What TF happened with blockchain?

Was it all just hype?

When I traveled home to the Bay Area for the holidays in 2017, the hype in my household was palpable. I had just returned to the outside world after being in my studying-for-finals hole for a few weeks, so I was very confused by the uncharacteristically chipper greeting I received from my brothers. I remember asking:

“What the hell has you two so excited?”

One of my brothers whipped out his phone and navigated to the Coinbase app. He then showed me how the $1,000 he had invested in Bitcoin earlier that year had more than doubled in value. He had tripled down and had invested even more money over the past few days, and it was rapidly increasing in value minute over minute.

I remember telling him this was too good to be true. Secretly, however, I didn’t know much about cryptocurrency or blockchain tech at the time, and I resolved to look more into it after Christmas and see if it was worth the investment.

But within 2 days, I had the ultimate older sister moment of “I told you so.” 😎

The price of bitcoin and other cryptocurrencies fell by over 20% in just a day, and their value continued to plummet over the next few weeks.

While I leaned into my immaturity and got a good laugh out of it at the expense of my brothers, this piqued my interested in blockchain.

Since then, I dove into the technology behind and potential of blockchain, beyond just cryptocurrencies, and I’ve become extremely fascinated not just by the hype around this emerging tech, but also by its inability to gain momentum in most industries, despite what the finance and tech bros predicted.

But first, what exactly IS blockchain and cryptocurrency?

I worry that the hype around blockchain and cryptocurrencies has left the impression on the average person that it’s super complex and hard to understand. In fact, I think it’s one of the most straightforward emerging technologies that people are working on today.

I guarantee you’ll understand it after watching a few YouTube videos. Trust me, it’s not as scary as it sounds, and it’s worth the watch.

There are also plenty of great articles out there that explain blockchain in layman’s terms, so I’m not going to reinvent the wheel here.

Simply put, blockchain is a computing protocol. It’s not an app — although Dapps (decentralized apps) can be built on a blockchain — and it’s also not a cryptocurrency.

Blockchains enable the secure transfer of money, assets, and information via the Internet without the need for a third-party intermediary, such as a bank. Transactions are validated, executed, and recorded chronologically in an append-only and tamper-resistant (immutable) database, where they remain always available on the Internet for lookup and verification.

Cryptocurrencies, like Bitcoin or Ether, are digital cash that can be transferred from one person to another without the need for a bank or clearinghouse. Ownership of coins is tracked in a digital, decentralized, distributed ledger, a.k.a. a blockchain! Cryptocurrencies are just one of the many use-cases of blockchain.

I’ve linked resources throughout this article that I highly recommend you check out to further your understanding of blockchain. I’ll leave it to you to dive into the details on your own, but here are the key things you need to know about blockchain at a high level:

1. It’s decentralized. Instead of relying on a centralized bank to update your balance sheet, everyone on a blockchain has a copy of the balance sheet. The decentralized network is controlled by the users, and no centralized team is taking a cut of the action. Nodes must reach a consensus that the transactions are legit to add a new block to the blockchain. If someone wants to hack into the blockchain and append a fake transaction or fake data, they’d have to hack into 51% of the nodes operating on the blockchain. In most blockchains, miners are incentivized to validate transactions for rewards or fees, depending on the consensus protocol.
2. It’s trustless. Instead of trusting a centralized authority to store your funds or your data, you trust in the blockchain’s protocol. Essentially, instead of trusting people, you are trusting code.
3. It’s (pretty) secure and immutable. The data in each successive block contains the hash (the cryptographic function that encrypts the data) of the previous block, which contains the hash of the previous block, etc. If someone wanted to change a transaction at any point in the blockchain, they would change the hash of the entire chain, the rest of the miner’s ledgers wouldn’t match up, and the fake transaction would be discarded.

Wow, okay that was painfully simplified for a perfectionist (me). If you want to know more, here’s another good starting place, but I’ll leave you to it at this point.

Now, back to the main topic. We’ve been promised that every industry that involves trust between two or more parties will be overhauled by blockchain. But…

It’s been over a decade. Why are we still waiting for blockchain to disrupt alllll the industries?

There are three reasons the finance and tech bros’ predictions haven’t come true.

Reason #1: Politics

The decision-making process in a traditional blockchain is decentralized, and theoretically, every participant in the network expects to have a say in important decisions. This is not how companies are run, and it’s not how most democracies run. Blockchain is anarchist by design.

The Republic of Georgia successfully migrated their land registry over to a blockchain with the help of Bitfury, but that was only because progressive politicians pushed for it. This is one of the most successful use cases of blockchain, but it wouldn’t have been possible without momentum from the government.

Until the U.S. government gets on board with blockchain and the transparency that comes with it, we can’t expect this decentralized system to disrupt our financial system or our democracy.

Additionally, mass awareness hasn’t happened yet. Most people in the western world have heard of Bitcoin, but try talking to one of your friends about blockchain. Unless you work in tech, you’ll probably be met glazed-over eyes and mild annoyance. Trust me, I tried it.

Until mass awareness takes hold, and until progressive politicians are willing to champion blockchain “for the people,” it’s doubtful blockchain will make much progress in a country like the U.S.

Reason #2: The Technology

In principle, blockchain is just a better version of a system we already use; think centralized databases like AWS and Azure. But in practice, developers and companies have yet to prove exactly how blockchain is better in a way that warrants moving from the old system to this new one.

To explain the obstacles in the way of mass adoption of blockchain tech, Vitalik Buterin, the founder of Ethereum, coined the term Scalability Trilemma.

Blockchain Trilemma

TL;DR: many believe it is impossible to create a blockchain network that is secure, scalable, and truly decentralized all at the same time.

If we’re unable to solve this problem with blockchain, there is pretty much no way companies are going to adopt this database protocol without being forced to. They already have a solution.

A developer can easily set up an AWS account and create your own scalable and secure (enough) database within minutes. The reality is that most people won’t care about the decentralized aspect at this point. At least with a service like AWS, you have a centralized team of people who are tasked with ensuring the health of the network, and most companies trust that Amazon will maintain the network. Granted, they could decide to shut down tomorrow and people would be f*cked, but most people generally believe that they won’t, so they’re fine with trusting a central authority.

Many are attempting to solve this trilemma, without much success. We have the lightning network, which is scalable, but it is much less decentralized and people question its security. Some companies are even deviating from the original concept of a blockchain and are instead improving scalability by working on something that looks more like a block-tangle.

At this point, these solutions aren’t good enough. Until this technological trichotomy can be resolved, blockchain will continue to struggle to prove itself as a better way to record transactional data.

Reason #3: Blockchain is inherently anti-capitalist

Bitcoin was first created as a response to the 2008 financial crisis. The originating community was antiestablishment by design; the distribution of wealth and financial opportunity goes against what many economists see as a fundamental tenant of western economies:

Wealth inequality is an unfortunate, but necessary byproduct of capitalism.

On a philosophical level, blockchain technology attempts to bring power back to the community. The implication of transferring assets using a blockchain network instead of relying on human-based institutions is that the traditional, centralized authorities responsible for verifying and validating transactions will most likely become obsolete. Do we expect behemoth companies (ahem, IBM) to innovate blockchain tech in a way that stays true to its original intention?

Finally, brands are aligning with the word blockchain as a means to their capitalist ends. I don’t necessarily disagree with their tactics, as they are obviously working. However, because their intentions are misaligned with blockchain’s fundamental philosophy, their “get a few people rich quick” use of blockchain is not going to catapult the technology into mainstream success.

This is why the “killer app” for blockchain, at least in the western world, is going to be digital currencies and asset management, rather than something like “AirBnB, but blockchain!”

Even though blockchain tech can improve the financial industry immensely, but this won’t happen until the government intervenes and regulates big banks that will never let go of their centralized power on their own volition, even if they are currently claiming to be “investing” in blockchain technology.

So don’t hop on the blockchain bandwagon because it can get you VC money or because “everyone else is doing it.” Do your research; the best use of your time is probably lobbying governments or the SEC to convince them to test out and adopt blockchain technology, or figuring out a different way to scale these networks.