Does Blockchain live up to the hype?

Heralded as the ‘next major disruptive technology and worldwide computing paradigm’ following mainframe computers, personal computers, the internet and smartphones,[1] the general consensus is that blockchain technology has huge potential to transform the way we do business, and manage our personal affairs. However, it’s becoming very difficult to separate out the signal from noise in the blockchain space. The market value of all cryptocurrencies in circulation has jumped over 1300% in the past year,[2] creating a gold-rush like mentality for new investors hoping to make a quick fortune. Further to this, over 1150 ‘altcoins’ (i.e. alternative cryptocurrencies launched after Bitcoin) are now in circulation,[3] purporting to solve different technological issues using blockchain technology. A significant portion of these altcoins have been aptly described as ‘shitcoins’ and ‘scamcoins’; involving products that do not need to be based on blockchain, or that do not add any technological benefits beyond current market offerings. This build-up of excitement and speculation seems unsustainable, and has shifted focus away from the technology itself.

The function of blockchain in a nutshell
To examine whether the blockchain space is overhyped, it is important to understand what the technology is fundamentally about. It’s less complicated than you think. Blockchain refers to a database (or a ledger) where all participants in the network hold a synchronised copy, instead of the database being held by a central party such as a bank or clearing house. Before new transactions can be recorded on the blockchain database, the consensus of network participants is required to validate the transactions, as opposed to trusting a central party will record the transactions accurately. This system of maintaining and updating the synchronised databases is secured by advanced cryptography, to ensure that the system is highly resistant to outages and manipulation.[4]

Where does the name ‘blockchain’ come from? As transactions are processed in ‘blocks’ of transactions before being added to chain of existing blocks (i.e. the historical database/ledger), this led to the use of ‘blockchain’ to describe the technology.[5]

So in a nutshell, blockchain is focused on the decentralisation of databases and data. The main benefits that blockchain can bring include (1) The decentralisation of trust (eliminating the need for trusting the central party), (2) Speedier recording of transactions/events on a database and (3) Reduction of fees, which would have been taken by the central party.[6] Importantly, blockchain is not a silver bullet that can somehow solve all business issues; a factor that many excited investors and speculators fail to realise.

Over-excitement?
Let’s make it clear; I’m a firm believer in the technological benefits of blockchain. However, there appears to be a level of unrealistic optimism in the space. Here are a few examples:

1 – Use Cases
Blockchain has some potentially ground-breaking use cases, many of which have already been demonstrated to some degree. These include acting as an exchange of value (Bitcoin is the quintessential example), creating ‘smart contract’ transactions that can automatically execute,[7] and allowing for secure and efficient data-sharing across fragmented sectors such as healthcare and government.[8]

However, blockchain is not a silver bullet, and the link between many examples on the market and the use of blockchain seems dubious at best. Take ‘Stox’ as an example, a cryptocurrency promoted by Floyd Mayweather, which raised $25 million in an initial coin offering (ICO). Stox has labelled itself as an ‘open-source, Ethereum-based prediction marketing platform where people can trade the outcome of events’.[9] When you strip away the marketing, Stox is simply a betting platform that limits you to using ‘Stox’ tokens as the medium of exchange. Why a new cryptocurrency is required for the betting platform, and why blockchain adds value to this betting platform is a mystery; shrouded behind clever marketing. Unsurprisingly, the current market value of Stox is currently sitting below its ICO value, meaning the coin has lost value since its inception. Despite this, investors appear all too happy to be pouring their money into similar questionable investments.

2 – Survival
Many have compared the current cryptocurrency market to the dot.com bubble of the late 90s and early 2000s, in the sense that investors are overly optimistic about the prospects of any project that has a basis in blockchain. This is not to say that the blockchain market does not contain projects that will survive long-term; after all, tech titans such as Amazon and Ebay survived the crash of the bubble with remarkable success. However, it is unlikely that in 5 years’ time, the thousands of coins currently in circulation will be traded and used on a regular basis, meaning many excited investors are likely to be burned. Cryptocurrencies can be updated with additional qualities and functions,[10] and in the process may render many altcoins redundant. Blockchain networks with the largest and most sophisticated development teams (such as Bitcoin, Ethereum and comparable projects) and who are solving important technological issues are likely to be the only networks to survive in the long-term.

3 – Time Frame
It’s important to recognise that blockchain is a very new technology, and its disruptive impact on business and society will take time to be realised. We can see this by examining the rate of adoption of previous ground-breaking innovations. It took manufacturing companies 50 years to shift away from steam-driven production to electric motors, after the invention of electricity.[11] Similarly, little productivity gains were attributable to the use of computers until 2000, about 50 years after the first computer program was invented.[12]

No doubt the pace of technological adaption has accelerated in recent years, however there are still a large number of hurdles before the technology can make an impact on our day-to-day activities. Let’s focus on the most common use case for blockchain: as a digital currency like Bitcoin. Currently, there are very few vendors that offer point of sale integration for purchasing goods or services with Bitcoin. Also, navigating digital ‘wallets’, which allow you to store digital currencies, can be difficult for the average Joe, as the user interface (UI) and user experience (UX) aspects are severely lacking. These are just a few of the issues that are severely limiting the widespread adoption of blockchain, and will take significant time and development to address.

In Summary:
So does blockchain live up to the hype? Well, yes and no. We know blockchain is a technological tool that can potentially reconfigure the way society operates, by redefining the way we structure, access, and validate transactions and information. However, there’s plenty of questionable projects purporting to use blockchain on the market, and the level of excitement on the market seems to correlate more with the booming cryptocurrency market, rather than being rooted in the technological progress itself. There’s certainly interesting times ahead, as we see how this plays out!

Image source: https://rollercoasterguy.github.io/

References

[1] Swan, Melanie. 2015. Blockchain: Blueprint For A New Economy.

[2] “Cryptocurrency Market Capitalizations | Coinmarketcap”. 2017. Coinmarketcap.Com. https://coinmarketcap.com/.

[3] Ibid.

[4] “In Blockchain We Trust”. 2017. Digitalist Magazine. http://www.digitalistmag.com/cio-knowledge/2017/05/30/blockchain-we-trust-05060375.

[5] “Block – Bitcoin Wiki”. 2017. En.Bitcoin.It. https://en.bitcoin.it/wiki/Block.

[6] “What Is Blockchain”. 2017. Youtube. https://www.youtube.com/watch?v=93E_GzvpMA0&t=228s.

[7] “How Do Ethereum Smart Contracts Work? – Coindesk”. 2017. Coindesk. https://www.coindesk.com/information/ethereum-smart-contracts-work/.

[8] “The Potential For Blockchain To Transform Electronic Health Records”. 2017. Harvard Business Review. https://hbr.org/2017/03/the-potential-for-blockchain-to-transform-electronic-health-records.

[9] “Stox”. 2017. Youtube. https://www.youtube.com/watch?v=lUPrafmW3Yo.

[10] Itkis, Dan. 2017. “How Many Cryptocurrencies Does The World Need?”. Venturebeat. https://venturebeat.com/2017/09/20/how-many-cryptocurrencies-does-the-world-need/.

[11] “Why Didn’t Electricity Immediately Change Manufacturing?”. 2017. BBC News. http://www.bbc.com/news/business-40673694.

[12] Ibid.