Hackernoon logoTen years in, nobody has come up with a use for blockchain by@kaistinchcombe

Ten years in, nobody has come up with a use for blockchain

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@kaistinchcombeKai Stinchcombe

(Sequel here: Blockchain is not only crappy technology but a bad vision for the future.)

Everyone says the blockchain, the technology underpinning cryptocurrencies such as bitcoin, is going to change EVERYTHING. And yet, after years of tireless effort and billions of dollars invested, nobody has actually come up with a use for the blockchainโ€”besides currency speculation and illegal transactions.

Each purported use caseโ€Šโ€”โ€Šfrom payments to legal documents, from escrow to voting systemsโ€”amounts to a set of contortions to add a distributed, encrypted, anonymous ledger where none was needed. What if there isnโ€™t actually any use for a distributed ledger at all? What if, ten years after it was invented, the reason nobody has adopted a distributed ledger at scale is because nobody wants it?

Payments andย banking

The original intended use of the blockchain was to power currencies like bitcoinโ€Šโ€”โ€Ša way to store and exchange value much like any other currency. Visa and MasterCard were dinosaurs, everyone proclaimed, because there was now a costless, instant way to exchange value without the middleman taking a cut. A revolution in banking was just the startโ€ฆ governments, unable to issue currency by fiat anymore, would take a back seat as individual citizens transacted freely outside any national system.

The killer feature: knowing you can get your moneyย back

It didnโ€™t take long for that dream to fall apart. For one thing, thereโ€™s already a costless, instant way to exchange value without a middleman: cash. Bitcoins substitute for dollars, but Visa and MasterCard actually sit on top of dollar-based banking transactions, providing a set of value-added services like enabling banks to track fraud disputes, and verifying the identity of the buyer and seller. It turns out that for the person paying for a product, the key feature of a new payment systemโ€Šโ€”โ€Šthink of PayPal in its early daysโ€Šโ€”โ€Šis the confidence that if the goods arenโ€™t as described youโ€™ll get your money back. And for the person accepting payment, basically the key feature is that their customer has it, and is willing to use it. Add in points, credit lines, and a free checked bag on any United flight and you have something that consumers choose and merchants accept. Nobody actually wants to pay with bitcoin, which is why it hasnโ€™t taken off.

The key feature of a new payment systemโ€Šโ€”โ€Šthink of PayPal in its early daysโ€Šโ€”โ€Šis the confidence that if the goods arenโ€™t as described youโ€™ll get your moneyย back.
It would take 5,000 nuclear reactors to run Visa on the blockchain.

Plus, itโ€™s not actually that good a payment systemโ€Šโ€”โ€ŠVisa can handle sixty thousand transactions per second, while Bitcoin historically taps out at seven. There are technical modifications going on to improve Bitcoinโ€™s efficiency, but as a starting point, you have something thatโ€™s about 0.01% as good at clearing transactions. (And, worth noting, for those seven transactions a second Bitcoin is already estimated to use 35 times as much energy as Visa. If you brought Bitcoinโ€™s transaction volume up to Visaโ€™s it would be using as much electricity as the rest of the world put together.)

Freedom to transact without government supervision

In many countries, and often our own, a little bit of ability to keep a few things private from the authorities probably makes the world a better place. In places like Cuba or Venezuela, many prefer to transact in dollars, and bitcoin could in theory serve a similar function. Yet there are two reasons this hasnโ€™t been the panacea itโ€™s assumed: the advantages of government to the individual, and the advantages of government to society.

Mt Gox loses all its customersโ€™ money

The government-backed banking system provides FDIC guarantees, reversibility of ACH, identity verification, audit standards, and an investigation system when things go wrong. Bitcoin, by design, has none of these things. I saw a remarkable message thread by someone whose bitcoin account got drained because their email had been hacked and their password was stolen. They were stunned to have no recourse! And this is widespreadโ€Šโ€”โ€Šin 2014, the then-#1 bitcoin trader, Mt. Gox, also lost $400m of investor money due to security failures. The subsequent #1 bitcoin trader, Bitfinex, also shut down after a loss of customer funds. Imagine the world if more banks had been drained of customer funds than not. Bitcoin is what banking looked like in the middle agesโ€Šโ€”โ€Šโ€œhereโ€™s your libertarian paradise, have a nice day.โ€

BitFinex loses all of its customersโ€™ money
Bitcoin is what banking looked like in the middle agesโ€Šโ€”โ€Šโ€œhereโ€™s your libertarian paradise, have a niceย day.

[This issue is particularly near and dear to my heart because my own company, True Link, is designed to help vulnerable seniorsโ€Šโ€”โ€Špeople likely to give out their credit card number over the phone, enter sketchy sweepstakes or donate to sketchy charities, participate in scam investments, or install password-stealing malware. As the people who most need security enhancements in banking and payments, they depend heavily on the existing protections and would absolutely be harmed by many of the proposed changes in favor of private-key authenticated, instant, and irreversible transfers. Someone starting from a human perspective on banking securityโ€”who is currently harmed and how can we help them?โ€”would come up with something very different from blockchain!]

Mongolian banks experienced +400% transaction volume with new sanctions against Russia. New slogan โ€“โ€œBitcoin: less cops than Mongolia.โ€

Second, government policies are designed to disrupt terrorist financing and organized crime, and prevent traffic in illegal goods like stolen credit card numbers or child pornography. The mainstream preference is to have transactions private but not undiscoverable under warrantโ€Šโ€”โ€Šask โ€œshould the government have a list everyone youโ€™ve paid money to,โ€ and most will say no; ask โ€œshould the government be able under warrant to get a list everyone a child pornography collector has paid money to,โ€ and most will say yes. Nobody wants bitcoin to 100x the total traffic in goods and services our government defines as illegalโ€Šโ€”โ€Šas one bitcoin enthusiast pointed out to me, โ€œIf you invented cash today, it would be illegal too.โ€

Micropayments and bank-to-bank transfers

Itโ€™s worth noting two particular payment use cases where people are particularly excited about blockchain-based currencies: micropayments and bank-to-bank transfers. In terms of micropayments, people enthuse that bitcoin transactions are free and instant. Actually, they take about eight minutes to clear and cost about four cents to process. People have proposed that you will use bitcoins for micropaymentsโ€Šโ€”โ€Šfor example, paying two cents to a musician to listen to their song on the internet, or four cents to read a newspaper article. Yet the infrastructure to do thisโ€Šโ€”โ€Šfor example, advance authorization with the source of funds so you donโ€™t have to wait eight minutes to read the article you just clickedโ€Šโ€”โ€Šactually eliminates the need for bitcoin at all. If youโ€™re happy to pay four cents an article or two cents a song, you can set it up to bill once a month from your bank account and read to your heartโ€™s content. And in practice, people prefer subscription services to micropayments.

Three years in, Ripple is to SWIFT what toothpicks are to the USย GDP

In terms of interbank payments, many people mention Ripple as a promising way to transfer money between banks. Over the last 30 days it processed two billion dollars (as of this writing) worth of interbank and interpersonal transactionsโ€Šโ€”โ€Šabout 40 secondsโ€™ worth of volume on the SWIFT interbank networkโ€Šโ€”โ€Šafter three years of being available to banks to trade 90% of the worldโ€™s high-volume currencies. This is like the proportion of US GDP comprised by toothpick sales. Why havenโ€™t banks preferred this new technology? The answer is that setting up a Ripple Gateway isnโ€™t actually much different than using the existing corresponding-account systemโ€Šโ€”โ€Šexcept that a lost password or security token can lead to much larger and more instant actual lossesโ€Šโ€”โ€Šwhich, as a reminder, has happened to more leading bitcoin exchanges than have managed to avoid it. The same features that make the banking system attractive to end users also make it attractive to banks. They already have ledgers, and donโ€™t need to distribute them, anonymize them, encrypt them, publish them, and make them irreversible.

โ€œSmartโ€ contracts

โ€œSmartโ€ contracts are contracts written as software, rather than written as legal text. Because you can encode them directly on the blockchain, they can involve the transfer of value based directly on the cryptographic consent of the parties involvedโ€Šโ€”โ€Šin other words, they are โ€œself-executing.โ€ And in theory, contracts written in software are cheaper to interpretโ€Šโ€”โ€Šbecause their operation is literally mathematical and automatic, there are no two ways to interpret them, which means thereโ€™s no need for expensive legal battles.

The DAO loses all its customersโ€™ money

And yet the real-world examples show the ways this is problematic. The most prominent and largest smart contract to date, an investment vehicle called the Distributed Autonomous Organization (DAO), enabled its members to invest directly using their private cryptographic keys to vote on what to invest in. No lawyers, no management fees, no opaque boardrooms, the DAO โ€œremoves the ability of directors and fund managers to misdirect and waste investor funds.โ€ And yet, due to a software bug, the DAO โ€œvotedโ€ to โ€œinvestโ€ $50m, a third of its membersโ€™ money, into a vehicle controlled by very clever programmers who knew a lot about recursion issues during balance updates. Some said this was a hack or an exploit because the software had not functioned as intended, while others said that there was no such thing as a hackโ€Šโ€”โ€Šthe whole point was that the software made decisions autonomously and there were no two ways to interpret it, and if you didnโ€™t understand how the software worked you shouldnโ€™t have participated. In the end, everyone got together and voted to retroactively amend the software contract and move the money back to its original owners. Whatโ€™s the takeaway? Even the most die-hard blockchain enthusiasts actually want a bunch of humans arguing about the underlying intention behind a contract, rather than letting the software self-execute. Maybe the โ€œdumbโ€ way is smart after all?

Even crypto enthusiasts want to argue about what their contracts mean

The DAO was an illustrative experiment, but what about for routine transactions at big companies? The investors and startups in the smart-contract space promise that the block chain will enable super-fast execution and paymentโ€Šโ€”โ€Šfor example that in healthcare applications, โ€œinstead of waiting 90โ€“180 days for a claim to be processed, or spending hours on the phone trying to get your bill paid, it can in theory be processed on the spot.โ€ But thatโ€™s true for any software-enabled purchasing system. My companyโ€™s Amazon servers scale automatically based on website traffic and bill us for how much we use. The idea that smart contracts would change this is a fallacyโ€Šโ€”โ€Šit conflates the legal arrangement being put into effect with software with the legal arrangement itself being coded as software. Amazonโ€™s terms of service are not a smart contract, but the billing system that implements those terms is automated. To the extent that health insurance billing, for example, is not automated, the problem isnโ€™t that existing software isnโ€™t โ€œsmartโ€ enough to handle submitting claims and paying them electronically, itโ€™s that the insurance company is slow moving, either by accident or because they on-purpose prefer a human review.

Can bitcoin make this go fasterย please?

In the end, everyone from blockchain enthusiasts to health insurers actually wants to argue out in human language what the business relationship is and interpret it on an ongoing basis, and then to write software that handles the fulfillment and payment. That already existsโ€Šโ€”โ€Šitโ€™s the status quo.

Distributed storage, computing, and messaging

Another implausible idea is using the blockchain as a distributed storage mechanism. On its face it makes senseโ€Šโ€”โ€Šyou break your document up into โ€œblocksโ€, encrypt them, and put them in a distributed ledgerโ€ฆ itโ€™s backed up across multiple locations, itโ€™s secure, and easy to track everything that happened.

Yet there are multiple excellent ways to break up files, encrypt them, and replicate them across multiple storage media in different locations. There is already a company that bills itself as a cheaper, distributed Dropbox, which encrypts and stores files across multiple usersโ€™ hard drives and pays them a small fee for the free space on their hard drives. The block chain is just a particularly inefficient and insecure way of doing this.

Ha! Can your blockchain doย THIS?

There are four additional problems with a blockchain-driven approach. First, youโ€™re relying on single-point encryptionโ€Šโ€”โ€Šyour own private keysโ€Šโ€”โ€Šrather than a more sophisticated system that might involve two-factor authorization, intrusion detection, volume limits, firewalls, remote IP tracking, and the ability to disconnect the system in an emergency. Second, price tradeoffs are entirely implausibleโ€Šโ€”โ€Šthe bitcoin blockchain has consumed almost a billion dollars worth of electricity to hash an amount of data equivalent to about a sixth of what I get for my ten dollar a month dropbox subscription. Fourth, systematically choosing where and how much to replicate data is an advantage in the long runโ€Šโ€”โ€Šthe blockchainโ€™s defaults on data replication just arenโ€™t that smart. And finally, Dropbox and Box.com and Google and Microsoft and Apple and Amazon and everyone else provide a set of valuable other features that you donโ€™t actually want to go develop on your own. Analogous to Visa, the problem isnโ€™t storing data, itโ€™s managing permissions, un-sharing what you shared before, getting an easy-to-view document history, syncing it on multiple devices, and so on.

The same argument holds for proposed distributed computing and secure messaging applications. Encrypting it, storing it forever, and replicating it across the entire network is just a ton of overhead relative to what youโ€™re actually trying to accomplish. There are excellent computing, messaging, and storage solutions out there that have all the encryption and replication anyone needsโ€Šโ€”โ€Šactually better than blockchain based solutionsโ€Šโ€”โ€Šand have plenty of other great features in addition.

Stock issuance

It was much-heralded when NASDAQ launched an internal blockchain-driven exchange for privately-held stocks. But wait: correct me if Iโ€™m wrong, but the whole purpose of NASDAQ (or the DTCC trade clearing system, for example) is that it has a ledger of who owns what stocks? Were they nervous that their systems, absent blockchain, would soon be unable to keep track of who owns what?

Similar to other transaction-tracking problems such as customer-to-merchant payments, the difference between NASDAQโ€™s ledger and blockchainโ€™s ledger is that blockchain is distributedโ€Šโ€”โ€Šit addresses the problem of lack of a trusted intermediary. And yet (for legal transactions) the company itself, its transfer agent of record, a clearinghouse, or an exchange are all trusted intermediaries and typically provide value-added services in addition. The reason NASDAQ is the right home for a blockchain-driven exchange is that theyโ€™re expert in the compliance and security aspects of trading stock. Cut out the middleman (here, NASDAQ itself) and the government and youโ€™ll ultimately be limited to companies that choose to make an end-run around the legal, compliance, and tracking systems common to the mainstream market. As people who trade in unlisted stocks will tell you, thatโ€™s a recipe for getting your money stolen.

Why you want to file securities paperwork when you issue securities

And weโ€™re already seeing this. New companies have also begun creating blockchain-based โ€œcoinsโ€ convertible into company stock, and selling them to the public in Initial Coin Offerings, or ICOs, as a cheaper and more flexible way to raise money than a traditional Initial Public Offering of stocks on an exchange. It will be interesting to see how long this craze lastsโ€Šโ€”โ€Šamong other things, offering tokens convertible to stock counts as a securities offering, and so the SEC rules presumably apply to these securities offerings just like any other. Either the โ€œcoinsโ€ are just less-secure electronic stock certificatesโ€Šโ€”โ€Šprotected by however carefully you store your password, rather than by the laws and protections of a securities exchangeโ€Šโ€”โ€Šor itโ€™s another attempt to do an end-run around the law.

Authenticity verification

Another plausible use of the blockchain is that if you want to make a public, unalterable, undeleteable signed statement, you can โ€œpublishโ€ it to the block chainโ€Šโ€”โ€Šthinking of the distributed ledger as more like a diary than a way to buy and sell. In theory you could use this for recording vote tallies, verifying the origin of diamonds or brand-name gear, verifying peopleโ€™s identity, resolving the ownership of domain names, keeping items in escrow, disclosing provisional patents under seal, notarizing documents, and so on.

One vote per person. Bitcoin wallets are harder toย count!

Without diving too thoroughly into the details of each of these, it seems the use cases all fall apart pretty quickly. For voting, the status quo is recording the total number of ballots cast, with the voter dropping a visible paper ballot in a box, and journalists and observers from both sides watching the ballot boxes the whole time. The tough problem in voting is keeping who voted for who anonymous and yet making sure that voters and votes are one to one. Paper does this so much better than blockchain.

For a public notary or similar, verifying your driverโ€™s license or having witnesses known to you present means that it wasnโ€™t signed with a stolen password or private keyโ€Šโ€”โ€Šbut, if a password or private key is adequate, you can just publish it signed with a PGP key. For establishing the authenticity of brand name goods like watches or handbags, or that a diamond was ethically mined, the ledger being distributed and encrypted doesnโ€™t add any valueโ€Šโ€”โ€Šthe originating company can just include a certificate you can verify online, just as they have done in the past. In cases of escrow, a smart contract can automatically pay for the goods without a need for a third party to verify and hold the funds, but you still need a trusted party to verify that the goods are delivered and as-promised.

Proving you know something, in the modernย world

And finally, if you want to irrefutably prove that you knew X at time Y without disclosing the actual knowledge publicly, encrypt it and email it to yourself at both a gmail and a hotmail address or post it on bitbucket, or print it out and notarize it, or postmark it by mailing it to yourself, or tweet an md5 of it, or whatever. But then again, how large is the irrefutably-prove-you-knew-X-at-time-Y-without-disclosing-X industry? Can you think of any leading company, or any company at all, that provides this service?

For domain resolutionโ€Šโ€”โ€Šthe process of figuring out whose servers get to see the traffic and respond to your requests when you type a URL into your address barโ€Šโ€”โ€Šitโ€™s promising to imagine that an all-digital record of smart contracts, where the actual act of payment being published to the ledger also updates who the domain resolves to, obviating the need for domain escrow services. Yet in practice, as with the DAO or other smart contracts, if valuable domains change hands due to theft or security issues, you actually need a way to override the ledgerโ€Šโ€”โ€Šas the result of a court order, for example. Just like with government-backed, law-backed bank accounts, real companies wonโ€™t prefer a situation in which a security breach or stolen password could result in someone else permanently and irrevocably owning bankofamerica.com or disney.com or sony.com or whatever. Adopting block chain technology makes theft or impersonation more likely rather than less. It sounds hypothetical until you realize more leading bitcoin exchanges have been hacked than notโ€Šโ€”โ€Šsomething that very rarely happens with the leading domain name providers.

So whatโ€™sย left?

Washing machines of the future will be able to order their own detergent

Each of these seems trivialโ€Šโ€”โ€Šyes, everyone knows handbags already come with certificates of authenticity with an ID number you can look up onlineโ€Šโ€”โ€Šexcept that in each case, millions if not tens of millions of dollars have been spent on entire companies dedicated to just that particular use case. And you can get even more esotericโ€Šโ€”โ€ŠSecond Life on the blockchain, or blockchain-enabled appliances so your washing machine can smart-contract for its own detergent, or a sports league where the coaching decisions are written on the blockchain. (For real!)

In the end, the advantages of the existing human and software systems surrounding transactionsโ€Šโ€”โ€Šfrom verifying identity with a driverโ€™s license to calling and clarifying the statements made in a credit disputed transaction to automatically billing your credit card for a newspaper subscriptionโ€Šโ€”โ€Šoutweigh the purported benefits, as well as hidden costs, of irrevocable, automated execution. Blockchain enthusiasts often act as if the hard part is getting money from A to B or keeping a record of what happened. In each case, moving money and recording the transaction is actually the cheap, easy, highly-automated part of a much more complex system.

Nobody went out and did a survey about whether most credit card users would be willing to give up their frequent flyer miles in return for also losing the ability to dispute a transaction.

Which leaves us where we startedโ€Šโ€”โ€Šcurrency speculation and illegal transactionsโ€Šโ€”โ€Šalong with perhaps a lesson. In conversations with bitcoin entrepreneurs and investors and consultants, there was often a lack of knowledge or even interest in how the jobs were being done today or what the value to the end user was. With all the money spent on bitcoin cash registers, nobody went out and did a survey about whether most credit card users would be willing to give up their frequent flyer miles in return for also losing the ability to dispute a transaction. Presumably, they thought, the reason IPOs are so expensive or venture fund formation paperwork is so onerous is because all those lawyers and accountants are just getting rich sitting around pushing paperโ€ฆ a bunch of smart engineers in their 20s with no industry experience could certainly do their jobs, automatically, in a matter of months, with just a few million bucks of venture capital.

So far, not so much.

Donโ€™t smart contract me,ย bro!

Kai Stinchcombe is CEO and cofounder of True Link Financial, a banking and investment service for seniors. In his spare time he enjoys hoping that, post singularity, a detergent delivery drone doesnโ€™t self-execute a smart contract on his life, bitbleaching him from the sky into a hissing pool of unstructured data in exchange for a handful of bitcoins.

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