<nettime> Ten years in, nobody has come up with a use for blockchain

[nettime's avid reader <nettime@kein.org>]

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

Dec 22, 2017

Kai Stinchcombe

Everyone says the blockchain, the technology underpinning
cryptocurrencies such as bitcoin, is going to change EVERYTHING. And
yet, after years of tireless effort and billions of dollars invested,
nobody has actually come up with a use for the blockchain—besides
currency speculation and illegal transactions.

Each purported use case — from payments to legal documents, from escrow
to voting systems—amounts to a set of contortions to add a distributed,
encrypted, anonymous ledger where none was needed. What if there isn’t
actually any use for a distributed ledger at all? What if, ten years
after it was invented, the reason nobody has adopted a distributed
ledger at scale is because nobody wants it?

__Payments and banking

The original intended use of the blockchain was to power currencies like
bitcoin — a way to store and exchange value much like any other
currency. Visa and MasterCard were dinosaurs, everyone proclaimed,
because there was now a costless, instant way to exchange value without
the middleman taking a cut. A revolution in banking was just the start…
governments, unable to issue currency by fiat anymore, would take a back
seat as individual citizens transacted freely outside any national system.
The killer feature: knowing you can get your money back

It didn’t take long for that dream to fall apart. For one thing, there’s
already a costless, instant way to exchange value without a middleman:
cash. Bitcoins substitute for dollars, but Visa and MasterCard actually
sit on top of dollar-based banking transactions, providing a set of
value-added services like enabling banks to track fraud disputes, and
verifying the identity of the buyer and seller. It turns out that for
the person paying for a product, the key feature of a new payment
system — think of PayPal in its early days — is the confidence that if
the goods aren’t as described you’ll get your money back. And for the
person accepting payment, basically the key feature is that their
customer has it, and is willing to use it. Add in points, credit lines,
and a free checked bag on any United flight and you have something that
consumers choose and merchants accept. Nobody actually wants to pay with
bitcoin, which is why it hasn’t taken off.

    The key feature of a new payment system — think of PayPal in its
early days — is the confidence that if the goods aren’t as described
you’ll get your money back.

It would take 5,000 nuclear reactors to run Visa on the blockchain.

Plus, it’s not actually that good a payment system — Visa can handle
sixty thousand transactions per second, while Bitcoin historically taps
out at seven. There are technical modifications going on to improve
Bitcoin’s efficiency, but as a starting point, you have something that’s
about 0.01% as good at clearing transactions. (And, worth noting, for
those seven transactions a second Bitcoin is already estimated to use 35
times as much energy as Visa. If you brought Bitcoin’s transaction
volume up to Visa’s it would be using as much electricity as the rest of
the world put together.)

__Freedom to transact without government supervision

In many countries, and often our own, a little bit of ability to keep a
few things private from the authorities probably makes the world a
better place. In places like Cuba or Venezuela, many prefer to transact
in dollars, and bitcoin could in theory serve a similar function. Yet
there are two reasons this hasn’t been the panacea it’s assumed: the
advantages of government to the individual, and the advantages of
government to society.

The government-backed banking system provides FDIC guarantees,
reversibility of ACH, identity verification, audit standards, and an
investigation system when things go wrong. Bitcoin, by design, has none
of these things. I saw a remarkable message thread by someone whose
bitcoin account got drained because their email had been hacked and
their password was stolen. They were stunned to have no recourse! And
this is widespread — in 2014, the then-#1 bitcoin trader, Mt. Gox, also
lost $400m of investor money due to security failures. The subsequent #1
bitcoin trader, Bitfinex, also shut down after a loss of customer funds.
Imagine the world if more banks had been drained of customer funds than
not. Bitcoin is what banking looked like in the middle ages — “here’s
your libertarian paradise, have a nice day.”

[This issue is particularly near and dear to my heart because my own
company, True Link, is designed to help vulnerable seniors — people
likely to give out their credit card number over the phone, enter
sketchy sweepstakes or donate to sketchy charities, participate in scam
investments, or install password-stealing malware. As the people who
most need security enhancements in banking and payments, they depend
heavily on the existing protections and would absolutely be harmed by
many of the proposed changes in favor of private-key authenticated,
instant, and irreversible transfers. Someone starting from a human
perspective on banking security—who is currently harmed and how can we
help them?—would come up with something very different from blockchain!]


Second, government policies are designed to disrupt terrorist financing
and organized crime, and prevent traffic in illegal goods like stolen
credit card numbers or child pornography. The mainstream preference is
to have transactions private but not undiscoverable under warrant — ask
“should the government have a list everyone you’ve paid money to,” and
most will say no; ask “should the government be able under warrant to
get a list everyone a child pornography collector has paid money to,”
and most will say yes. Nobody wants bitcoin to 100x the total traffic in
goods and services our government defines as illegal — as one bitcoin
enthusiast pointed out to me, “If you invented cash today, it would be
illegal too.”

__Micropayments and bank-to-bank transfers

It’s worth noting two particular payment use cases where people are
particularly excited about blockchain-based currencies: micropayments
and bank-to-bank transfers. In terms of micropayments, people enthuse
that bitcoin transactions are free and instant. Actually, they take
about eight minutes to clear and cost about four cents to process.
People have proposed that you will use bitcoins for micropayments — for
example, paying two cents to a musician to listen to their song on the
internet, or four cents to read a newspaper article. Yet the
infrastructure to do this — for example, advance authorization with the
source of funds so you don’t have to wait eight minutes to read the
article you just clicked — actually eliminates the need for bitcoin at
all. If you’re happy to pay four cents an article or two cents a song,
you can set it up to bill once a month from your bank account and read
to your heart’s content. And in practice, people prefer subscription
services to micropayments.

In terms of interbank payments, many people mention Ripple as a
promising way to transfer money between banks. Over the last 30 days it
processed two billion dollars (as of this writing) worth of interbank
and interpersonal transactions — about 40 seconds’ worth of volume on
the SWIFT interbank network — after three years of being available to
banks to trade 90% of the world’s high-volume currencies. This is like
the proportion of US GDP comprised by toothpick sales. Why haven’t banks
preferred this new technology? The answer is that setting up a Ripple
Gateway isn’t actually much different than using the existing
corresponding-account system — except that a lost password or security
token can lead to much larger and more instant actual losses — which, as
a reminder, has happened to more leading bitcoin exchanges than have
managed to avoid it. The same features that make the banking system
attractive to end users also make it attractive to banks. They already
have ledgers, and don’t need to distribute them, anonymize them, encrypt
them, publish them, and make them irreversible.
“Smart” contracts

“Smart” contracts are contracts written as software, rather than written
as legal text. Because you can encode them directly on the blockchain,
they can involve the transfer of value based directly on the
cryptographic consent of the parties involved — in other words, they are
“self-executing.” And in theory, contracts written in software are
cheaper to interpret — because their operation is literally mathematical
and automatic, there are no two ways to interpret them, which means
there’s no need for expensive legal battles.

__The DAO loses all its customers’ money

And yet the real-world examples show the ways this is problematic. The
most prominent and largest smart contract to date, an investment vehicle
called the Distributed Autonomous Organization (DAO), enabled its
members to invest directly using their private cryptographic keys to
vote on what to invest in. No lawyers, no management fees, no opaque
boardrooms, the DAO “removes the ability of directors and fund managers
to misdirect and waste investor funds.” And yet, due to a software bug,
the DAO “voted” to “invest” $50m, a third of its members’ money, into a
vehicle controlled by very clever programmers who knew a lot about
recursion issues during balance updates. Some said this was a hack or an
exploit because the software had not functioned as intended, while
others said that there was no such thing as a hack — the whole point was
that the software made decisions autonomously and there were no two ways
to interpret it, and if you didn’t understand how the software worked
you shouldn’t have participated. In the end, everyone got together and
voted to retroactively amend the software contract and move the money
back to its original owners. What’s the takeaway? Even the most die-hard
blockchain enthusiasts actually want a bunch of humans arguing about the
underlying intention behind a contract, rather than letting the software
self-execute. Maybe the “dumb” way is smart after all?
Even crypto enthusiasts want to argue about what their contracts mean

The DAO was an illustrative experiment, but what about for routine
transactions at big companies? The investors and startups in the
smart-contract space promise that the block chain will enable super-fast
execution and payment — for example that in healthcare applications,
“instead of waiting 90–180 days for a claim to be processed, or spending
hours on the phone trying to get your bill paid, it can in theory be
processed on the spot.” But that’s true for any software-enabled
purchasing system. My company’s Amazon servers scale automatically based
on website traffic and bill us for how much we use. The idea that smart
contracts would change this is a fallacy — it conflates the legal
arrangement being put into effect with software with the legal
arrangement itself being coded as software. Amazon’s terms of service
are not a smart contract, but the billing system that implements those
terms is automated. To the extent that health insurance billing, for
example, is not automated, the problem isn’t that existing software
isn’t “smart” enough to handle submitting claims and paying them
electronically, it’s that the insurance company is slow moving, either
by accident or because they on-purpose prefer a human review.
Can bitcoin make this go faster please?

In the end, everyone from blockchain enthusiasts to health insurers
actually wants to argue out in human language what the business
relationship is and interpret it on an ongoing basis, and then to write
software that handles the fulfillment and payment. That already
exists — it’s the status quo.

__Distributed storage, computing, and messaging

Another implausible idea is using the blockchain as a distributed
storage mechanism. On its face it makes sense — you break your document
up into “blocks”, encrypt them, and put them in a distributed ledger…
it’s backed up across multiple locations, it’s secure, and easy to track
everything that happened.

Yet there are multiple excellent ways to break up files, encrypt them,
and replicate them across multiple storage media in different locations.
There is already a company that bills itself as a cheaper, distributed
Dropbox, which encrypts and stores files across multiple users’ hard
drives and pays them a small fee for the free space on their hard
drives. The block chain is just a particularly inefficient and insecure
way of doing this.

There are four additional problems with a blockchain-driven approach.
First, you’re relying on single-point encryption — your own private
keys — rather than a more sophisticated system that might involve
two-factor authorization, intrusion detection, volume limits, firewalls,
remote IP tracking, and the ability to disconnect the system in an
emergency. Second, price tradeoffs are entirely implausible — the
bitcoin blockchain has consumed almost a billion dollars worth of
electricity to hash an amount of data equivalent to about a sixth of
what I get for my ten dollar a month dropbox subscription. Fourth,
systematically choosing where and how much to replicate data is an
advantage in the long run — the blockchain’s defaults on data
replication just aren’t that smart. And finally, Dropbox and Box.com and
Google and Microsoft and Apple and Amazon and everyone else provide a
set of valuable other features that you don’t actually want to go
develop on your own. Analogous to Visa, the problem isn’t storing data,
it’s managing permissions, un-sharing what you shared before, getting an
easy-to-view document history, syncing it on multiple devices, and so on.

The same argument holds for proposed distributed computing and secure
messaging applications. Encrypting it, storing it forever, and
replicating it across the entire network is just a ton of overhead
relative to what you’re actually trying to accomplish. There are
excellent computing, messaging, and storage solutions out there that
have all the encryption and replication anyone needs — actually better
than blockchain based solutions — and have plenty of other great
features in addition.

__Stock issuance

It was much-heralded when NASDAQ launched an internal blockchain-driven
exchange for privately-held stocks. But wait: correct me if I’m wrong,
but the whole purpose of NASDAQ (or the DTCC trade clearing system, for
example) is that it has a ledger of who owns what stocks? Were they
nervous that their systems, absent blockchain, would soon be unable to
keep track of who owns what?

Similar to other transaction-tracking problems such as
customer-to-merchant payments, the difference between NASDAQ’s ledger
and blockchain’s ledger is that blockchain is distributed — it addresses
the problem of lack of a trusted intermediary. And yet (for legal
transactions) the company itself, its transfer agent of record, a
clearinghouse, or an exchange are all trusted intermediaries and
typically provide value-added services in addition. The reason NASDAQ is
the right home for a blockchain-driven exchange is that they’re expert
in the compliance and security aspects of trading stock. Cut out the
middleman (here, NASDAQ itself) and the government and you’ll ultimately
be limited to companies that choose to make an end-run around the legal,
compliance, and tracking systems common to the mainstream market. As
people who trade in unlisted stocks will tell you, that’s a recipe for
getting your money stolen.

And we’re already seeing this. New companies have also begun creating
blockchain-based “coins” convertible into company stock, and selling
them to the public in Initial Coin Offerings, or ICOs, as a cheaper and
more flexible way to raise money than a traditional Initial Public
Offering of stocks on an exchange. It will be interesting to see how
long this craze lasts — among other things, offering tokens convertible
to stock counts as a securities offering, and so the SEC rules
presumably apply to these securities offerings just like any other.
Either the “coins” are just less-secure electronic stock
certificates — protected by however carefully you store your password,
rather than by the laws and protections of a securities exchange — or
it’s another attempt to do an end-run around the law.

__Authenticity verification

Another plausible use of the blockchain is that if you want to make a
public, unalterable, undeleteable signed statement, you can “publish” it
to the block chain — thinking of the distributed ledger as more like a
diary than a way to buy and sell. In theory you could use this for
recording vote tallies, verifying the origin of diamonds or brand-name
gear, verifying people’s identity, resolving the ownership of domain
names, keeping items in escrow, disclosing provisional patents under
seal, notarizing documents, and so on.

Without diving too thoroughly into the details of each of these, it
seems the use cases all fall apart pretty quickly. For voting, the
status quo is recording the total number of ballots cast, with the voter
dropping a visible paper ballot in a box, and journalists and observers
from both sides watching the ballot boxes the whole time. The tough
problem in voting is keeping who voted for who anonymous and yet making
sure that voters and votes are one to one. Paper does this so much
better than blockchain.

For a public notary or similar, verifying your driver’s license or
having witnesses known to you present means that it wasn’t signed with a
stolen password or private key — but, if a password or private key is
adequate, you can just publish it signed with a PGP key. For
establishing the authenticity of brand name goods like watches or
handbags, or that a diamond was ethically mined, the ledger being
distributed and encrypted doesn’t add any value — the originating
company can just include a certificate you can verify online, just as
they have done in the past. In cases of escrow, a smart contract can
automatically pay for the goods without a need for a third party to
verify and hold the funds, but you still need a trusted party to verify
that the goods are delivered and as-promised.

__Proving you know something, in the modern world

And finally, if you want to irrefutably prove that you knew X at time Y
without disclosing the actual knowledge publicly, encrypt it and email
it to yourself at both a gmail and a hotmail address or post it on
bitbucket, or print it out and notarize it, or postmark it by mailing it
to yourself, or tweet an md5 of it, or whatever. But then again, how
large is the irrefutably-prove-you-knew-X-at-time-Y-without-disclosing-X
industry? Can you think of any leading company, or any company at all,
that provides this service?

For domain resolution — the process of figuring out whose servers get to
see the traffic and respond to your requests when you type a URL into
your address bar — it’s promising to imagine that an all-digital record
of smart contracts, where the actual act of payment being published to
the ledger also updates who the domain resolves to, obviating the need
for domain escrow services. Yet in practice, as with the DAO or other
smart contracts, if valuable domains change hands due to theft or
security issues, you actually need a way to override the ledger — as the
result of a court order, for example. Just like with government-backed,
law-backed bank accounts, real companies won’t prefer a situation in
which a security breach or stolen password could result in someone else
permanently and irrevocably owning bankofamerica.com or disney.com or
sony.com or whatever. Adopting block chain technology makes theft or
impersonation more likely rather than less. It sounds hypothetical until
you realize more leading bitcoin exchanges have been hacked than
not — something that very rarely happens with the leading domain name
providers.

__So what’s left?

Each of these seems trivial — yes, everyone knows handbags already come
with certificates of authenticity with an ID number you can look up
online — except that in each case, millions if not tens of millions of
dollars have been spent on entire companies dedicated to just that
particular use case. And you can get even more esoteric — Second Life on
the blockchain, or blockchain-enabled appliances so your washing machine
can smart-contract for its own detergent, or a sports league where the
coaching decisions are written on the blockchain. (For real!)

In the end, the advantages of the existing human and software systems
surrounding transactions — from verifying identity with a driver’s
license to calling and clarifying the statements made in a credit
disputed transaction to automatically billing your credit card for a
newspaper subscription — outweigh the purported benefits, as well as
hidden costs, of irrevocable, automated execution. Blockchain
enthusiasts often act as if the hard part is getting money from A to B
or keeping a record of what happened. In each case, moving money and
recording the transaction is actually the cheap, easy, highly-automated
part of a much more complex system.

Which leaves us where we started — currency speculation and illegal
transactions — along with perhaps a lesson. In conversations with
bitcoin entrepreneurs and investors and consultants, there was often a
lack of knowledge or even interest in how the jobs were being done today
or what the value to the end user was. With all the money spent on
bitcoin cash registers, nobody went out and did a survey about whether
most credit card users would be willing to give up their frequent flyer
miles in return for also losing the ability to dispute a transaction.
Presumably, they thought, the reason IPOs are so expensive or venture
fund formation paperwork is so onerous is because all those lawyers and
accountants are just getting rich sitting around pushing paper… a bunch
of smart engineers in their 20s with no industry experience could
certainly do their jobs, automatically, in a matter of months, with just
a few million bucks of venture capital.

So far, not so much.



#  distributed via <nettime>: no commercial use without permission
#  <nettime>  is a moderated mailing list for net criticism,
#  collaborative text filtering and cultural politics of the nets
#  more info: http://mx.kein.org/mailman/listinfo/nettime-l
#  archive: http://www.nettime.org contact: nettime@kein.org
#  @nettime_bot tweets mail w/ sender unless #ANON is in Subject: