Blockchain! What’s the point?
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Blockchain. You have probably heard about the rocketing prices of blockchain-based cryptocurrencies like Bitcoin or Ethereum. But why? Why has it captured the world’s attention? And does it live up to the hype?
Our Centralized Society
Technology models Society, which models Technology
Society has for the large part, been centralized. And it is not very difficult to understand why when we imagine what happens without kings and governments. We work best as a society when we work together; and when we don’t, having someone to decide what is right and wrong helps arbitrate between disagreeing members of society. However, such power corrupts, and once corrupted often leads to the fall of kingdoms and nations. And it is just 200 years ago where we made our first attempt at decentralized governance, democracy.
You are probably wondering what society and its problems have to do with blockchain systems. Well, technology often models after society. E-commerce sites like Amazon and Ebay attempt to model shops and markets but on a global scale. Shops and markets are inherently centralized systems in their respective neighbourhoods, and when we replicate it on a global scale, we see companies like Amazon having sales of over 5,000 dollars per second or 17 million per hour.
Societies love centralized systems, it thrives in its efficiency; and the internet has allowed such centralized systems to bring together, not neighbours and friends, but towns and countries. Centralization on such a large scale brings with it great power to the arbiters of these centralized systems. And as moths to a flame, power attracts people, modelling our world against the backdrop of these colossal centralized technologies, giving birth to a new social order. One where 7 of the top 10 companies are big-tech.
Blockchain is an experiment in decentralization, just as democracy was for the past 200 years. It is an attempt to create decentralized technology, to allow a world now dependent on centralized systems an alternative and a choice.
Blockchain: A New World Order
Creating a system where power flows to the bottom, and stays at the bottom
Countries are governed by governments and monarchs, but in an increasingly globalized world, who or what will step up to govern the world? The United Nations (UN) comes to mind. The UN attempts at arbitrating disputes through consensus votes and agreements, but repeatedly fails to enforce such agreements due to a lack of consensus or lacking the ability to meet appropriate penalties for not conforming to an agreement or law. Furthermore, only a handful of cases are ever arbitrated at the global level due to the great inefficiencies of such a consensus based arbitration.
The 2 predominant forms of consensus mechanisms in blockchain are Proof of Stake and Proof of Work. In this, blockchain takes a few lessons in decentralized consensus and agreements from the UN. As in the UN, a single group or computer facilitates the acquiring of consensus, and all disputes are arbitrated through a simple vote of all key players. And as in the UN, a hierarchical system of voting takes place, where selected individuals are tasked with representing the interests of the stakeholders they are beholden to. However, in the event the representative maliciously attacks the system, every other party can hold both the representative and their stakeholders alike responsible, penalising them to disincentivize further attacks.
With a provably secure method of encoding decentralized consensus into computers, blockchain systems can attain consensus faster and better than any other physical decentralized governance system. Ushering in the rise of cryptocurrencies like Bitcoin and Ethereum, a currency no longer dependent on governments and central banks but the society as a whole to maintain, validate, and arbitrate the record of each individual’s wealth.
Documentation and financial systems
Improving lives for the undocumented through a global ledger
Despite the “not to be marginalized” problem of the corrupting nature of centralized systems, a more visibly detrimental issue emerges from such systems — dependence and reliability. Over 1 billion people in our world of 7 billion are undocumented, without a government issued identity; and over 3 billion people are without ready or easy access to documented ownership and financial services. This is a problem. The unbanked and undocumented often have a lower quality of living. The access to centralized documentation, and with it financial institutions, bring about many opportunities that you and I take for granted today.
Cheap and easy credit comes easy for most of us, but is it as easy in undocumented regions of the world? The 3 billion unbanked and undocumented in the world often cannot get credit easily, and would get loans from family members and friends. And even if there are banks, interest rates tend to range between 30 and 50 percent rather than our often “sub 10” percent interest we have grown used to having. But who could blame these banks for charging exorbitant rates when the risks that comes with giving a loan is monumental in an undocumented society; where you cant easily look up a person’s credit rating, or easily find your debtor’s place of residence. This is a systematic failure, and requires a systematic solution, one that cryptocurrencies, decentralized finance, and smart contracts promises to resolve.
Blockchain: Boons and Banes of a new world
Cryptocurrencies, NFTs, DeFi, and Supply chains. Is it worth it?
Blockchain technology is not a perfect solution. It is slow, very slow; and depending on the network’s size and the type of consensus mechanism used, might be susceptible to a 34 or 51 percent attack. These 2 banes of blockchain technology manifest themselves differently in the various implementations. So let’s take a look at what these boons and banes are in it’s implementation, and if it’s ultimately worth it.
Cryptocurrency. It is the predominant use case of blockchain technology with over a trillion dollars market capitalization, and acts as a replacement to visa and central banks. It attempts to solve the issues surrounding the dependence of central banks through an e-payment platform, but can it stand up to the rigours of e-payment? Cryptocurrencies are slow, very slow. Bitcoin, the granddaddy of cryptocurrencies makes between 3 to 5 transactions per seconds (tps); whilst Visa, standing at the forefront of e-payment makes a whopping 1700 tps. Obviously cryptocurrencies are already on the backfoot, but there are other metrics by which to gauge the effectiveness of cryptocurrencies, cost and scalability.
There is a reason for the exorbitant cost of using public blockchains, and that is the enormous amount of work needed to secure it. Bitcoin and Ethereum, amounting up to 80% of the cryptocurrency’s market capitalization, uses an exceedingly energy intensive mechanism called Proof of Work, which ties the cost of transactions to the costs of electricity, and hence fossil fuels. This also means a hugely wasteful use of energy to maintain said blockchains, another bane against the use of blockchains in our world. But how does this cost scale? Does the cost per transaction reduce as more people join the network? Well, no, the cost per transaction actually increases, and that is due to the increased number of transactions in the network that fights to use the limited resources in the system, increasing the demand for the resources in the system, and hence increasing price.
So why is cryptocurrency a success if it’s worse in every conceivable way? That’s because governments control their currency, and inflation-inducing financial policies are more of a worry to savers than the higher costs of cryptocurrencies. Also, in countries already rife with unstable currencies, where the trust is so lacking in their own currency that people use phone minutes to buy groceries, cryptocurrencies might just be better. Furthermore, the issue of cost and scalability are actively under R&D, with various releases of different consensus mechanisms and blockchain structures, maybe one day, cryptocurrencies will be used by the common man.
Other uses of blockchains include logistic systems, decentralized finance (DeFi), and documentation using Non-Fungible Tokens (NFTs). And I believe this is where blockchain truly shines, when it solves issues of trust or in the democratisation of services.
In supply chains there is often a lack of trust between parties, and a deterministic decentralized contract is ideal in such trustless situations; increasing visibility of transactions, with its efficient and trustless form of sharing and managing data, and allowing for provenance tracking for all parties. Furthermore, costs and scalability are not a concern in private blockchains, due to limited participation.
DeFi and NFTs are technologies invested in the democratisation of services. Despite its high cost compared to 1st world banking and documentation systems, its visibility to all allows it to work in 3rd world countries. With such reliability, perhaps, in the near future, we may yet control our own data.
Blockchain. So does it live up to the hype?
