So, About the Blockchain...
"Transformational Tech" Fizzles
Blockchain.
It’s the supposedly “world transforming” technology at the heart of cryptocurrency. It’s a buzzword beloved by venture capitalists. For the past few years, if you included the words “blockchain technology” in your investor pitch deck you’d find yourself having to dodge wads of cash being hurled at you by VC firms. There’s a whole sector of the tech world that was intent on convincing you that wherever the price of Bitcoin and Ethereum might go, blockchain had massive, world-changing potential.
But now, with the collapse of the cryptocurrency market, and the monster-of-the-week style exposures of the sector’s most prominent figures, folks are starting to wonder if this amazing technology is all that it’s cracked up to be.
There’s a lot of flim-flam around what exactly blockchain technology is capable of. A deep-dive into the subject reveals that it’s a rather niche piece of tech with limited applications. While utopian rhetoric abounds, real-life implementations are rare. Where it has found purchase, its uses seem to fly in the face of the hippie-dippie philosophical goals of its creators. Those who intend to reap massive profit off it are oftentimes comically unaware of its origins and history.
A Little History
In order to understand what the potential of Blockchain is, it’s important to understand what it was designed for.
Blockchain was created in 2008 by the mysterious progenitor of Bitcoin, Satoshi Nakamoto. It was built to be a decentralized and immutable ledger of Bitcoin payments, able to be sent between individuals anonymously, without the snooping eyes of a third party financial institution looking at your PornHub subscription or nightly 7/11 taquito purchases.
It’s important to point out that the immutability part of Satoshi’s invention is specifically supposed to solve for the problems created by the decentralized part.
Satoshi was imaging a financial system without auditors or accountants. By making the ledger unchangeable, Satoshi was attempting to make it immune to fraud. This would solve the issue of users of this system potentially being able to do multiple transactions with the same piece of digital currency by altering the digital ledger. This was a specific problem that prior digital currencies had been running into since computer scientist and cryptocurrency grandfather David Chaum, who would later introduce an ill-fated Bitcoin ancestor named Ecash, published his 1982 paper Blind Signatures for Untraceable Payments.
As NFT people have recently learned and anyone who recalled how to Right Click>Copy already knew, the nature of a digital object is that it’s very easy to make a replica of. Digital currencies suffered from the same problem. Rather than being the first digital currency, Bitcoin was actually the latest in a long line of digital currencies to tangle with this issue. Blockchain progenitor Satoshi Naomoto specifically told us that he was trying to solve the “double spending” problem in the second sentence of the notorious white paper published along with the release of Bitcoin.
So WTF is a Blockchain?
Basically, it’s a database. In the context of cryptocurrency, it is a massive and ever-growing financial ledger of all transactions done with a specific token like Bitcoin or Ethereum. You might imagine a giant floating mass of chains, all tied to each other. As transactions of the given cryptocurrency occur, the chains grow ever-longer. Because the chains are made of continuous mathematical equations, you can’t go back into the blockchain and alter a past transaction, because it would throw off the entire ledger. Database nerds call this an “immutable data structure.”
Now, tech companies and venture capitalists are trying to find other uses for these un-editable blockchain databases. The results, as we will see, are unimpressive.
Square Peg, Round Hole
Since cryptocurrencies have exploded in popularity, corporations, analysts, and all sorts of people have been obligated to start justifying their use, because there’s a sort of kayfabe in place where they have to pretend there’s a logical reason for investing it.
It simply wasn’t enough at the Goldman Sachs offices in 2017 to wave your hand at the Bitcoin chart and tell your boss “da line keep goin’ up!” You had to write reports that cited fundamentals for why it was a solid investment. So now there’s a whole sector of finance dedicated to dreaming up potential uses for cryptocurrencies’ underlying blockchain technology, so that these highly paid finance dudes can pretend they are engaged in something other than bald and surprisingly low-information gambling. You can imagine a brackish hell-pit where clammy-handed researchers at Deloitte and Andreessen Horowitz spend their days attempting to shove the square peg of blockchain technology into various round holes. Can we put breakfast cereal on the blockchain? No? How about exotic cheese?
There’s a utopian quality to the rhetoric around the supposedly world-changing impact of blockchain. A 2017 article in the Harvard Business Review claims The Promise of Blockchain is a World Without Middlemen. The writer describes a world in which these decentralized ledgers have dramatically streamlined sectors as diverse as ATM machines, and global supply chains.
In fact, five years later, the lack of “transformational” progress is striking. It’s easy to broadly imagine that the utopian promise of a tamper-proof ledger, held out of the greedy hands of bankers and financiers, could transform a whole host of cumbersome, extractive industries, from contract lawyers to medical records to real estate brokers. Yet vanishingly little of that has come to pass, and proponents become eel-like in their slipperiness when you start asking why blockchain is the preferable solution here, vs any other sort of centralized database.
Inside the Clown Car
Instead of a transformed and streamlined world, we’ve got a veritable circus of useless bullshit. Despite mind-boggling amounts of money being poured into creating useful blockchain-based products here, the results are vaporous.
Supply chain startup ShipChain, once heralded as potentially transforming the maritime shipping industry, ran aground after being hit with a cease-and-desist, along with a big fine by the S.E.C.
In the same industry, global shipping giant Maersk and IBM had promised that their blockchain-based platform TradeLens would help haul the global shipping industry into the 21st century by bringing its different interlocking and notoriously squirrely players onto a consolidated and open platform. But by late 2022, Maersk announced they were discontinuing the project.
Around the same time, the Australian Securities Exchange announced they were canceling their own much-delayed project to replace their aging trade clearance software with a blockchain-based platform, citing “solution uncertainty.” The cost incurred to the exchange by the failed project? $168 million.
Many of these companies also seem to run into what you might call an incentive problem, that members of the diverse industries who they are trying to coax into getting “on-chain”, have been resistant historically to putting all their information on centralized databases. Turns out, port operators and cargo ship owners who’ve been keeping paper records since we were still using whale blubber lamps aren’t so easily convinced by VCs chanting “blockchain! blockchain!” to the tune of the Simpson’s Monorail song.
This doesn’t even get into the latrine fire which is web3, where lavishly-compensated and deeply confused VCs have decided that the next iteration of the web will be one where literally everything is buyable and sellable on a blockchain-ized internet, and users will exchange cryptocurrencies for everything from broadband signal to virtual property.
No True Blockchain
There are some notable instances of blockchain databases being used with success in private business, but they often contain a critical caveat when it comes to centralization.
One example is Walmart Canada, whose representatives co-authored this piece for the Harvard Business Review making trumpting noises about having used a centralized blockchain to deal with managing payments to its trucking companies and other aspects of their domestic supply chain operation.
Of course, Walmart Canada is not using a decentralized blockchain, theirs is centralized. In a centralized or “private” blockchain, a single party has control over the virtual ledger. Why would any private business want to expend money and effort shifting over to using a database it can’t even control? As the writers of this hype-piece concede, decentralized databases aren’t well suited for private business.
This should then beg the question: since the entire idea of blockchain is creating a ledger that can self-regulate without third-party auditing, since the point of immutability was fixing for decentralization, what the heck is a point of a company using decentralized blockchain databases? As cryptographer Bruce Schneier points out in his excellent 2019 Wired op-ed, these are really blockchains “in name only”, and a cynical mind might wonder if Walmart Canada isn’t just trying to ride on the coat-tails of a buzzword.
The Takeaway
Blockchain technology is a niche invention, meant to solve a niche problem, which is sending money to someone online anonymously and without a third party supervising your transaction and making sure nothing nefarious happens like a double payment. Like Bitcoin, it is a tool and to some degree a proof-of-concept for what was supposed to be a utopian alternative financial system.
But the cryptocurrency revolution has been hijacked by some of the very same sort of people its inventors meant to circumvent. Avaricious institutional investors and money-brained venture capitalists. They are totally uninterested in the original philosophical aims of the project. For that reason, they are prone to profoundly misunderstanding both the point of the technology and its potential. In my view, they’ve mistaken a niche libertarian tool for a money-printing machine.
But how can all of these fabulously paid VCs and finance dudes have lost the plot so badly that they’ve spent nearly a decade and untold fortunes trying to force the implementation of blockchain technology towards problems it is fundamentally unsuited for? Surely they read Satoshi’s White Paper. Surely they’ve read up on past digital currencies in order to understand the context of the project they are investing in? The dirty reality, I suspect, is that these guys read the same WSJ articles as you or I, and are better at keeping pace with the other lemmings dashing towards the cliff than thinking critically about use cases or historical precedent.
A Caveat
It’s becoming fashionable, amid the smoke of various crypto project dumpster fires, to swing to the other side of the cryptocurrency debate and say the whole thing is bullshit. However, as this excellent Scott Alexander piece lays out, there are enormous uses for a blockchain-enabled decentralized finance system, mostly as a way to resist tyranny and keep your money safe from untrustworthy or unstable national banking systems.
This might not sound like a very compelling use-case if you live on the Upper West Side of Manhattan or in Palo Alto, but it is a prospect oftentimes appealing to people who live in parts of the world with growing middle classes and crash-prone financial systems like Nigeria or Vietnam. Data around global crypto adoption seem to bear this out. In the long run however, investors may be disappointed to find that blockchain is ill-suited for purposes outside of hiding your money from the government.