Blockchain’s Greatest Promise

Photo by Rick Tap on Unsplash

In HBO’s Silicon Valley, protagonist Richard Hendricks was rambling to venture capitalist Russ Hanneman:

We could build a completely decentralized version of the current internet with no firewalls, no tolls, no government regulations, no spying. Information would be totally free, in every sense of the word.

In my previous article, “The future of blockchain companies”, I had briefly mentioned why the freedom of information is so important for our future. In short, there are three main reasons:

  1. There is insufficient accountability and transparency in how sensitive user information is collected, stored, and used by governments and tech giants.
  2. The net neutrality fight is not over.
  3. The economic inefficiency that arises from monopolies like Amazon and Facebook stems largely from the ability to leverage on information asymmetry.

To clarify, “free information” does not mean that information will not cost us anything. There is always a cost. I am referring to the possibility that our data and information will no longer be controlled and leveraged by a small group of centralized organizations. No more firewalls or ‘internet fast lanes’. No more media censorship. No more data breaches and leaks. No more platform monopolies. Disruption of the information age is happening.

Blockchain’s greatest promise

Perhaps, beyond the freedom of information, blockchain’s greatest promise lies in the disruption of the finance industry. Just as how blockchain technology could change the way information is exchanged, it can transform how value is exchanged. Founder of Gitcoin, Kevin Owocki, strongly believes that blockchain is the TCP/IP of the internet of money.

The fundamental concept of Bitcoin and other cryptocurrencies has its merits, and the technology presents enormous potential for new startups to challenge centuries-old incumbents in the global financial industry — now, the financial industry suddenly presents itself as a vast blue ocean for the taking.

As a matter of fact, Bitcoin was invented to offer an alternative currency to fiat currencies with these main value propositions:

  1. Currency supply: There is a known & fixed currency supply of 21 million bitcoins. Nobody can print more Bitcoin at will.
  2. Immutability: All transactions are recorded on a public secure ledger and the data cannot be altered or censored.
  3. Inclusivity: Anyone can create a Bitcoin wallet to send and receive Bitcoin.
  4. Consensus: The system ensures accuracy of all transactional data and motivates good behaviour even without a central authority.

Despite their high capitalization and revolutionary concepts, market leaders Bitcoin and Ethereum are not without their flaws. The technology is in its infancy despite the hype. Who knows if Bitcoin and Ethereum would be a Yahoo or a Google?

Reality check

What are blockchain and cryptocurrencies good for right now?

Remittance
Cryptocurrencies offer great value as a tool for cross-border remittance. In Nov 2018, the Litecoin network processed a transaction for about 1.16 million litecoins (worth ~$62 million at the point of transaction). The transaction fee costs the sender $0.50. In comparison, using TransferWise to transfer $1 million from Singapore to the US will cost about $2,500 in transaction fees. Moreover, most traditional remittance services will take a few business days to move your money, but the Litecoin network will work almost instantly, 24/7, all year round.

Ownership and management of securities
Tokenizing securities like stocks, bonds, and options (read: Security tokens) can reduce transaction time and fees by eliminating middlemen like brokers and bankers. Smart contracts could potentially replace the tedious paperwork associated with securities trading. Security tokens also make it easier for investors to liquidate their assets.

Credit and banking services for the unbanked
More than 1 billion Asians are unbanked or underbanked, which means they have no access to proper financial services — no bank accounts, no credit services, and no way to engage and participate in digital commerce or the gig economy. Many of the unbanked Asians are mobile natives, and mobile cryptocurrency wallets could present themselves as a viable enabler and equalizer for emerging markets.

Note that I did not mention fundraising in this section. On hindsight, I believe that the fundraising bubble in 2017 did more harm than good for the industry — fraudulent behaviour like scams and hacks was rampant and ICOs created a lot of harmful price speculation. There is nothing wrong with tokenizing network ownership and using it as a means to fund research and development, but the industry must relook at how ICOs and other fundraising activities are conducted.

What are blockchain and cryptocurrencies not good for right now?

Micropayments
Instantaneous micropayments at high transactional volumes are problematic for public blockchains for two reasons — network scalability (block size + block time) and transaction fees.

Ecommerce acceptance
Large cryptocurrency firms like BitPay and Coinbase are offering merchant support for ecommerce sites, but the volatility in prices of major cryptocurrencies can be a huge deterrent for ecommerce retailers. A $100 fluctuation in Bitcoin prices within the span of a day may not sound significant, but for larger retailers who make tens of thousands of transactions monthly, the fluctuation will prove to be difficult to stomach.

Alternative store of value
The proposition of cryptocurrencies as either an alternative store of value or safe haven asset stemmed from:

  • Fixed currency supply
  • Ease of acquisition and mobility compared to physical gold
  • Price performance of cryptocurrencies being generally unlinked to any one national currency or macroeconomic factors

However, as mentioned before, extreme volatility in prices is not helping the case. The prices of major cryptocurrencies have fallen by more than 90 percent since Dec 2017. Bitcoin prices have nosedived from $19,700 apiece to $3,500 in Jan 2019. This scale of volatility is probably not what retail and institutional investors can accept as a store of value.

Besides, it is very risky for an individual to store cryptocurrencies. Cryptocurrency exchanges could be hacked. Paper wallets and hardware wallets could get misplaced or stolen. Once the private key is lost, all assets stored in that wallet address are locked forever. That is surely not confidence-inspiring for new investors.


A revolution not too far away

We are certainly in early days of mainstream adoption for solutions built on smart contracts and trustless public blockchains, but the next industrial and financial revolution may not be as far away as we think.

I find it necessary and unexpectedly insightful for us to witness in retrospect Clifford Stoll’s article on NewsWeek, titled ‘The Internet? Bah! Hype Alert: Why cyberspace isn’t, and will never be, a nirvana’, penned in 1995. Here’s a short excerpt:

After two decades online, I’m perplexed. It’s not that I haven’t had a gas of a good time on the Internet. I’ve met great people and even caught a hacker or two. But today, I’m uneasy about this most trendy and oversold community. Visionaries see a future of telecommuting workers, interactive libraries and multimedia classrooms. They speak of electronic town meetings and virtual communities. Commerce and business will shift from offices and malls to networks and modems. And the freedom of digital networks will make government more democratic. Baloney.
Do our computer pundits lack all common sense? The truth is no online database will replace your daily newspaper, no CD-ROM can take the place of a competent teacher and no computer network will change the way government works.

A “new internet” can be a vision too idealistic for most to fathom — even the internet today is a technological development that took decades in the making.

The exponential growth of technological development is the main cause of why we are so bad at making predictions about tech. Most of us make predictions by projecting a trajectory from past events. Yet, just because the internet and its protocols took more than fifty years to develop, does not mean that a new one will take fifty more. While I cannot predict definitively when, I believe blockchain tech will usher in a new interconnected society and economy.

I remain an advocate for the blockchain revolution.