Blockchain is Overhyped and Misunderstood

"Blockchain, not bitcoin." It's an oft-repeated credo that started gaining traction as bitcoin entered mainstream consciousness, and one that is still popular in established business sectors and with relative newcomers to the concept of a decentralized ledger. It suggests that it's the innovation behind bitcoin — the blockchain — that is worth getting excited about, and furthermore it purports that blockchains stand to revolutionize just about everything.

I was reminded of this attitude recently when I came across a video by Gary Vaynerchuk, an entrepreneur and internet business celebrity. He was asked if he was "invested into blockchain and bitcoin." His response provides a good illustration of common misconceptions and fallacies about this topic.

Here's Gary on what a blockchain is:

It's a platform of trust, and we can do shit with each other, and everyone else is out.

Not bad, although it's probably be more accurate to say that it's a platform without trust. Everyone else is out, which means you don't have to trust them. In fact, you don't even have to trust the person that's paying you. But Gary also said:

I love showing my Coinbase to people, they're like fuuuuuck

Well, in this case, by keeping his coins with a third party Gary does have to trust other people. He has to trust Coinbase and its employees, of course, but also the authorities in the jurisdictions where Coinbase operates.

But the discord between those two quotes is not the main reason it stuck out to me. Rather, it's his presumption that bitcoin is operating on a low, naive level whereas Ethereum (another blockchain-based currency) is a bit more sophisticated and the broader potential of blockchain vastly above either of them. I think this is backwards.

What is a blockchain?

Bitcoin was not the first attempt at digital cash, nor was it the first attempt at digital cash based on cryptography. Previous attempts came up short due to requiring some entity in charge, which also means a central point of failure and trust on which the entire system must rely.

A cryptographic signature can indicate that a transaction is valid, but what about when you encounter two valid transactions spending the same tokens? How can you tell which one is legitimate on your own? This is a variation of the Byzantine Generals' Problem, where generals with limited communication must agree amongst themselves on whether to attack or retreat in spite of traitorous generals who may mislead them. How can they come to a consensus without a "lead" general to command them?

What made bitcoin different from other attempts is a proposed solution to this problem, the blockchain. In bitcoin, there are no central servers and no privileged entities. Anyone can perform provable, computational work to commit transactions to the blockchain, thus forming a ledger affirming which bitcoins have been spent and which haven't. Anyone can download this ledger and verify for themselves that it is cryptographically valid, allowing them to participate in the network without needing to trust third parties. Modifying or otherwise tampering with the blockchain is extremely challenging and expensive, thus making the transactions within effectively final and irreversible. For the purposes of this article you don't need to grasp exactly how this works, but what's important to understand is that the critical innovation behind bitcoin was how to achieve consensus without centralization or trust.

Another important thing to consider is that, while blockchains are great for decentralized networks, they are horribly inefficient when compared to traditional, centralized solutions. A decentralized network requires tremendous computational redundancy and bandwidth as all data must be transmitted to and validated by each participant in the network. That's in addition to the considerable work required to build a secure blockchain. Take PayPal, for instance. PayPal has enterprise level hardware and networking to handle their operations. Can you fathom if you yourself needed that level of computing resources just to be able to pay for something on eBay?

What's not a blockchain?

Frankly, a lot of the things that are being labeled as "blockchains" these days simply are not. Let's look at some examples. From The Economist:

These new blockchains need not work in exactly the way that bitcoin’s does. Many of them could tweak its model by, for example, finding alternatives to its energy-intensive “mining” process, which pays participants newly minted bitcoins in return for providing the computing power needed to maintain the ledger. A group of vetted participants within an industry might instead agree to join a private blockchain, say, that needs less security.

Yes, indeed they'd save a lot of energy. That's because they wouldn't actually be using a blockchain. The vetted participants, not the blockchain, have the final say.

From a Fortune article titled Mastercard Will Now Let You Pay With Blockchain—But Not Bitcoin:

Mastercard’s blockchain, however, could cut out those middlemen and connect a purchaser’s bank directly to that of the supplier, remitting the payment more efficiently and possibly faster, Pinkham says. (Although the transaction itself will register on the blockchain instantaneously, the funds are still moving through the same system Mastercard uses now, meaning there won’t necessarily be an improvement in speed, he cautions.)

This reads like exact business-as-usual Mastercard plus publicly accessible — and unofficial — transaction history. Again, Mastercard is just about the polar opposite of the use case in which a blockchain makes sense.

Fortune again on IBM's new "blockchain":

He predicts that, in the next year, central banks will begin issuing digital currencies of their own, and that these will become an integral part of blockchain-based money transfers.

Central banks already issue digital currency, what do you think is in your checking account? Hint: your bank doesn't have paper bills lying around to cover their digital balances. Central banks, as the ultimate and singular arbiters of their respective currencies, are even worse candidates for a blockchain than Mastercard is.

At least Fortune occasionally acknowledges this misuse of terminology:

Ultimately, anyone working on next-generation data structures with cryptographic signatures and joint-stakeholder elements might now be said to fall under the “blockchain” umbrella.

Yeesh. This is legacy companies and institutions detecting a trendy new buzzword and twisting it to lay claim to it themselves. This is like Hans Moleman trying to pass himself off as Bart Simpson.

A friend asked me, “are you discounting a ‘reduced’ blockchain too quickly?” Indeed, there may be value in taking existing business processes and using a pseudo-blockchain to cut out intermediaries or add transparency. But these are incremental improvements using technologies that existed prior to bitcoin.

Remember, it’s a defining feature of blockchains that the blocks are difficult to produce. That’s why one can safely assume that is has not been tampered with, even in the presence of dishonest actors. A private or vetted network can rely on the reputation and trust of the participants. After all, operating on a blockchain is supposed to be between you and me — everyone else is out.

What about Ethereum?

The aforementioned Ethereum is an interesting case. It uses a blockchain — a real one— but by allowing unrestrained code on the blockchain it creates a computing platform on which decentralized applications can be built. It also makes it easy for anyone to create new virtual tokens on top of Ethereum. As a result, hundreds of Ethereum-based Initial Coin Offerings (or ICOs) have popped up, each promising to solve problems or revolutionize industries through decentralization and the blockchain.

The problem is, most of these “decentralized” applications are either not decentralized at all — relying heavily on specific servers and people to function — or they tackle an issue where decentralization and trustlessness is not very important or only needed in niche situations. Examples of such misappropriations are countless (see here for a list of very real and very ridiculous ICOs), but one that always sticks out in my mind is Dentacoin, “The blockchain solution for the global dental industry.” Why dentists need their own blockchain, or what exactly Dentacoin is trying to achieve through one, is beyond me. And yet, at the time of this writing, all Dentacoins in circulation are worth over $28 million dollars, down from a peak of over $100M.

Beyond dubious ICOs, there are concerns with Ethereum’s own grip on decentralization. Remember that all these applications must run on every node in the network. Just like how it’s an enormous challenge to process all of PayPal’s operations on ones own computer, it’s also a challenge to handle the computational baggage of every decentralized application in existence.

The blockchain decides — unless we say so

There’s also a complicated history to Ethereum. One of its first applications was called the Decentralized Autonomous Organization, or the DAO, which attracted a giant amount of investment and attention. To make a long story short, the code for the DAO had a critical bug that allowed much of the invested funds to be stolen. Influential figures in Ethereum, many of whom had lost money in the DAO themselves, pushed for a hard fork to manually undo the transactions leading to the DAO theft. They got their way, and within a few days the history of the DAO was effectively erased from the Ethereum blockchain (the original, unmodified Ethereum chain lives on as “Ethereum Classic” but is largely overshadowed by Ethereum).

This episode showed that Ethereum’s blockchain was not as final, and its code not as unstoppable, as once thought. Recently, a similar situation has surfaced. The Parity Wallet is one of the more popular Ethereum clients. It was created by one of Ethereum’s co-founders lending it a great deal of credibility, and is used by several ICOs to store the funds they’ve raised.

But it too had a major vulnerability (more than one, actually) that resulted in over $100M worth of funds being permanently frozen. Immediately this sparked a debate of whether the funds should be manually unfrozen using a hard fork similar to how the DAO funds were unstolen. This comment in favor of unfreezing the funds from the Ethereum subreddit stuck out to me.

A comment sentiment expressed in the Ethereum community

This misses the point of having a blockchain. The innovation behind the first blockchain — bitcoin’s— was not to rely on social contracts or popular will. It was a way to come to consensus in an environment with self-interested or even malicious actors, eschewing trust and leaders in favor of pure, verifiable math and cryptography.

Decentralization is everything

I first wrote about bitcoin five years ago, excited at the time over having recently discovered new, virtual money impervious to inflation, currency controls, and physical distances. A lot has happened since then in the world of bitcoin, but the fundamentals have not changed.

What makes bitcoin or any other blockchain-based network innovative and worthwhile boils down to a few related concepts; decentralization, trustlessness, and censorship-resistance. It’s the idea that participants need not agree to more than a set of protocol rules to operate in tandem as a network. It’s what makes a network inexorable, and what distinguishes bitcoin from e-gold and Ethereum from Amazon Web Services.

Blockchain is an expensive approach and still quite experimental, but it does have revolutionary implications. Bitcoin is showing that for the purposes of a payment network, store of value, immutable ledger, and financial smart contracts, a blockchain can be well worth it. And there may in fact be other applications where true decentralization opens new and exciting doors. Just don’t get lost in the blockchain hype.

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