual technical details and costs are abstracted away from a lot of VCs and executives in such a way as to obscure what a blockchain can and can’t do. Everyone under them become afraid to say that the emperor has no clothes and we have the situation that we have now.”
Jimmy you’re my hero…
The emperor is naked, but that’s normal
Some people pointed out that euphoria and mass failures is part and parcel of any new and disruptive technology’s evolutionary process, just like the dot.com era…
But the logic in that argument assumes blockchain technology will become as pervasive and important as the internet was. Blockchain will never be as pervasive to the average person’s life as the internet or even the mobile phone has been. It will mostly work behind the scenes to drive some commonly used legal, fintech, industrial or logistics solutions. Most blockchain startups will probably be selling B2B solutions and not B2C products and services.
This blockchain craze has more to do with the current popularity of venture capitalism and the startup fever than the true value of blockchain technology itself.
Okay, if you don’t want to believe a bunch of internet writers, how about top research firm IHS Markit?
While the breadth and depth of blockchain applications, trials and projects is expanding, there are relatively few examples of blockchain applications being used in everyday life, with many challenges to overcome ahead.
There are significant hurdles to blockchain technology adoption because it is complex and can be difficult to understand…As the evolution of Bitcoin has demonstrated, there are challenges to scalability, usability and transaction costs.
— “Blockchain — Technology, use cases and challenges”, IHS Markit
I believe blockchain technology is here to stay and will find its place in history, once all the practical issues are ironed out.
But realistically speaking, right now blockchain technology is more of a problem we are trying to solve rather than a solution we can implement at scale. We are still some distance from broad based commercialization of the solutions it can potentially provide.