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    By Pavel Kravchenko,

    Kravchenko is a decentralized systems expert, public speaker and the founder of Distributed Lab, a startup dedicated to bringing open-source blockchain to the financial sector.

    We all tend to have similar assumptions about the future.

    If you were to poll financial industry experts, the majority would agree that by 2050 sending payments will be as easy as WhatsApp messaging.

    We all (on some level) believe payments will be digital and instant – money transfers will be free, transactions will be private, the origin of funds will be provable, and that the user will be the ultimate owner of his or her funds.

    Where you’ll run into arguments, is whether or not ‘bitcoin’ or ‘blockchain technology’ is the right tool to bring about this change.

    Vested interests

    First, a step back. When bitcoin appeared, it looked like a prototype for the future.

    Bitcoin transfers were almost instant, cheap (even for microtransactions), kind of private (until you dug deeper) and transparent (until we saw Monero), and users (mostly) had sole control over their funds.

    There were some who, seeing these attributes, were quick to herald that bitcoin was the path to this bright future. There was a catch, though: it was generally those who were most heavily invested in bitcoin that were saying bitcoin would be widely used.

    In the process, this group assumed bank fees, regulation, wealth inequality and the risk of the failure of third parties in finance would be enough to convince the average Joe to follow suit.

    But even though bitcoin has amassed an $18bn market cap and hundreds of millions people have heard about it, it is not yet in widespread use.

    Edge cases

    That’s not to say it has failed. Rather, I would argue bitcoin is succeeding, but not where it’s original supporters had hoped. If you look at this report from Chainalysis, you will see that the majority of bitcoin is used for speculation or in the ‘gray economy’.

    There are a few reasons for that: there is actual utility for bitcoin in the gray economy, bitcoin’s legal status is not well clarified in many countries, it still displays high volatility, and its public reputation is not that positive.

    To sum it up with a generalisation, most ‘bad’ people don’t use bitcoin because they expect that it will be legal, and most ‘good’ people don’t use bitcoin because they expect it will become illegal.

    On the other hand, even in the gray economies, there is huge potential for bitcoin to grow. Far from being marginalized, bitcoin could find a real role here in facilitating global commerce.

    Bitcoin is a great invention, and has big potential.

    It solves one important problem: the need for fast, cheap, trustless, anonymous, international money transfer, and it solves it really well.

    The hype

    But, bitcoin isn’t for banks. Even if some of them liked bitcoin, they can’t use it. In its place, then, they have focused on how decentralized systems could actually be used to handle precious assets and provide self-governance.

    In 2015, tech dreamers and bitcoin enthusiasts began eyeing bank budgets, and all of a sudden, bitcoin was transformed.

    These people invented the term ‘blockchain payment’, and instead of talking about a ‘digital currency’, chose the more politically acceptable term.

    However, a lot of confusion resulted from the fact that ‘blockchain’ was understood differently by different people.

    Depending on who you’d you ask, it could mean: the bitcoin blockchain, blockchain as a technology, or a specific implementation of blockchain tech.

    Adding this confusion of meaning, the mainstream media was extremely careless with the terminology.

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    The above definition mixes up the bitcoin blockchain with the pure technology and creates overblown and incorrect expectations.

    Is it any wonder why we now have groundless hype?

    Pushback

    Obviously, when people who understand what blockchain is hear something like “bank Y will adopt payments on blockchain” or “blockchain is an immutable record of tracked changes”, they can’t help but become a bit irritated.

    Blockchain, defined broadly, is a mechanism for reaching consensus regarding the state of a shared ledger between an unknown number of parties who don’t trust each other. But, ‘blockchain’ has become a chimera sent to solve all the problems banks and governments have today.

    The real irony is that private blockchain solutions haven’t evolved from the advanced database technologies that have been around for some time.

    But ‘blockchain’ has done one thing well, too – that is, show how big the market for core banking, processing and wallet software is.

    Banks do realize they have to modernize their technology, and thanks to bitcoin, they understand that something can be changed soon. It’s just that, in banking, there are no multiple parties that don’t trust each other.

    ‘Blockchain’ doesn’t mean ‘decentralization’ for the financial industry, it means ‘changes and innovation’.

    Failed so far

    Just a few companies, however, have developed some blockchain mechanisms to test how change and innovation could be achieved.

    Unfortunately, these are generally more expensive than current database technologies. They might improve the efficiency of some of their processes, but on an organization level, there won’t be any significant effect.

    Applying standard business approaches to the ‘blockchain industry’ –  patents, proprietary components – have been just as misguided.

    For example, in the computer industry,  every consumer device, regardless of the producer, is able to operate on the Internet. This is true for Linux, eTorrent, Android, bitcoin – all of which generated global change because they were open source and license free.

    What the financial industry needs are products that share the same philosophy, just like the Internet needed Apache web server and the TCP/IP stack.

    Not over yet

    This is why I believe it’s too early to declare bitcoin the winner – not every invention is used as intended.

    Indeed, on further scrutiny, the comparison doesn’t hold much water. (It would be like comparing C++ and WindowsXP or HTTP and WhatsApp).

    The codebases powering blockchain projects will lead to crypto-based account management, synchronization between databases, proofs of integrity of history and decentralized reconciliation. Yes, you can build these things using old methods, but the presence of blockchain codebase will reduce the time needed to do so.

    Even in this regard, it is clear that blockchain technology has much wider implications than databases. Because of this promise, technological research should continue  in earnest on consensus protocols, cryptography, smart contracts and databases.

    The inevitable evolutionary process of the market will weed out the substandard business models and only leave standing those that create real and lasting value.

    Ironically, though, there will be change.

    Most of the blockchain projects that survive will transform into enterprise software companies with all the related consequences (just look at Coinbase – it became a bank).

    There is a high expectation of a coming revolution in the financial industry – and ‘blockchain-based’ products are likely to become a foundation of it.

    However, I would argue we should keep our eyes on that bright future we all see ahead.

    ‘Blockchain’ may not change our lives, but it will inspire open software that will.

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