The blockchain story is bullshit
There are a lot of smart people who assert that blockchain technology will be a protocol revolutionary on the scale of the initial Internet technologies. While the blockchain is indeed a clever solution to the Byzantine Generals Problem (a fault tolerance problem in distributed systems), I argue that its practical applications are rather limited. The story that blockchain technology will re-shape significant components of the Internet is bullshit.
The allure of the blockchain story is that the technology enables transactional systems (e.g. money transmitters, domain name providers, deed repositories etc.) that require placing trust in a single authority can instead be replaced by a network of equals that no single entity controls. The distributed, authority-less system is thus immune to corruption and abuse of institutions and owners. Now let me explain why that story isn’t as compelling as it may seem.
The blockchain is just a database that’s distributed across multiple nodes. There are a lot of database technologies that allow data to be distributed across multiple nodes. The clever thing about the blockchain system is that there no longer needs to be trust between the different nodes. Anyone and everyone can “own” a node of the system. So instead of trust, the blockchain protocol adds a ‘proof of work’ tax that involves a lot processing power for each transaction instead. Because it takes a lot of work to come up with a ‘proof’ that verifies a transaction, the overall system necessarily operates much slower. Instead of any transaction being instantly confirmed and syndicated in a standard database, a blockchain-based transaction takes some X time to verify, confirm, and distribute. One may argue that the performance problem is mitigated with future improvements and optimizations, but at best it’s performance is equal to the performance of a standard distributed database. The reason why transactions are slow today (e.g. money transmitting) is more of an artifact of regulation than technology.
Not Neutral in Practice
Performance argument aside, blockchain’s egalitarian story breaks down in practice. A blockchain-based system rewards people who provide processing power to keep the system running (doing the proof of work). In the Bitcoin network (the application that the blockchain was invented for), the reward is bitcoin. In other future transactional systems for application x, the rewards are “x-coins” used for transacting on that specific application’s blockchain.
For blockchain-based systems being created today, a lot of the systems are ‘pre-mined.’ The creators, by virtue of being the only ones on the network, do all the initial processing and reap all the initial rewards. Hence, they have a gigantic head start in accruing value. On top of that, the difficulty of the proof of work increases exponentially as the system gets more adoption, so later adopters need to do more and more work to get less and less rewards. While the initial headstart doesn’t necessarily bestow control over the database (that requires >%50 of processing power), it does seed a massive economic disparity.
So in practice, the system quickly devolves into an oligarchy of the creators and early adopters who end up having a disproportionate amount of “x-coins”. So the trust issue reverts into trusting that the creators + early adopters to not abuse the system. This is the exact argument used against single-authority systems that the authority may abuse the system. While the distribution of power is relatively fair (determined strictly by processing power), the distribution of wealth (in the form of x-coins) is not. Analogously, what we’re doing here is simply replacing a king with oligarchs. While kings tend to at least have a facade of neutrality, oligarchs are less constrained with the social courtesy of appearing neutral.
Authority is Good
Authorities make sense in important transactions because there will be conflicts between transacting parties. Resolving conflicts requires the enforcement of judgments, and enforcement requires administrative powers including the ability to reverse transactions. The nature of the blockchain is that there is no administrative power and there’s no way to reverse transactions (unless you own >50% of processing power and at that point you basically own the blockchain and become the authority). But in a lot of cases, that’s actually what you want. Some proposed applications of the blockchain are currency, domain names, and deed transfers. In all those spaces, the ability to reverse transactions after arbitration is considered a feature not a flaw. Charging back credit cards is a feature; recovering property after a breach of contract is a feature for domain names and real estate.
Transactions of importance get complicated quickly and need arbitration, and for arbitration to be enforced requires authorities that wield binding legal ramifications. That’s why most of the important authoritative databases like bank accounts, real estate deeds, etc. are heavily regulated and/or government institutions.
There are some really cool properties that emerge from the blockchain system that I think are quite elegant. But there also exists manifestations of decentralized networks and technologies (Tor, Darknets, etc.) that are also interesting. Looking at the blockchain from a realist’s standpoint, it is not obvious that there is a need for a worse-performing database, that an unregulated oligarchy has disproportionate power over, that isn’t improved with administrator arbitration. It looks like a technology looking for a problem to solve, rather than a technology created to solve a problem.
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In response to broad and active discussion, I clarify and expand on my thoughts here.