Decoding Blockchain (3/3) — When a blockchain is desirable

5 min readOct 6, 2018

Part 1 can be found here.

Part 2 can be found here.

4/ When a blockchain is desirable?

The framework

Whenever trust mechanisms already exist today, a blockchain is not needed, unless:

a) The existing trust mechanisms are so inefficient that one can demonstrate with a cost / benefit analysis that a decentralized system is preferable. So far, I have seen zero convincing business case in this category, only ridiculous unfalsifiable speculation “blockchain will revolutionize X”

b) The very purpose is to bypass the existing trust mechanisms (“break the law”), and it can be proven that the benefits exceed the costs and that there is a demand for it. The P2P cash system Bitcoin is in this category. So far it seems that censorship resistance is worth the costs for the community because the hash rates keep increasing; but it is still not clear if there is a demand beyond speculation. Open questions: what is the acceptable cost of extra-national censorship resistant money? What is the structure and the size of the demand for that? [9]

A blockchain could be beneficial when there is no existing trust mechanism today:

a) Marginally, in a B2B market: if it is possible to create a consortium when there is none today, the participants will probably be better off using a centralized system rather than a pseudo-blockchain. The gain comes mainly from creating a governance, standards and revamping the business processes, not so much from the technology used. [10]

b) In a P2P market, provided five more conditions are met:

Transactions / state transitions are simple
The amount of data stored is limited
Throughput does not matter
The whole process is digital
The governance of the system is decentralized

This is the proposed framework to assess when a blockchain is desirable:

To summarize the disruption potential of blockchains:

A pseudo-blockchain can still be used in a B2B / consortium environment but with a marginal effect. Basically it would consist in adding digital signatures and time-stamping to enforce accountability, which generally can be done centrally
Smart contracts won’t replace lawyers, they may enforce rules in areas of the law deserted by lawyers
Cryptocurrencies won’t replace fiat money, they may allow the unbanked to access financial services
Etc.

Testing the framework

Let’s test the framework with often cited blockchain use-cases:

a) Blockchain voting platforms for public authorities fail the test because trust mechanisms exist today and their governance is centralized by nature. You can add digital signatures and time-stamping to e-voting but this is not even a pseudo-blockchain.

b) Supply chain use cases fail the test because they require interfaces with the physical world. In fact, once all the participants agree on the governance, norms & standards along the supply chain, technology does not matter because the problem is already solved. The operator will decide on the best technology to use

c) Insurance claim management use cases fail the test because they are centralized by design and require interfaces with external sources of information

d) Security tokens are tradable digital assets representing the shares of the issuing company:

From the point of view of the issuing company: using Nasdaq Private Markets or the ERC-20 standard on the Ethereum platform is simply a procurement decision — the business of the firm could be completely unrelated to blockchain.
From the point of view of Ethereum: this is a case where building an “ICO platform” with blockchain makes sense because its governance is relatively decentralized, censorship resistance is required, there is no cheap international private security platform and blockchain is precisely a great tool to manage scarce digital assets

e) Utility tokens can be used to purchase a good or a service in the future. At their core, they are financial instruments similar to digital coupons. Same analysis as for securities: from the point of view of the firm it is only a procurement decision and for Ethereum it makes sense to offer a cheap and convenient “scarce digital coupon engine”

About enterprise blockchains

The only proven benefit of blockchain for enterprises is that it allows the marketing of compelling narratives that, even though built on wrong premises, spark useful conversations about the inefficiency of businesses processes across markets and the need for digitalization. However don’t conflate blockchain with digitalization. Sure enough, while you digitalize processes, you can squeeze in some useful accountability features such as digital signatures and time-stamping, and pretend it is “a blockchain”, even though it is not and even though it is only a small fraction of the solution.

Don’t conflate blockchain with digitalization

It is true that financial services are efficient, there are indeed billions of dollars of inefficiencies to be captured. Financial services just need to be revamped, period. Blockchain technology is not an argument. Vendors could take the opportunity to sell some pseudo-blockchain in the process, but a huge majority of the transformation budget would be spent on governance, procedures & documentation, and standard technology.

“Blockchain“ is not an argument

When you are being pitched an enterprise blockchain solution:

Sales and marketers: blockchain is the new internet!!!
Engineers: let’s do a proof of concept of a “distributed ledger”
What you really get: a public key infrastructure, digital signatures, time-stamping and replicated databases (i.e. decades-old technologies)

What saves pseudo-blockchain technology charlatans is that accountability is indeed a useful feature in business processes, and that firms are ready to adopt imperfect systems as long as they provide superior services compared to other imperfect systems.

Conclusion

The key takeaway of this article is that the public should not believe the hype and remain doubtful of any article making unfalsifiable claims without a proper cost / benefit analysis. Blockchain technology is not the universal solution to all human problems. Don’t be fooled by evangelists, sales and marketers.

“The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt” Bertrand Russell
“There are no solutions; there are only trade-offs” Thomas Sowell