Given its potential and arguable Bitcoin success as global digital virtual currency, why did Blockchain not disrupt the world yet
1. ICOs gave early exit to potential disruptors ICOs were meant to help raise funds for good Blockchain projects with committed teams. Unfortunately, in the name of “decentralization”, companies raised millions and billions of dollars, on the back of white papers, and did not have motivation left to deliver the projects. Early liquidity, also like in the case of dot com bubble on 1999, meant that true value of the projects and disruptions would take more time before it could be unveiled.
2. (Mis)Use Cases of Blockchain I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail. —Abraham Maslow in 1966 (as quoted in Wikipedia)
Myths on Blockchain
Anything on Blockchain does not mean truth
Blockchain achieves truth (transactions validity) in Bitcoin transactions with the help of 1000s of mining nodes, with up to 1000s of servers supporting each node. Miners are incentivized by Bitcoins to perform the mining exercise. For any Blockchain use case, worth asking the following,
• Are all transactions going to be public? (example, Banks Blockchain use cases won’t like this)
• You will allow decentralization in the workflow? i.e. Some consensus algorithm (say majority of miner votes), will make final decision in transactions validity (example, Governments or any Central authorities won’t like this)
• Miners understand and can help in validating transactions (example in supply chain finance, how can miners validate any facts about fake invoices, workflows or multiple discount loans?)
“Blockchain is not the magic wand that generates immutable truth”. It’s just a means to an end. Transparency / Digitization is best achieved by Blockchain Several POC’ed or Advocated use cases are nothing but digitization of some data. Examples below,
• Land registry on Blockchain is done by several states, governments etc. Whereas none of them has allowed for independent miner validations (i.e. only states can decide who owns which property and when they approve the transfers), so it just makes online record keeping instead of offline. Such processes by Governments and Companies have been digitized for decades, without blockchain, and more efficiently.
• Invoice discounting If a supplier sends an invoice to a client, that gets accepted, then they can take say 70% loan against that invoice from a bank to develop the products, or get some cash-flow while the products are shipped (say from China to US) which takes weeks. Typically in such loan, supplier, supplier’s bank, client and client’s bank are involved in confirming the transaction and supplier’s bank gives loan after that. This approval process can take days.
The challenge in this loan issuance is that there can be fake invoices, or companies can take bank loan from multiple banks against the same invoice, or that the counterpart client does not exist. Hence banks are cautious in giving such loans.
Now independent miners are bank’s risk departments who can help validate the authenticity of the transactions. And no bank will open their client data to other banks for validation (in fear of losing the client to other bank).
So all that can be achieved is that document transfer between the 4 entities, can be made faster from days to hours, by using digital signing and digital documents transfer. Such solutions exist, and work well without Blockchain. Most problems advocated here are typical digitization problems that can achieve transparency by making the steps in the workflow public. Think about DHL or any other courier service tracking the package in transit, or Uber’s car driver and trip details. People, who need to know, can know it online very easily, and without needing any Blockchain technology implementation.
All crypto-currencies make sense
Bitcoin is owned and run by the community. There is no “known” majority Bitcoin holder. It makes sense for community to adopt it as decentralized currency, as an alternate to fiat currencies.
But different countries like Venezuela launching their crypto currency, or centralized crypto currencies like Ripple make no sense. All they need maybe is a digital currency instead of fiat currency, or digital payment mechanism like Paypal, which has worked well for years.
But if the transaction validation is done by Government or 1 company like Ripple, its not decentralized and is not a crypto currency.
Smart contracts are perfect and legally enforceable
Smart contracts on Blockchain maybe useful for achieving conditions based trigger conditions in the Blockchain. Some known challenges with smart contracts must be understood,
• It’s debatable whether such contracts should be coded within the Blockchain, or at the application layer on top of the Blockchain.
• Many smart contracts are poorly coded and hence end up hurting the use cases rather than helping them.
• Very few proven scaled up use cases of smart contracts exist till date. The most successful ones so far are ICO tokens and Crypto-kitties.
• If smart contracts go wrong, good luck. And also, they are not legally enforceable in any jurisdiction so far.
The above challenges maybe overcome over time, as the Etherium alike protocols mature improve and become scalable, making them more accepted widely. And smart contracts shall be more relevant as automation & Iots grow, leading to more “machine interacting with machine” scenarios.
So whats needed for Blockchain to work
So where might Blockchain work then? Lets take the most successful Blockchain app. How Bitcoin Blockchain REALLY worked, see below the key factors in its success.
Shared Beneficial Ownership– Bitcoin Blockchain is owned by the public, striving to build a decentralized financial system where trust is built in a democratic fashion. While Bitcoin was initiated by smart hackers, it was scaled by the tech community and eventually became mainstream, because it seemed to help the whole world and everyone had an equal opportunity to build their businesses around it (like all miners, bitcoin exchanges, etc.). Wikipedia, Linux and several other open and crowd-sourced platforms have scaled in a similar fashion.
Independent mining achieves trust– Blockchain does not create trust inherently. Several nodes independently validating all transactions, for some incentive, build trust in a Blockchain. If the Blockchain app did not have enough independent miners, Bitcoin transactions would not have been so trustworthy.
True decentralization – Bitcoin is truly decentralized. There is no central point of failure. There is no dependence on 1 person, 1 node, 1 company, 1 Ceo, 1 nation, or 1 leader.
No contract among transacting parties– While doing a Bitcoin transfer, payee and payer do not need to know each other. They do not need to have a legal agreement between them defining terms and conditions of their transaction.
Some other factors –There are other factors that need consideration, including, multiple parties executing the transactions, transparency of transactions acceptable to all parties, public or private blockchain, etc.