Sell all crypto and abandon all blockchain

Blockchain hype is an essential part of the crypto-craze, and its fading is cause to expect the eventual crash.

The reason is a relationship between a beguiling, but wrong, idea about technology, and the value it has injected back into crypto-currencies such as Bitcoin and Ethereum. Break that cycle, and you unspool the loop that’s spun itself into a boom.

It goes something like this:

Crypto-currency prices attracted attention. Serious people recognised a fad, seeing the inherent and fatal contradiction of something trying to be both a speculative asset and a currency useful for buying wheelbarrows, lattes or running shoes. No-one uses gold bars from the safe for petty cash.

The underlying technology was neat, however. The distributed ledger which underpins Bitcoin has some cool features we’ll get into below, which led many to a default intelligent-sounding position: “Bitcoin is the perfect bubble, but blockchain is a remarkable solution”.

Banks, companies and investors threw real money at developing blockchain products. Doing do was entirely rational. The world’s biggest fortunes were made from exciting new technologies!

Then came the key development, a rush of initial coin offerings known as ICOs, which further inflated the crypto-currency and blockchain bubbles.

In an ICO, tokens connected to a technology project are sold online, typically in exchange for Bitcoin or Ethereum. Big valuations for the tokens created a gold rush, creating demand for the cryptocurrency needed to get in on the ICOs. Inflating values for everything prompts the launch of more token offerings, and so on, with the overall market capitalisation for crypto related “assets” taken as validation.

We’ve previously picked apart various token offerings, as well as taken on some of the larger issues applying blockchain technology to anything other than a crypto-currency. They include data regulation, competition, and that existing tech can already do the job.

What’s encouraging is those critiques are starting to spread, with people who really understand the technology explaining why the blockchain-for-everything fad makes no sense.

For instance, here’s a recent Medium post from Kai Stinchcombe, who argued that “Blockchain is not only crappy technology but a bad vision for the future”.

We’ll let him give the explanation of the technology promised above:

A blockchain isn’t an ethereal thing out there in the universe that you can “put” things into, it’s a specific data structure: a linear transaction log, typically replicated by computers whose owners (called miners) are rewarded for logging new transactions.

There are two things that are cool about this particular data structure. One is that a change in any block invalidates every block after it, which means that you can’t tamper with historical transactions. The second is that you only get rewarded if you’re working on the same chain as everyone else, so each participant has an incentive to go with the consensus.

The end result is a shared definitive historical record. And, what’s more, because consensus is formed by each person acting in their own interest, adding a false transaction or working from a different history just means you’re not getting paid and everyone else is. Following the rules is mathematically enforced—no government or police force need come in and tell you the transaction you’ve logged is false (or extort bribes or bully the participants). It’s a powerful idea.

Indeed, and this is what made Bitcoin and its copycats fascinating.

But, as he goes on to explain, this is not what is being sold or hyped. The integrity of public blockchains for crypto-currency has made it a “futuristic integrity wand” to be waved at every problem.

Except blockchain doesn’t even solve most problems of trust. The integrity of data on a public blockchain can be trusted not to change, but that says nothing about whether the data is right in the first place. For votes, tuna, shipping containers or mango supply chains, a blockchain registry would only be as good or as trustworthy as the people contributing to it.

What tends to be forgotten is that Bitcoin’s unique selling point is that absence of a need for trust, which arrived at a moment just after a financial crisis when trust in monetary systems was low. What, though, are the other markets or modes of human interaction where a total absence of trusted gatekeepers is possible or desirable?

Not for nothing do so many blockchain start-up pitches focus on the technology, as if it were inherently better to bring blockchain to x , rather than leading with the solution to a real-world problem. They are tokens in search of users as an end in itself.

Here’s Mr Stinchcombe again:

Blockchain’s technology mess exposes its metaphor mess — a software engineer pointing out that storing the data a sequence of small hashed files won’t get the mango-pickers to accurately report whether they sprayed pesticides is also pointing out why peer-to-peer interaction with no regulations, norms, middlemen, or trusted parties is actually a bad way to empower people.

So public, trustless blockchains are not going to catch on.

There may be some uses for private blockchain technology in banks, who would love to cut costs by sharing technology — but only with entities they trust. Improvements to back-office database software meant to manage data integrity and permissions tend not to be the stuff of bubble valuations, however.

An honest perspective on blockchain is not one which demands a bubble valuation, or even really the attention of executives whose job isn’t to think about the sort of technology infrastructure they might be buying in a decade.

Try for instance a report from R3, a blockchain company, on the many challenges involved in bridging the gap from existing bank systems to a nirvana of distributed ledger technology.

As it explains, trade processing is about taking a small number of inputs to generate a very large number of outputs.

Don’t forget the different outputs also demanded by regulators, clients, and auditors as well. As the report says:

There would be nothing particularly simple about turning all the required business logic into a [distributed ledge technology-style] smart contract and it would be a very complex piece of code.

Then there is the problem of timing. Distributed ledger tech is “inherently slower” than that used in all the fast paced liquid markets like FX, equities, government bonds. But the legal mechanism where settlement happens at the same time as the trade is too fast for markets used to settling trades on a time delay.

Overcoming these barriers to reach “ledger nirvana” is the work of many years. Here’s some of the R3 conclusion on the challenge:

…in markets, agreement about the “facts” of a transaction (whether between the parties involved, or between systems within the same bank) can be highly unstable and asymmetric. Trade processing, in many areas of markets, is not simply about agreeing on the details and settling the trade. The trade may undergo many lifecycle events, and there may be changes to many of the non-economic attributes during the life of the trade. The view of trades will be partially asymmetric between parties because different banks have different risk appetites, different accounting treatments, or simply want to conceal information about the trade that the other party “does not need to know,” such as their own P&L arising from the trade.

At some point the usefulness of trust, and the slow and complicated reality of interacting with existing human practices, is going to deflate the blockchain bubble.

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