Don’t buy the blockchain hype
but do buy into the cryptocurrency future.
Blockchains are a brilliant application of cryptography to the concept of a distributed, immutable log. But here’s the thing: there is a 99% chance that blockchains are totally inappropriate for whatever problem you’re thinking about solving, especially when the disadvantages are so numerous.
When should you use a blockchain? Almost never.
Karl Wüst and Arthur Gervais neatly summed up the point of a blockchain more elegantly than I ever could in Do you need a blockchain?:
[Blockchains allow] mutually mistrusting entities to exchange financial value and interact without relying on a trusted third party.
If you’re considering building a blockchain-based app or investing in a blockchain-based startup, first ask yourself, does the problem being solved require interactions or exchanges of financial value between mutually mistrusting entities? “Mistrusting” is meant both in the sense that you’re unable to establish another entity’s identity and also that you don’t trust that entity with your data. If not, then guess what: you don’t need a blockchain!
Look at the following flow chart from the same article, summarizing the process that you should follow for deciding whether blockchains are appropriate for your solution:
- “State” here means data
- “Writer” effectively means a user
- “TTP” means “trusted third party” (e.g., an individual, corporation, government) who can be trusted with your data
- Example: when you use Facebook, the state includes your feed and posts, the writer is you and the TTP is Facebook
The vast majority of apps end at step two or three of the flowchart. Meaning that you don’t need a blockchain.
Blockchain hype vs. cryptocurrency promise
So then why are there so many blockchain startups appearing? Two words: hype and monetization. The hype around blockchains makes fundraising easier if you’ve got one.
The monetization part is more interesting. By basing your company off of a blockchain, you’re effectively creating a self-contained monetary system, the scarce tokens of which can be exchanged for real money. ICO’s are one way of exploiting this exchangeability, but I sense that we’ve only scratched the surface. The real sea change will be when we stop thinking of apps as products or services that we sell, but rather as interlinked, miniature economies that we profitably participate in — and probably skim off of.
The potential for “apps as economies” is one of the reasons why I’m long on cryptocurrencies, but we’re not there yet. You can’t buy your milk and bread with ether yet. Until that day, blockchains merely offer an inferior technical solution that incurs greater operational complexity, far slower transaction speeds, and a radically new (and relatively untested) security model than traditional distributed web apps.*
- with the exception of a few applications that meet the criteria of the flowchart above (e.g., Bitcoin, Ethereum, Stellar).