Posts Tagged ‘blockchain’

Bitcoin Hype

Tuesday, January 16th, 2018

Blockchain has become quite the hyped technology over the past year.

Consider this: it’s a distributed, validated ledger of transactions. It’s useful to transfer value between parties who may not know each-other, who may wish to remain anonymous and who wish to ensure that transfer is singular — no “double payment.”

That’s the high level picture.

On the other hand, it’s got some draw-backs:

  • It’s computationally expensive, by design.
  • It’s a profligate user of electrical energy.
    Bitcoin alone is estimated to consume over 41 terawatt-hours per year:
    digiconomist.net/bitcoin-energy-consumption.
  • It’s slow.
    The entire Bitcoin network only processes about 300,000 transactions/day
    or about 3.5 transactions/second).
    blockchain.com/charts

People have lots of wild theories about where this technology will bear fruit, but in practice the only major use case today is for criminals to pay for goods and services. Awesome.

The other “use case” today is a speculative market in exchanging Bitcoin for hard currency, like USD. Here’s the chart:

www.xe.com/currencycharts/?from=XBT&to=USD&view=1Y

I recently read a great write-up comparing the hype of blockchain to the reality:

https://hackernoon.com/ten-years-in-nobody-has-come-up-with-a-use-case-for-blockchain-ee98c180100

So what’s the reality?

  • Is it a safe place to store value? Only if you are sure that your private key and/or password will never be compromised and that you’ll never make a mistake when transferring funds. If you don’t trust yourself enough for that, with large value wealth storage, then it’s a bad platform for you.
  • Are bitcoin exchanges a safe place to store money? Given their history of hacks and shady business, I’d say no.
  • Is it good for funds transfer? Not really, given the cost and delay of transactions. Only criminals who really, really need anonymity would put up with the awful process.
  • Is it good for small payments? Not really. Too slow and costly.
  • Is it a good alternative for hyper-inflationary currencies issued by idiot regimes? US Dollars or Euros are a more practical choice there.
  • Does it have stable value? If you read the news, you know that Bitcoin/USD exchange rates have behaved more like a bubble than an investment-grade product.
  • Would it be a good alternative to inter-bank transfers? Maybe, but not anytime soon.
  • What about smart contracts? Sounds good, but people engaged in legal contracts generally want to understand what they are signing up for, and few can read algorithms. Moreover, how do you tie a smart contract to real-world trigger events?
  • What about using it to manage identities? The only plausible use case here is for citizens or consumers (forget about identities within the enterprise) and in any case it’s not clear how to link such a blockchain to physical things like birth records or driver licenses.

In other words, it’s a cool way for criminals to transfer funds anonymously and a plausible way for institutions to handle large but infrequent transfers among themselves. For everything else, the cost, inconvenience, non-repudiation, delay and even anonymity look like problems rather than advantages.

But everyone is making noises about “doing blockchain,” like this soft drink company:

Long Island Iced Tea?

So why is everyone jumping on the blockchain bandwagon? Because it’s the latest fad, and if your company tells the world that it’s researching the latest blockchain technology, your stock price will probably get a bounce. But don’t hold your breath for results.