The Fundamentals and Future of Blockchain and Bitcoin: Part 4 of 4

This is the last of our 4-part introduction to blockchain. In Part 1, Part 2, and Part 3, I’ve set out to explain the why, what, and how of this emerging technology. This last part identifies a few of the challenges raised by skeptics in the field. As with many other emerging technologies, there is a degree of hype and overreaching aspiration that is eventually tempered by the reality of implementation and market adoption. As technologists and entrepreneurs, our task is to identify where we are in the hype cycle and whether investing in this new kind of ledger will result in sufficient returns.

Summary So Far

• A ledger functions as proof of ownership
• Blockchain is an immutable, sometimes public, usually distributed, ledger
• Blocks of data are chained together using cryptography such that each subsequent block adds additional difficulty to changing blocks before
• Adding new blocks to a public distributed blockchain requires proof of work to disincentivize fraudulent activity
• The work of adding each block is rewarded with crypto coins, the activity of which is called mining
• The amount of work to get coins automatically adjusts to approximate coin value

Problems

Cost

By design, the proof of work to add blocks and mine coins has become ever more resource intensive such that it now requires specialized hardware (ASICs) running in, typically liquid-cooled, specialized data centers collocated near power generation where power is the cheapest. All that is to say is that there is legitimate concern that the resource cost of mining coin is not sustainable. Likewise, as the cost to participate has rapidly climbed, it has evolved to be far out of reach for anyone, but very well financed ventures. This flies in the face of much of the idealism surrounding the promise of minting and trading currency by consensus and without a central power structure. Further, there is not yet a model for sustaining the addition of new blocks without rewarding new coin. In fact, BitCoin is designed to stop rewarding new coin after a set quantity has been created. There is a vague suggestion that fees will be used from there on to sustain the proof of work. So far this is an untested scheme.

Crypto coins are speculative

So far, BitCoin and others fail as true currencies because their valuations fluctuate wildly. For a currency to be broadly adopted, there will have to be a reasonable expectation that the coin accepted today will have a similar value in the future when it is spent.

Garbage in garbage out

Blockchain is designed to be a generally public and distributed, immutable ledger. It does not, however, have the ability to ensure that only true and complete data gets recorded. Until someone invents mechanisms to do that as well, it is unclear how blockchain will be truly free of some of the same trusted 3rd party dependencies it’s intended to obviate. To put it another way, trading coin created within the blockchain works fine because it is contained in a closed system. But when it comes to asserting prior ownership of any external asset, including USD or Yuan, what guarantee is there that the data is accurate and complete?

Threats from the threatened

If blockchain has the potential to truly disrupt centralized power structures, then you can be sure that those power structures will fight to either kill it, or more likely, coopt it. Of many scenarios one might imagine, a government-backed crypto currency would not likely require proof of work—since it would not be a publicly distributed implementation—and could be much more stable by employing fiat and central-bank intervention. These benefits would likely appeal to the majority of people. Of course, there is an opportunity, in this scenario, for all transactions to be tracked by the government in the name of law and order. Or, another scenario is that deep pockets of wealth could be tapped to execute the sort of 51% attack earlier described as impractical. In other words, if blockchain has the potential to be every bit as disruptive as its proponent’s claim, then it’s sure to encounter strong and likely overwhelming resistance so long as it cannot be put to use by those powerful entities that are threatened to be disrupted.