Let’s Cut the Crap: Why Payments is the Most Important Use Case for Crypto
Judging by the headlines, it seems like every problem can be solved with a good blockchain. People hope that it will regulate supply chains, store and distribute music, run games, track weapons, enforce workers’ rights, track votes for elections, run rewards programs, and the list goes on. This week my gym advertised that we could track our workouts on their new blockchain. It almost seems like blockchain is to us what the Internet was to the world twenty years ago.
A humorously titled paper, called “Do You Need A Blockchain?,” is making its rounds and offers some important insights. It points out that, as exciting as blockchain is, it’s just not practical for many tasks that people want to use it for. A blockchain provides a way for individuals to interact with each other, exchanging some kind of information, currency, etc., in a trustless environment. Its principal benefits are transparency and decentralization, removing third parties on interactions.
While a blockchain could be used in most of the situations we mentioned, many of these hot new blockchain applications simply don’t make sense for a blockchain. Distributed ledgers are expensive. They require time to achieve consensus due to decentralization, and storing and/or executing files on each computer in the network is expensive in time and energy. The time to use a blockchain is when the value gained in decentralization, transparency, and trustlessness is greater than the cost in compute time and money of the same.
Payment systems are by far the most logical and important use case for blockchains. As demonstrated by major cryptocurrencies like Bitcoin and Ethereum, a blockchain can provide users with a safe place to do peer-to-peer transactions, with fees at a fraction of the cost of credit cards and other standard payment processing solutions. If these two blockchains could only scale, they would be a viable option for everyday transactions. The reason this works so well is that using third parties to process transactions is expensive. So expensive, in fact, that the advantages of the blockchain overshadow its costs.
For perspective, let’s look at other popular use cases for the blockchain and compare them to payment processing. Some of these most famous ones are: to store and stream music, allowing people to pay artists directly and mitigate copyright infringements; as a voting platform; for exchanging real estate, car, or weapons titles/ownership; to keep track of medical records; and to monitor supply chains and weed out modern slavery or illegal poaching.
From a surface level, these are exciting problems that a blockchain may be able to tackle! Let’s take a look, starting at storing and streaming music. File storage is substantially more expensive on a blockchain than in a centralized database, because you have to store something on every single machine in the network in order to store it on the blockchain. It is true that the problem of distributing music benefits from the decentralization, peer-to-peer interactions, and to a degree the trustlessness (musicians don’t trust consumers to obey copyright laws). Consumers, on the other hand, may not appreciate the transparency of the blockchain, and unless this music blockchain has a currency redeemable for things other than streaming music, we may risk a centralized, trusted, third-party company that interfaces between subscribers and the blockchain. Do the benefits outweigh the costs?
Using the blockchain as a voting platform also has inherent challenges. For example, how do we keep voting anonymous to avoid coercion, but also give access to law enforcement to check for voting fraud? Even if each voter keeps their identity secret, if votes are publicly visible, it would be possible to do traffic analysis on the voting chain and potentially discover the identities of certain voters. Moreover, who should secure the network and be the miners? A private company with special interests, a government group, local governments? That question gets sticky quickly.
For real estate, car, or weapons titles, the blockchain is probably not the right solution either. Remember that a blockchain is worth the cost if transparency, trustlessness, and decentralization yield a sufficiently high benefit. The first question to ask here is: Why can’t the government just keep a centralized database on these titles? Well, we may not trust the government. But then, how could you trust the government to enforce ownership even if you do have a blockchain? We’re going to have to trust someone to enforce ownership — whoever that is can just keep a database.
In the case of medical records — sure, it’s nice that this is a distributed database, but where is the trustlessness we have to mitigate? With the blockchain every hospital would keep every patient’s records in their systems, always, as well as spend the electricity in coming to consensus. What disputes would this consensus settle? Can someone “double spend” their doctor’s visit and get diagnosed twice? Furthermore, if the hospitals trust each other enough to want to know each other’s records regarding diagnoses and treatment, why can’t they trust one another to correctly deliver records if petitioned? It makes substantially more sense for hospitals to just keep centralized databases.
Finally, monitoring supply chains. Like in some of the previous examples, in this case we have no way of completely eradicating the need for trust. We have to rely on companies to record their transactions on the blockchain, and to record all of them honestly. Even if the process is somehow automated, there would have to be physical devices, recording things about the physical world, that we have to trust to be non-faulty and untampered with. Even if we want to track a supply chain for companies which exclusively use some cryptocurrency platform, like Bitcoin or Ethereum, we have to trust that the company made all their purchases on that currency, and did so honestly. Since the whole point of the blockchain is trustlessness, this is just an expensive way to keep having to trust companies to follow regulations.
Let’s cut the crap. Payments, the original use case of the blockchain, is by far the most logical and feasible use case for crypto. Let’s simplify things, calm down, and get a globally scalable transaction platform up and running. In the crypto hype we’ve lost track of why we need blockchains, what they’re useful for, and why they unfortunately don’t solve every problem.
