Blockchain is a terrific solution, but for what?

Blockchain is a terrific solution, but for what?

Blockchain will change everything: the transportation industry, the financial system, government… in fact, it is probably easier to list the areas of our lives that it will not affect. That said, enthusiasm for it often hinges on a lack of knowledge and understanding. Blockchain is a solution in search of a problem.

Imagine: a crowd of programmers in a huge hall. They sit on folding chairs, with laptops in front of them on folding tables. A man appears on the blue-purple-lit stage.

“Seven hundred blockchainers! – he shouts to his audience. Pointing to the people in the room:” Machine learning…” and then at the top of his voice: “Energy turnaround! Health care! Public safety and law enforcement! The future of the pension system!”

Congratulations, we’re at the 2018 Blockchaingers Hackathon in Groningen, Netherlands (fortunately, a video survived). If the speakers are to be believed, history is being made here. A little earlier, a voice in the accompanying video asks the audience: can they imagine that right here, right now, in this room, they will find a solution that will change “billions of lives”? And at these words, the Earth on the screen explodes with a beam of light.

Then Raymond Knops, the Dutch Minister of the Interior, appears, dressed in the latest techno-geek fashion, a black hoodie. He is here as a “super-accelerator” (whatever that means). “Everyone feels that blockchain is going to fundamentally change governance,” Knops says.

I’ve been hearing about blockchain all the time in recent years. As much as the rest of us do, though. Since it’s everywhere.

And I’m obviously not the only one wondering: Can someone explain to me what it is all about? And what is its “revolutionary nature”? What problem does it solve?

In fact, that is why I decided to write this article. I can say at once: it is a strange journey to nowhere. I have never in my life encountered such an abundance of jargon that describes so little. I have never encountered so much pompousness that deflates so swiftly on closer inspection. And I have never seen so many people looking for a problem for their “solution.”

“Agents of Change” in a provincial Dutch town

The residents of Zeudhorn, a town of just under 8,000 people in the northeastern Netherlands, had no idea what blockchain was.

“All we knew was that blockchain was coming and we were in for a global change,” one town official told Newsweekly. “We had a choice: sit back or take action.”

The residents of Seidhorn decided to act. It was decided to “move the municipal program to blockchain” to help children from low-income families. To do this, the municipality recruited a student and blockchain enthusiast Maarten Veldhuijs for an internship.

His first assignment was to explain what blockchain is. When I asked him a similar question, he said it was “a kind of system that cannot be stopped,” a “force of nature,” if you will, or, rather, a “decentralized consensus algorithm.” “Okay, it’s hard to explain,” he finally admitted. – I told the authorities: “I’d better make you an app, and then everything will make sense.”

Said – done.

The assistance program allows low-income families to rent a bicycle, go to a theater or movie at the city’s expense, etc. In the past, they had to collect a lot of paperwork and receipts. But Velthuijs’ app has changed everything: Now all you have to do is scan a code – you get a bike and the business owner gets money.

Suddenly the tiny town became one of the “centers of the global blockchain revolution. Media attention and even awards followed: the town won an award “for innovation in municipal work” and was nominated for the best IT project and the best civil service.

The local administration showed increasing enthusiasm. Velthuijs and his team of “apprentices” were shaping a new reality. The term did not, however, fit well with the excitement that swept the city. Some residents bluntly referred to them as “change agents” (an English expression for people who help organizations transform themselves).

How does it work?

Well, okay, change agents, revolution, everything changes… But what is blockchain?

At its core, blockchain is the much-lauded spreadsheet (think of Excel with a single spreadsheet). In other words, it’s a new way of storing data. In traditional databases, there is usually one user responsible for it. It is he who decides who has access to the data and who can enter, edit and delete it. With blockchain, it’s different. No one is responsible for anything and no one can change or delete data. They can only enter and view them.

Bitcoin is the first, best known, and perhaps only use of blockchain. This digital currency allows money to be transferred from point A to point B without the involvement of a bank.

How does it work? Imagine you need to transfer a certain amount of money from Jesse to James. Banks are very good at this. For example, I ask the bank to send money to James. The bank starts the necessary checks: is there enough money in the account? Does the account number exist? And in its own database it writes something like “transfer money from Jesse to James”.

In the case of bitcoin, it’s a little more complicated. You say at the top of your voice in a sort of giant chat room, “Transfer one bitcoin from Jesse to James!” Then there are users (miners) who collect transactions into small blocks.

To add these blocks of transactions to the public blockchain, the miners have to solve a difficult problem (they have to guess a very large number from a very extensive list of numbers). It usually takes about 10 minutes to solve this problem. If the time to find the answer steadily decreases (e.g., miners switch to more powerful equipment), the difficulty of the task automatically increases.

Once the answer is found, the miner adds the transactions to the latest version of the blockchain – the one that is stored locally. And a message goes into the chat room: “I’ve solved the problem, look!”. Anyone can check and make sure that the solution is correct. Everyone then updates their local versions of the blockchain. Voila! The transaction is complete. The miner receives bitcoins as a reward for his work.

What kind of task is this?

Why is this task necessary at all? In fact, if everyone always behaved honestly, there would be no need for it. But imagine a situation where someone decides to spend their bitcoins twice. For example, I say to James and John at the same time, “Here’s a bitcoin for you.” And someone has to verify that this is possible. In that sense, miners do the job that banks are usually responsible for: they decide which transactions are allowed.

Of course, a miner can try to cheat the system by colluding with me. But an attempt to spend the same bitcoins twice would be immediately exposed, and other miners would refuse to update the blockchain. Thus, the malicious miner will spend the resources to solve the problem, but will not be rewarded. Due to the complexity of the task, the cost of solving it is high enough to make it much more profitable for miners to stick to the rules.

Alas, such a mechanism is very inefficient. And the case would be much easier if the management of the data could be entrusted to a third party (for example, a bank). But this is exactly what Satoshi Nakamoto, the notorious inventor of bitcoin, wanted to avoid. He considered banks to be a universal evil. After all, they can freeze or withdraw money from your account at any time. That’s why he invented bitcoin.

And bitcoin works. The cryptocurrency ecosystem is growing and evolving: at last count, the number of digital currencies is over 1,855 (more than 5,000 as of February 2020).

But that’s not to say bitcoin is a resounding success. Only a small percentage of stores accept the digital currency, and for good reason. First of all, payments themselves are very slow (sometimes a payment takes 9 minutes, but there were cases when the transaction lasted 9 days!) The payment mechanism is very expensive (try it yourself – it’s much easier to open the hard blister with scissors). And finally, the bitcoin price itself is very unstable (grew up to €17000, fell down to €3000 and then jumped up to €10000 again…).

But worst of all, we are still far from the decentralized utopia that Nakamoto dreamed of, namely the elimination of unnecessary “trusted” intermediaries. Ironically, there are only three mining pools (a mining pool is a massive concentration of mining computers located somewhere in Alaska or elsewhere far above the Arctic Circle) that are responsible for generating more than half of the new bitcoins* (and thus checking transactions). (There are now four of them.)

* Nakamoto believed that anyone would be able to work on the problem on an equal footing with others. However, some companies took advantage of exclusive access to specialized equipment and space. Through such unfair competition, they were able to seize a leading role in the ecosystem. What was intended to be a purely decentralized project has again become centralized. The current level of decentralization for different cryptocurrencies can be seen here.

For now, bitcoin is much better suited for financial speculation. The lucky person who bought a cryptocurrency for $20 or euro at the dawn of its existence now has enough money for several trips around the world.

Which brings us to blockchain. An impenetrable technology that brings sudden wealth is a proven formula for hype. Advisors, managers and consultants learn about the mysterious currency that turns ordinary people into millionaires from the newspapers

An industry worth 600 million euros

Meanwhile, Bloomberg estimates the global size of the industry at about 700 million USD or 600 million euros (this was in 2018; according to Statista, the market then was 1.2 billion USD and reached 3 billion in 2020 – note). Large companies like IBM, Microsoft and Accenture have entire divisions dedicated to this technology. In the Netherlands, there are all sorts of subsidies for blockchain innovation.

The only problem is that there is a huge gap between promise and reality. So far, the feeling is that blockchain looks best on PowerPoint slides. A Bloomberg study found that most blockchain projects don’t go beyond the press release. The government of Honduras was about to move its land registry to blockchain. That plan was shelved. The Nasdaq exchange was also going to build a blockchain-based solution. So far, nothing. What about the Central Bank of the Netherlands? Again, it’s a miss! According to consulting firm Deloitte, of the 86,000+ blockchain projects launched, 92% were abandoned by the end of 2017.

Why do so many projects fail? Enlightened – and therefore former – blockchain developer Mark van Cuijk says, “You can also use a forklift to lift a package of beer onto the kitchen table. It’s just not very efficient.”

I’ll list a few problems. First of all, this technology contradicts EU legislation on the protection of private data, in particular the right to digital oblivion. Once information enters the blockchain, it cannot be deleted. For example, there are links to child pornography on the bitcoin blockchain. And it is impossible to remove them from there.

* A miner can add any text to the bitcoin blockchain if he wants. Alas, it can be links to child pornography and naked photos of exes. Read more: “A Quantitative Analysis of the Impact of Arbitrary Blockchain Content on Bitcoin” by Matzutt et al (2018).

Plus, blockchain is not anonymous, but “pseudonymous”: each user is tied to a specific number, and anyone who can match the user’s name to that number can trace their entire transaction history. After all, the actions of each user in the blockchain are open to all.

For example, Hillary Clinton’s alleged email hackers were caught by matching their identities to bitcoin transactions. Researchers at Qatar University were able to fairly accurately identify tens of thousands of bitcoin users using social networking sites. Other researchers have shown how users can be easily de-anonymized using trackers on online shopping sites.

The fact that no one is responsible for anything, and all information in the blockchain is unchanged, also means that any errors remain there forever. The bank can cancel the money transfer. In the case of bitcoin and other cryptocurrencies, this is impossible. So whatever was stolen remains stolen. A huge number of hackers constantly attack cryptocurrency exchanges and users, and scammers launch “investment instruments” which in fact turn out to be pyramid schemes. According to some estimates, almost 15% of all bitcoins have been stolen at some point. And it’s not even 10 years old yet!

Bitcoin and Ethereum use the same amount of energy as all of Austria

On top of that comes the question of ecology. “The environmental issue? Aren’t we talking about digital coins?” – you might wonder. We are, which makes the situation very strange. Solving all these complex mathematical problems requires a huge amount of electricity. So much so that the world’s two largest blockchains, Bitcoin and Ethereum, currently consume as much electricity as the whole of Austria. A Visa payment requires about 0.002 KWh; the same bitcoin payment consumes up to 906 KWh of electricity – more than half a million times that amount. This amount of electricity is consumed by a family of two in about three months.

And over time, the problem of ecology will become more and more acute. Miners will use more and more power (i.e. they will build more mining farms somewhere in Alaska), the complexity will automatically increase, requiring more and more computing power. This endless, pointless “arms race” leads to more and more power being required for the same number of transactions.

And for what? This is actually the key question: what problem does blockchain solve? Okay, thanks to bitcoin, banks can’t just withdraw money from your account at will. But how often does that happen? I’ve never heard of a bank just taking money from someone’s account. If a bank did something like that, it would be immediately sued and have its license revoked. Technically it’s possible; legally it’s a death sentence.

Of course, crooks don’t doze off. People lie and cheat. But the main problem lies on the side of the data providers (“someone secretly registers a piece of horse meat as beef”), not the administrators (“the bank makes the money disappear”).

Someone suggested moving the land registry to blockchain. In their view, this would solve all the problems in countries with corrupt governments. Take Greece, for example, where every fifth house is unregistered. Why are these houses not registered? Because Greeks just build without asking anyone’s permission, and the result is an unregistered house.

Except that blockchain can’t do anything about it. Blockchain is just a database, not a self-regulating system that checks all data for accuracy (not to mention slowing down all illegal constructions). The same rules apply to blockchain as to any other database: garbage in = garbage out.

Or, as Bloomberg’s Matt Levine writes, “My immutable, cryptographically secure blockchain record that I have 10,000 pounds of aluminum in storage doesn’t help the bank much if I then sneak all that aluminum out the back door.

The data should reflect reality, but sometimes reality changes and the data stays the same. That’s why we have notaries, supervisors, lawyers – in fact, all those boring people that blockchain supposedly can do without.

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