Is Blockchain Technology The Next Big Thing? Or Will It Fail To Live Up To The Hype?

Wherein a blockchain skeptic opines on blockchain's usefulness.

In a past column, I wrote a fictional (sort of) story where I envisioned the next recession being triggered by the realization that blockchain technology had no practical purposes and was mainly used by criminals.

Last year, it looked like anything but criminal. Many people jumped on the blockchain bandwagon when the value of the cryptocurrency Bitcoin skyrocketed. Investors bought as much as they could. Academics and entrepreneurs tried to learn more about blockchain and its potential applications. And lawyers tried to learn as much as they could about the subject as demonstrated here.

But I didn’t really understand it. Instead of jumping on the bandwagon, I became a skeptic. And I am not alone. In fact, some are more confused then ever. And we’re wondering whether blockchain will live up to the hype. I want to discuss a few issues I have come across while trying to understand what blockchain is.

What is blockchain?

The first problem with blockchain is that most people do not understand what it is or what it does. One reason for this is because there seems to be numerous definitions with varying levels of complexity.

For example, Wikipedia defines blockchain simply as a “growing list of records, called blocks, which are linked using cryptography.”

Investopedia defines it as a “digitized, decentralized, public ledger of all cryptocurrency transactions.”

Sponsored

Another ATL columnist, Tom Kulik, defines blockchain as “a distributed ledger technology that leverages a decentralized computer system to create secure, verifiable and permanent records of transactions.”

Dealbreaker’s Mike McDonald offers this definition: “Blockchain is a distributed or decentralized digital network that enables the exchange of value or the ability to confidently share data—including financial assets and contracts—in a secure environment.”

Another reason why blockchain is confusing is because the above definitions themselves contain terminology that need further defining. Like “distributed ledger,” “decentralized,” “cryptography,” “cryptocurrency,” “secure,” “records,” and for the lawyers, “transactions.” Unfortunately, most of these definitions are very technical.

So most people try to understand blockchain the way most law students try to understand the rule of perpetuities: repeat the definition over and over again hoping that the information eventually osmoses into your brain and magically turns into understanding. But eventually most give up and hope it’s not going to be tested on the bar exam. Or in the case of blockchain, hope that a client (or a government agency) will not ask a lawyer to explain themselves.

So what is blockchain supposedly useful for?

Sponsored

If you don’t understand the definition of blockchain, then that’s not a dealbreaker. I mean, I don’t need to know how my desktop computer’s motherboard and graphics card work in order to appreciate its ability to transcribe my thoughts into a computer screen using a word processor.

In essence, the purpose of blockchain is to certify transactions between people. So what are its practical applications?

There have been many theoretical examples on how blockchain can be used. Like tracking the origin of food, authenticating luxury goods, and verifying financial transactions and title on real estate searches. And most lawyers have heard about how blockchain can be used to create so-called “smart contracts.” But none of these have yet been implemented to any extent.

But the most common use for blockchain presently is facilitating the purchase and sale of cryptocurrencies, the most famous being Bitcoin. Bitcoin is the cryptocurrency that started with a value of less than $1 and rose to $18,000 at its peak in 2017. This is because someone was able to convince others to pay $18,000 for Bitcoin on the belief that someone else will pay $1 jillion dollars in the future.

This Bitcoin bonanza has resulted in the creation of over 1600 copycat cryptocurrencies and over 500 cryptocurrency exchanges.

Will blockchain disrupt the status quo?

Many people are calling blockchain the “next big thing” or a potential disruptor of how we conduct transactions. They are sketchy on the details but claim that blockchain makes transactions faster, secure, and more efficient. Let’s focus on cryptocurrencies, since that is the only real application of blockchain technology.

Proponents of cryptocurrencies claim that blockchain technology can be used to create alternatives to traditional banks. They point out that banks typically take one to seven business days to transfer money while blockchain technology can verify transactions within minutes and with lower transaction fees.

In the past, Bitcoin transactions took less than an hour to complete. But as the popularity of Bitcoin increased, so did the waiting periods and the transaction fees. According to this article, Bitcoin’s popularity has resulted in a backlog of transactions that needed to be verified which meant that people waited for several days before seeing their money. The problem is, the people doing the verifying — called miners — could choose which transactions to verify. So the miners needed an incentive to verify one person’s transaction over another’s. And that incentive came from increased transaction fees. So people paid higher transaction fees to the miners in exchange for getting their transactions verified first so they can get (or send) cryptocurrencies.

So it appears that during peak trading hours, hold times are longer and transaction fees are higher which will diminish the appeal of cryptocurrencies. Not only that, some banks (like Chase and Paypal) are also offering instantaneous transfers for a nominal fee. Some companies have stopped accepting Bitcoins as payment because of this.

While it remains to be seen if blockchain can improve the efficiency of certain industries, in the case of cryptocurrencies, it does not seem to be living up to the hype.

Blockchain proponents tend to make strange arguments.

As a skeptic of blockchain technology, I want their supporters to be able to answer my questions if they will have a shot at changing my mind. But when I argued or even tried to start a dialogue with their fans (usually anonymous commenters writing on blockchain articles), I found that many of them couldn’t answer any technical questions about how blockchain worked. Many didn’t know what blockchain was. Instead, they would rant about what was wrong with society. The content of their rant usually depended on their political beliefs.

A conservative would say something like this:

Big government wants to control the banks. They don’t care about regular people like you and me. The only thing Big Brother cares about is overregulating the banks and forcing them to report everything we do with our money so they can tax us into poverty. If we invest in Bitcoin now, it will throw a monkey-wrench into the system. And we can make enough money to buy a Lambo.

A liberal would say something like this:

Rich corporate executives want to control the banks. They don’t care about regular people like you and me. The only thing these overpaid fatcats care about is finding reasons to take our money by charging us all kinds of fees and interest which will get them huge bonuses while putting us into poverty. If we invest in Bitcoin now, it will throw a monkey-wrench into the system. And we can make enough money to buy a Lambo.

I must admit that it is amusing to listen to this unusual display of bipartisan lunacy. But it’s not a good idea to follow the crowd when it doesn’t understand what they are investing in.

Blockchain is basically an online ledger where transactions are verified by a decentralized network. Even though the transactions are public, they are somehow more secure. It is an emerging technology with possible potential for growth. But most people don’t really understand what it is because different people are giving different explanations. And in the case of cryptocurrencies, they look less like alternatives to traditional banking and more like a high-risk investment. And of course, there have been many instances of fraud and theft involving cryptocurrencies and blockchain technology.

In a future column, I will write about what the government plans to do (if anything) about blockchain and a few stories involving fraud. But before I do that, I, like everyone else, needs to learn more about this topic.


Shannon Achimalbe was a former solo practitioner for five years before deciding to sell out and get back on the corporate ladder. Shannon can be reached by email at sachimalbe@excite.com and via Twitter: @ShanonAchimalbe.

CRM Banner