The Many Blockchain Myths and Where it Might Work

Blockchain hype is currently off the charts. A wide variety of use cases have been proposed, and many experiments are underway. Discovering blockchain’s potential in retail must necessarily involve filtering proposed use cases through the sieve of what blockchain actually does well. More than a few initiatives (especially DAOs or decentralised autonomous organisations) are sanctimonious “power to the people” slogans masquerading as a business model. “Power to the people” slogans don’t end well. As citizens living under communist regimes eventually realize, power to the people usually translates to eternal power to the chairman. The utopia of decentralized goodness might never arrive. It is therefore imperative to understand what blockchain does not entail, and emphatically does not do.

A convention of the genre of writing about blockchain is that one must begin with an attempted definition of the technology. So here goes. What is blockchain? It is a system of running a decentralized database without a single trusted custodian, made possible by cryptographically making it very hard to make changes to the database in violation of the rules enshrined in the system. In other words, a Bank of America or a Walmart keeps it databases secure from unauthorized tampering through bewildering array of techniques and technology, such as encryption, gateway security, endpoint security, identity and access management, physical security, employment contracts, and the of course the law of the sovereign nations where they operate. A blockchain system – at least in theory – achieves the same level of database inviolability by raising the computational resources necessary for making changes to absurdly high levels through cryptography. Computational resources so high in fact, that it makes more economic sense to play by the rules.

A few pernicious myths associated with blockchain must go;

That it eliminates the need for trust in credible institutions. In June 2017, greatly exaggerated rumours of Vitalik Buterin’s death wiped out US$4 billion of the Ethereum coin’s value, indicating that humans still like warm glow of a trusted, charismatic figure’s association with an allegedly pure digital investment vehicle.

That it eliminates the need to create the rules of governance. it doesn’t, it merely changes the mechanism by which rules are enforced. The rules formulated at the time of creation is as subject to the messy business of human to human conversations, and biases of the creators as is the case with every other software system. And, the founders, as with all genesis stories, are finite in number. The intent of the masses has no way of being encapsulated in the rules. Also, blockchain isn’t necessary for members of an industry who compete tooth and nail for the same business to form a body that defines the rules of cooperation. Exhibit A is the financial services industry’s SWIFT (the society for worldwide interbank financial telecommunication).  

That it does anything beyond cryptographically making a secure decentralized database possible. A plethora of standard software things are conflated with blockchain. Much has been written about smart contracts. Enforcement of contracts, which is the enforcement of rules, is business rules management, IT process automation (as Forrester calls it), or plain old software. It isn’t an essential or even a necessary property of blockchain. The two have nothing to do with each other. Likewise, with purported use cases such as establishing authenticity of items of luxury. It is never explained how the necessary step of a certified expert with a certified set of tools will make a judgement call on the authenticity of the product. That certifying authority must – by necessity – be an entity trusted among consumers and firms through the length and breadth of the supply chain. What does this unavoidable step of physical assessment have to do with a cryptographically secure distributed ledger? As one writer said memorably, “a person who sprayed pesticides on a mango can still enter onto a blockchain system that the mangoes were organic”

That it is necessarily decentralized. In almost any human endeavour gains accrue disproportionately to the few, in accordance with the power law, also known as the Pareto principle. The top 1% cornering 40% of the American national wealth stems from the same dynamic. So far there isn’t much reason to believe blockchain will be any different. The bulk of transactions now happen at exchanges. The days of Mr. Joe Average tethering his laptop to the Wi-Fi and the city grid and mining bitcoins are long gone. It’s now all about ASICs, proximity to cheap sources of electricity such as hydroelectric power, preferably in a region that is cold and dry, and building datacentres with tens of thousands of servers consuming tens of megawatts of power. It is becoming harder and harder to nurse the myth that blockchain is decentralized in practice. 

Now, let’s look at where blockchain might work:

Where there is a trust deficit in the incumbents. Normal people don’t dream about decentralized control when the current intermediaries are recognized, trusted, and work just fine. They are happy with banks because there isn’t a trust deficit with retail banks in functional economies. Likewise, with governments and bureaucracies in functioning democracies. But where the situation with intermediaries is too nebulous and sketchy, with a long string of little-known, unorganized players, there could be an opportunity for blockchain to step in and address the trust deficit.

Where the appearance of not being owned by a single entity is important. Major banks can get together to form a SWIFT, and SWIFT would work. But when the appearance of giving equal chance to the little guy is important, blockchain could go a long in driving the right sort of PR both among participants and end consumers.

Where there is an actual perceptible benefit to the end user (and a significant benefit over status quo). Peter Thiel’s principle of 10X improvement must be evoked here. The blockchain industry has burned through enough electricity to power Iceland through several long Arctic winters, but that elusive 10X use case is still not in sight. That is not to say the future will not see a quantum leap in tangible benefit to the end consumer.

The confluence of the three factors above could get us real use cases in our industry, retail, which go beyond pilots. But that’s for another post. Watch this space!

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