Why Blockchain?
When folks ask me about what I do and I say I work for a major crypto company, the most common follow-up is, “Oh interesting. Hey, can you explain blockchain?”
This is both a very natural and somewhat odd question, depending on what the person really means. Usually I just say, “Haha, well yes, but I don’t think you’d really want me to!” (Keeping the conversation lively is much more important in such settings.)
When they ask, what such inquirers are really looking for is somewhat ambiguous. They could either mean explain how blockchain works as a technology (which I try to avoid, unless they’re a tech person) or more often why it exists in the first place (how it adds value, why is there such hype around it, etc.). It’s this latter one that’s more interesting, so I hope to unpack some of that value here without explaining too much about how blockchain works.
First, the blockchain technology gets tons of criticism, probably especially from tech-savvy folks. Some criticisms I share, like the environmental impact of Bitcoin. (Although I’d also argue we should always be focusing our best energies on oil companies, but we should also act to change what we can.)
“The problems blockchain solves already have solutions.” When I hear this, it’s usually meant in a few different ways:
- “The problems blockchain solves are already solved and therefore don’t need additional attention.”
- And similar, “The problems blockchain solves already have perfect solutions.”
- “The problems blockchain solves are already solved with existing solutions that are less costly and complex.”
Technology is always addressing the same problems.
The irony is that new technologies often solve problems that already have solutions. Typewriters already “solved” the rapid creation and reproduction of typeset paper documents. Smartphones with third-party apps existed before the iPhone. Taxis with request-on-demand (by phone) already existed before Uber and Lyft.
Yet despite existing solutions, the technology industry keeps reinventing proverbial mouse traps for the same problem of catching mice, each a better or different from the last.
So what really matters are the specific improvements a new technology affords us. Is the new solution cheaper, easier to access, more broadly applicable, less complex, etc.?
Also, these criticisms come often come from a place of a technological understanding paired with a misunderstanding or ignorance of the alternatives.
What I mean is, while blockchain as a ledger is quite complex, I’d argue it’s still nothing in comparison to the existing financial system and its current ledgers.
Blockchain is complex, but so are financial databases and systems.
The US financial system, which uses both digital and paper-based systems, are extremely complex. Just because Venmo makes it look like you can send a friend $38.10 “instantly” to split the dinner tab doesn’t mean this transaction actually happens within a few seconds. Venmo keeps this value proposition robust by enabling its customers to carry balances (not insured by the FDIC), but if you have a 0 balance, the traditional financial system kicks in, and several transactions are registered in accordance to the more traditional protocols in place. The settlement for those transactions can take days.
On the Ethereum blockchain, settlement happens every 12 seconds.
Blockchain and its consensus mechanism comprise a remarkable system of incentives, and relies on a quirk of probabilities that make it far more attractive to just play the game than even attempt to cheat.
Blockchain alone is essentially a ledger (i.e. an oddly restricted database) that’s entirely immutable and mathematically impossible forge or hack, once the latest state is established.
The network provides resilience. Similar to distributed source code systems that developers use every day (like git, Mercurial, or SVN), multiple copies of the blockchain are on each archival node. This isn’t just for resilience though – it’s critical to achieving the kind of consensus resilient to hacking as well.
The states of other databases can be hacked, all of them, except blockchain.
Databases have human administrators who have permissions to change any entry, but blockchain disallows this.
However, blockchain as an immutable database actually isn’t quite that interesting. But when you combine that with consensus, now the aspirations of blockchain start to emerge.
A “simple” bank transfer now goes through a multi-stage process that happens behind-the-scenes, one in
The larger financial system acts in ways that you have no control over at all. We “trust” these systems work in our best interests, and some may argue they work
Consumer protections come about when Congress and regulatory agencies put in protections for the public,
So what does this have to do with blockchain?
Blockchains and the consensus networks that govern them ensure that digital value can be transfer without an intermediary, without several private institutions and government agencies backing them.
The problems solved by blockchain aren’t technical, they’re societal.
In developed nations, the problems that emerge are things like:
- Certificates of Deposit aren’t honored when banks are acquired by other banks.
In developing nations, however, more problems that cryptocurrencies can address emerge:
It’s about digital authority.
Your creditworthiness is currently tied to databases and polices owned by three private agencies. If you’ve never had to fix an error on those reports, you’re quite fortunate, but those needing to go through that process know acutely the pain of doing so.