The Blockchain Is A Solution In Search Of A Problem

It is hard to think of another term that is as hyped right now as “blockchain”. It is a new fad that has taken the financial world by storm. Everyone is talking about blockchain, firms are rushing out press releases announcing their interest and countless new proposals appear every day claiming they will revolutionise pretty much every industry. Even people uninterested in Bitcoin are taking a look at blockchain, in fact because so few people actually use the cryptocurrency to buy anything, the shift has focused instead to the technology aspect of Bitcoin. The situation resembles the Emperor’s New Clothes, with no one wishing to admit they don’t see any use to blockchain for fear of seeming behind with the times or not tech savy.

Let’s start with what blockchain is. Most explanations drown readers in tech jargon and use buzz words like “disruption”, “revolution” and “innovation” without actually explaining what’s so special about it. When you strip away the hype, blockchain is basically just a ledger, a system for keeping records. Ledgers might be exciting to accountants but I can’t understand how the rest of the finance and tech worlds have lost their minds over it.

A blockchain has three features that make it different from other ledgers. It is usually described as public, decentralised and immutable, which means: anyone can see it, anyone can contribute to it and once entered the details can’t be changed. So rather than a ledger that one accounting team has access to, it is a ledger that anyone all over the world can access and it can’t be edited.

 

 

Now let’s stop and ask a basic question: what problem does this solve?

 

 

Take a moment and try to think of any situation where a public, unchangeable ledger not controlled by one person, would solve the problem.

 

 

I can’t think of any such example and despite searching through the internet, I didn’t find anyone else who has either. This is because blockchain wasn’t developed to solve any problem, the technology was developed first and then people went looking for applications for it. One of the first thing businesses students are taught is that they should look for a gap in the market, find something that people want but don’t have and base their business on that. A common mistake is to build a business based on what you like and then try to convince everyone else to think like you. This is the core problem with blockchain, rather than aiming to solve a problem and having a clear use, the technology was developed first and now huge efforts are being made to convince people that this is actually something they want.

Block chain concept

The Flaws of Blockchain

So, let me explain why nobody needs a public ledger. The first and most major flaw is that it is public. What company would ever want all of its financial information to be completely public? Imagine if everyone could easily see all the payments a business makes? What blockchain advocates call “transparency” everyone else would call a nightmare. Depending on how the system is set up, you could try to hide behind anonymous names and random digits, but with some effort it would be possible to figure who these names refer. However, if a blockchain is no longer public, then it is no longer a blockchain, it’s basically just a private database.

The second feature/flaw is immutability. What business would adopt a system where every action was set in stone? In such a system, no mistake can be undone. Yet everyone makes mistakes so this rigidity is a flaw not a benefit. Bitcoin gives us examples of how terrible this is, if get a single digit wrong on a transfer, then the money is gone forever and there’s nothing you can do about it. Whereas if I made the same mistake on a bank transfer, I could contact the bank and reverse the transaction. For some unknown reason blockchain advocates view this safety device as a terrible burden that must be removed, but everyone else views it as a major benefit. However, a blockchain that can be edited and records undone is just a private database.

The third feature of blockchains is that they are decentralised, which is a problem because no business is decentralised. Bitcoin transactions are confirmed in a decentralised system, which means that anyone could do so, you don’t need special permission. The process is complicated but a simple explanation is that it relies on consensus. If ten different people confirm that the transaction was worth $5 and one person says it was worth $50, then the consensus is $5 and that transaction is confirmed. However, this feature offers no benefits to a business because they don’t need people from all over the world to process the records, that’s what they have employees for. In fact, for security reasons they would prefer if only employees could process records and exclude outsiders. However, a blockchain with limited access is just a database.

A second problem with decentralisation is that it is massively inefficient. Claims that the blockchain would be faster and more efficient than existing systems are nonsense, by design it is slower than any centralised online system (it may be faster than paper systems). In a centralised system there may be one person who processes a file, but in a decentralised there could be dozens of people who need consensus before the file is processed. This system is obviously far more inefficient and would massively increase labour costs. Blockchain advocates argue that centralised systems are dangerous because they leave too much control in the hands of one person, who could misuse this power or be hacked. However, guaranteed inefficiency is a terrible price to pay for the small risk of abuse of power. Ironically, decentralised blockchains like cryptocurrencies have proven to be extremely susceptible to hacking, fraud and theft.

The blockchain gets its name because there is a chain linking every block that holds each record. This allows you to trace back records, but it means there is an enormous amount of unnecessary data clogging the system. Think of the memory required to store a database that holds thousands duplicates of every record, not only in its current state, but in every previous state. Think of the waste of resources involved in having thousands of people checking every transaction and needing consensus before it can be confirmed. The system is so inefficient that the Bitcoin blockchain uses more electricity than my entire country (Ireland) just to process its transactions (and it doesn’t have many transactions).

People need an incentive to maintain and contribute to this database and you can’t just pay your employees because then the system isn’t decentralised. Bitcoin rewards the people who process its transactions with bitcoins, but how would a non-currency blockchain reward people? How do you upgrade the system? All changes must be voluntary and by consensus in a decentralised system and they must be compatible with the previous system. Consensus is so hard that even when Bitcoin was faced with crippling problems like extreme high transaction fees and slow transaction times, the community was unable to agree to a solution. What business wants to be stuck with the same record system for decades, unable to fully update and weighed down by the burden of decades of paper trails?

blockchain-explained-39-638

Rather than being a miracle invention that can be used in any situation, blockchain is actually extremely limited in what it can do. In most cases, a private database would do the job better, it’s only in a very specific situation that a blockchain would be used. There is even a website to help you decide if you really need a blockchain – spoiler alert, in most cases the answer is no.

Smart Contracts Are Dumb

A major area of hype is smart contracts. These are computer contracts that automatically kick in when certain conditions are met. The claimed benefit is that people don’t even need to trust each other to sign these contracts, because it is in the hands of a computer, it is neutral, fair and can’t be appealed. So, it could automatically deduct my rent from my account and send it to my landlord at the first of every month. If this sounds familiar, it’s because it already exists, it’s called a standing order. If the bill is for a variable amount (like electricity), it’s called a direct debit. Congratulations blockchain on your revolutionary act of inventing something we already have.

It is claimed that smart contracts would dramatically increase efficiency and remove the cost of lengthy legal battles. However, this only makes sense if you don’t know much about law. Smart contracts are only suitable for simple basic commands, complicated legal issues are beyond it (it goes without saying that costly legal battles are caused by complicated, not basic issues). Let me gives you an example. A friend of mine is renting out a horse. The contract is simple, in exchange for the horse, she only asks for two things: a monthly payment and that the welfare of the horse is well looked after.

A smart contract could handle the first, but not the second requirement. The intent is clear and understandable, no one wants damage done to their property (or pain to a loved animal). But how could a computer fully capture this requirement? Would there be specifications as to the exact amount of food the horse is fed, the amount of times it is cleaned, exercised and the duration of such? The use of whips is a delicate matter, how could a smart contract decide if “excessive” or “unnecessary” whipping occurred? Actually, how could it decide if any of the conditions are met? The horse is outside the blockchain, so the system would rely on data entered either by the lendee (who could lie) or the lender (who can’t supervise). The only way a trustless system could process this would be if the horse was under constant vide surveillance, which would be expensive, invasive and doesn’t need the blockchain.

There’s no need to invent what we already have

This is actually a common flaw in most blockchain proposals, most of the problems aren’t actually technical problems. I think part of the problem comes from the fact so many advocates come from the IT sector where their job revolves around using code to solve problems. If you do that all day it would be easy to think that all problems could be solved by code. When you have a hammer, all problems start to look like nails. But many of the inefficiencies blockchain claims to solve aren’t caused by technology, in fact the technology already exists, people choose not to use it.

For example, some hailed bitcoin and blockchain as technological breakthroughs that would allow faster financial transactions. However, the technology for instant transactions to anywhere in the world already exists. Banks could easily implement it, they don’t for reasons of security. The fact it takes a day or two for a transaction to process isn’t because we don’t have better technology, it’s because that time is used to confirm the transaction, ensure the clients are following the law (specifically anti-money laundering and terrorism financing law) and no mistakes are made. I am actually able to make instantaneous bank transfers to people who have accounts with the same bank (AIB) as me and my debit card allows instant payment with a tap.

In Ireland, vote counting is a very slow process done by hand that lasts days. But proposals to “disrupt” elections with blockchain are unneeded because electronic voting already exists. The government rejected it despite its speed because of fears the system could be hacked and the results tampered with. So, the counts are slow, but everyone can observe the process, which increases trust in the system and legitimacy of the process. Using the blockchain would also remove the secrecy of the ballot (which is one of the core features of a free election) and cause major problems with the registration and verification of voters. It would require a national database of every voter in the country with their ID, proof of address and voting history. Imagine if that fell into the wrong hands or worse, was public information.

blockchain-cogs

Proposals for the blockchain usually involve tokens or storage of data or proof of ownership. As a storage instrument, blockchains are horribly inefficient and are worse than a simple Dropbox. For example, it has been proposed to use blockchains to store property deeds. But this already exists in Ireland. There is no need for this to be hosted on the blockchain, a regular database will do it. Another example was to use the blockchain to register works of art, as they would be held forever on the blockchain and can’t be changed, it’s claimed this would eliminate fraud and theft. However, the blockchain is only as good as the information entered and to prove this, an artist registered the Mona Lisa as his creation. This prank can’t be edited or removed because nothing can be removed from the blockchain. Garbage in, garbage out, the blockchain doesn’t change that.

Blockchain tokens are supposed to reduce theft, ensure product quality, allow consumers to fully trace the history of their product etc. When you strip away the buzzwords, it’s basically a glorified form of stock control. The blockchain doesn’t do anything that the barcode doesn’t already. In fact, it’s worse because the blockchain isn’t connected to the product, so it is reliant on the data entered. If the data is wrong, the blockchain won’t correct this. So, if warehouse staff steal some goods and replace them with cheap counterfeits, but enter in the blockchain that the goods are still genuine, the blockchain has been of no use in preventing fraud or theft. When the fraud is discovered, the blockchain provides no information as to at what point the fraud took place. Also, what business would want their stock control to be public or allow non-staff to potentially enter the data? But if the blockchain is private, only staff can use it and mistakes can be corrected then it is no different from stick control that already exists.

Some might say that it’s still early days, that this is just the foundations, that we are still experimenting and still haven’t fully explored the potential of a blockchain, so it’s too soon to judge it. This links back into my title, people are desperately trying to figure out some use for blockchain. The technology is actually about ten years old, which in IT terms practically makes it out of date. Blockchain proposals are always written in the future tense, it’s always about what amazing changes are just around the corner. Yet these changes never arrive, instead they keep getting pushed further and further into the future. It’s like chasing the horizon, it always seems to be coming but it never arrives. If after ten years, a technology has nothing to show for itself but promises for the future, maybe it isn’t that revolutionary.

I first discovered blockchain during the 2013 Bitcoin bubble and at the time people made excuses, saying the technology was new, so it hadn’t been put to use. I remember in 2014 how people compared it to the early days of the internet, in 2015 it was compared to email in 1993 because it was taking its first steps but would soon change the world. In 2016 people talked about all the inroads it was making and would soon catch on. In 2017, I read about how the financial system better watch out because bitcoin and blockchain were going to completely disrupt their industry. Now hear we are in 2018 and people are still comparing it to email in 1993. What if the technology never progresses beyond 1993? Will people in 2020 still be comparing it to the early days of the internet? At what point do we stop chasing the horizon and admit that blockchain doesn’t actually provide any solutions? Even in 1993 people understood the benefit of free instant messages to anywhere in the globe, after ten years, no one has found any problem that blockchain solves.

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5 thoughts on “The Blockchain Is A Solution In Search Of A Problem”

  1. You are ignorant of history, if you don’t know that the problem existed, was well known, and talked about by many, before Satoshi provided a solution.

    I actually read an article in the ’90s in Boardwatch Magazine that described the problem in detail.

    So the premise of this blog post is one hundred percent incorrect.

    1. Alright dude. We’ve had this blockchain thing (which Bitcoin is derived from) for over 10 years now…. and…. I’m seeing no groundbreaking applications that use it thus far. You sound triggered Bob. Go pound sand somewhere else.

  2. First, great article. I really enjoyed reading it. I do have a few points on contention though.

    A public, immutable ledger could be extremely useful for non-profit organizations. I understand private companies don’t want all their data out in the ‘wild’. For any organization that requires a high level of transparency (like where all the donated money went), this could be the difference between a large, accountable charity and a dead one because it’s full of corruption and unnecessary overhead.

    I can even see many ‘peons’ like myself might want governments to use this for their non-classified information. Unfortunately, most governments are already too corrupt to implement this, but it’s fun to hope.

    This technology could also be useful for the recording of historical events. We’ve all heard that history is written by the victor, but what if there was a system by which the loser’s voice could be heard? It would require a lot of parsing to determine what is and is not a valid comment, but all of them no matter how unpopular would exist forever.

    To the point that it wasn’t created with a problem in mind, I would point you to the Bitcoin white paper. It was made quite clear the technology was developed in an attempt to solve the problems caused by centralized banking/financial systems. Whether it actually did that is a matter of debate, but it was definitely created to fix something.

    About instantly transferring value (money), I understand your points about why banks take so long to execute this function. However, it seems clear to me that there is a market for instant money transfer; particularly between people in different countries that may or may not share the same bank. The currency application of blockchain technology (from a practical standpoint) is about providing options. For those that aren’t huge fans of the current banking and credit card systems, this seems like an option with a lot of potential. Bitcoin was the first iteration, and has since been used as a baseline for other cryptocurrencies who’s proponents believe they’ve discovered a way to improve upon the original.

    As to not inventing something we already have, I would use the example of heating a house. There are several methods by which one can warm their abode (gas, electricity, oil, wood, etc.). Each has it’s good and bad points. Coming up with an alternate solution to a problem that has already been solved is not always a fruitless endeavor. Whether a method has value is the purpose of a market.

    I completely agree that in most cases, a blockchain is not necessary or even desired. I also share your sentiments about smart contracts. Perhaps someone will eventually find a function that I do see as useful, but I can’t see the appeal in its current state.

    There are certainly negative aspects to blockchain technology which you’ve done an excellent job highlighting (the power requirement being a major one). But I do see some positive aspects of the technology. While it may not have grown as fast as the internet, there is progress, and I’m convinced we have yet to see the full potential of this shiny, new toy.

    Keep up the good work. Your posts are always thought provoking.

  3. First of all, thank you for your respectful and constructive tone. You won’t believe how rare that is. However, I still disagree with your examples.

    Charities and NGOs already disclose their accounts and using a blockchain has no advantage over simply publishing financial statements in terms of transparency. In fact, maintaining a blockchain would only increase the unnecessary overheard costs that you criticise. How can an outside judge which expenses are necessary and unnecessary? For both NGOs and government bodies, using a blockchain would involve major privacy violations.

    The blockchain wouldn’t be any good for recording historical events, it’s far more inefficient than any other form of data storing. The records don’t last forever, they only last as long as the database is maintained. Finally, winners writing history is a metaphor, not a factual statement, we have records from the losers of every war that involved literate eye witnesses.

    Blockchain’s initial purpose was to allow Bitcoin to function, this only technically counts as a solution to a problem. As for whether Bitcoin is useful, to me the empirical evidence says definitely no. But that’s a debate for another article.

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