Blockchain evangelists love to herald that if you plot a timeline of the internet from inception to widespread adoption, blockchain is on the same track. The technology’s Napster moment is imminent: The killer “DApp” (Decentralized Application) that no one can live without is near, and it’s the one that fundamentally changes the world and launches a digital economy renaissance.
No matter how close we are to that moment, blockchain is big business right now. Banks, exchanges, CCPs, and brokerages alone are estimated to have spent $1 billion on blockchain technology in 2017, an amount expected to double by 2019. The big consortiums are financed by banking titans that each support multiple blockchain projects, some of which compete directly against each other in the race to see who can bring their concept to market (or production) first. It’s an institutional rush not unlike venture capitalists who spread their bets across multiple startups: One of them is sure to hit big Speaking of venture capital, why bother when you can raise money using an ICO (Initial Coin Offering)? As of this writing, there have been 234 of them in 2017, valued at $3.6 billion . The private equity side of the story is the same: Some $4.5 billion has been spent on startups competing to build the next great DApp, of which there are now over 700. The strategy for blockchain investors is straightforward: Get into the game, and hang in there until the tectonic disruption arrives.
But what if we’re a lot further away from a Napster moment than anyone thinks?
Gamble on cryptocurrencies. Invest in distributed ledgers.
Jamie Dimon, JP Morgan CEO and designated archvillain of the cryptocurrency movement, made headlines with his blunt assessment of bitcoin as a “fraud”. But his analogy of currencies being “invented out of thin air” is entirely accurate. The ICO market is a big contributor to bitcoin’s surge in value. To purchase an ICO’s cryptocurrency, you typically buy it with bitcoin or ether. The number of ICOs more than tripled from 2016 to 2017; bitcoin’s value has gone up over 1600% in the same period.
All this says is that interest in cryptocurrency is skyrocketing. But there are no fundamentals driving this value. The bulk of cryptocurrency investment is speculative, because the DApps behind these ICOs do nothing useful at present. Most of them are gambling applications, or make use of “predictive markets,” which is essentially a way to crowdsource your betting instincts for you.
In other words, cryptocurrencies are a technology without a solution. Whereas the US dollar is backed by the full faith and credit of the US government, bitcoin is backed by the mathematics of a cryptographic algorithm, and more importantly, the libertarian social network that fervently believes in its value. This irrational exuberance follows the path of every bubble before it, from tulips to real estate. Outside of this network, a cryptocurrency is worthless. The only rational explanation why anyone would accept bitcoin today as payment is 1) because they have the electronic means of accepting it, and 2) because they think they’re getting something in return that, because of this digital gold rush, will soon be worth much more than the dollar value of the goods they’re selling.
As a medium of exchange, it’s arbitrage at best, and gambling at worst. If bitcoin has any intrinsic value (and we don’t think it does), then it’s very difficult to explain to an economist’s satisfaction. Plus, bitcoin’s volatility hardly makes it a reliable store of value. A dollar has value everywhere on Earth, and its strength or weakness can be measured against other currencies backed by the faith of foreign governments. For the foreseeable future, this will continue to be reality, and barring a global cataclysm, we do not worry about flash crashes or anything else eliminating the value of a dollar.
Thus, trade cryptocurrencies if you must, but please do so sensibly. If the day ever arrives when we can pay everything from our taxes to the local lemonade stand in bitcoin, then you’ll be in a great spot.
Meanwhile, the rest of Wall Street and other industries don’t care about cryptocurrencies, which is to say they lack faith in its potential to solve actual business challenges. They only care about the cost savings that distributed ledgers could help them achieve. Unlike bitcoin, those potential savings are in real dollars, billions of them. Most of the banking experiments are distributed ledgers deployed on permissioned networks structured very much like the centralized institutions that cryptocurrencies were designed to replace. But that’s where the real value is: Using blockchain technology to modernize the inefficient legacy systems that so many industries stand upon.
Don’t try to shoehorn distributed ledger technology into older processes. Redesign them from the ground up.
So many operations in so many different industries are comprised of disjointed systems and relic data stores cobbled together from mergers, acquisitions, expansion and consolidation. Distributed ledgers are attractive because they answer a cry for standardization, security, and an indisputable record of ownership transfers from one business unit to the next, from dollars to things.
But you don’t just snap your fingers to move all of this to a blockchain. Decide what, exactly, about your business could be improved by adding blockchain to your technology stack. In the short run, that exercise alone will yield more value than the technology itself. “Blockchain for the sake of blockchain” is not a strategy, and before you consider the advantages of distributed ledgers, you should take a closer look at off-the-shelf solutions that can already manage tangible business use cases.
Remember, to achieve these savings, industries are going to have to invest considerable sums into blockchain R&D first. In the meantime, hold the line with proven technology as distributed ledger technology matures.
Distributed ledgers combined with other technologies is where the real unicorn lurks.
There are two tricky use cases that make Ethereum private network deployments difficult to apply to real life use cases: First, bringing external information into the system, which is crucial for making smart contracts practical; and second, the requirement to keep the transaction history of private nodes hidden from the rest of the network, while simultaneously making all transactions visible to the network owner or anyone else whom they designate, such as a regulator.
There are multiple companies developing technologies to tackle these issues, and many are specific to an industry context. But a Napster moment can’t happen without a standardized solution. Someday there’s going to be a bedrock technology that not only supports this core functionality, but also extends to allow separate blockchains to share information with each other. APIs and smart contracts are perfect logical matches for one another in the short run, but the technology to watch closely may really be Digital Object Architecture. In terms of disruptive potential, DOA could become the equivalent of what TCP/IP did for the internet.
Blockchain hasn’t made the world a better place—yet.
Artificial Intelligence draws the most attention from ethics watchdogs who rightfully warn of the dangers of creating something we can’t control. But this has happened already. Any tool can fix or do harm; the great socio-technological revolution ushered in by Facebook, Google and Twitter has enabled bad actors to interfere with elections and manipulate the narrative of Western politics.
The great use case for blockchain technology is bitcoin, and it is the currency that drives the economy of the Dark Web. Every illicit, illegal good or service you can possibly imagine hides behind the libertarian vision of a trustless economy run by empowered digital currency holders. Sadly, business is brisk. For as long as people continue believing in bitcoin, whether as punts or as “investors in the technology,” its very existence supports the agenda of those who seek to do harm.
While these are heady days for bitcoin valuations, perhaps bitcoin needs to fail in order for distributed ledger technology to really thrive. If, hypothetically, governments around the world decided to crush the cryptocurrency movement—or, the world ran out of electricity to mine it, whichever comes first— the event would also destroy all the ICOs that tried to invent a solution for a technology that perhaps never deserved one.
It might not be the way we envisioned a Napster moment happening. But anything left standing after bitcoin’s collapse would be something worth paying close attention to.