Blog 1 - What is the point of blockchain tech anyway ?

July 26, 2018

As a long time tinkerer with bitcoin and a passionate believer in its potential to change the world for the better, I have watched with interest as institutions grapple with how to apply and utilise its' underlying technology, blockchain. It seems that many believe that it is a potentially groundbreaking technology but as summarised in many Dilbert strips, they struggle to find a use case for it within their current organisations. 

 When they start to look closer at the technology, they see that it is 1000s of times slower and more expensive to process and store data than what can be achieved using a simple cloud virtual private server (VPS) and it severely lacks the ability to secure the confidentiality of data. PWC estimates that the electricity used to mine bitcoin is greater that used by the whole of Austria and others estimate that the actual cost per transaction is around $USD58 ! When you consider the number of Bitcoin mining devices (computers) is estimated to be in the 100000s, and all of these are competing to process the same single 2MB block of data, the cost and inefficiency of the world's preeminent and arguably only successful use case for blockchain technology is startling. Add in that all the transactions are permanently stored and publically available - that is completely visible to everyone for all time -  it becomes apparent why organisations struggle to find a use case for it.

 

It appears that Blockchain technology is not very useful as a replacement for existing IT systems, so what is it useful for beyond bitcoin type applications ?

 

Some of the beneficial attributes of blockchain technology - immutability, non stop functioning, programmability, and its ability to move value (not just IOUs)  - do lend blockchain as a means of removing frictions where multiple parties are required to interact, such as supply chains. However, it is arguable that the most promising characteristic of  bitcoin and therefore blockchain technology is its ability to function without the need for a trusted third party.

 

Bitcoin performs many of the same functions of both a bank and a payment processor but does not require its participants to trust any such third party organisation. That is, it removes the cost, risk and friction of third parties that sit between our transactions. Considering that at the moment although bitcoins represents money, it can represent anything that has value - a vote, a share, a property title, fractional ownership, basically anything that has value and it becomes apparent that blockchains ability to remove the need for trusted third parties is very powerful.  Today our institutions take inputs from one party and transform the inputs before selling an output to another party and this function can potentially be replaced by computer code running on a blockchain.

 

We  do have organisational structures that closely resembles this scenario today. Co-operatives and other P2P businesses, transfer value generated back to participants rather than extracting and distributing profit to shareholders. The promise of these business models is that participants should  receive lower cost goods or services than those provided by a corporation, so how come they are such a comparatively minor part of our interactions with third parties organisations is with entities that are structured in this way ? Our hunch is that this is primarily because these P2P business models rely on humans to govern their operation who lack accountability to shareholders and this limits organisational efficiency and that blockchain technology can fix this problem.

 

This is the first in a series of blogs that will explores this possibility and attempt to identify specific elements of P2P business models that may be operated on a blockchain. It is being done as part of a Masters in IT that I am undertaking at Charles Sturt University. 

 

 

 

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