During the go-go days of the 1990s, people who should have known better convinced themselves that economic booms and busts were a thing of the past. Such was their faith in traditional institutions like central banks that only small policy tweaks sufficed to magic away all perceived problems.
“Trust the Fed — trust the market,” was the operating mantra, echoing globalist ideals.
Fast forward post 2008 financial meltdown, ginormous hacks and fake news, and an entirely new slogan has taken hold, one that reflects a more libertarian mood: “Trust nobody — trust code.” This includes bankers, lawyers, governments — even formerly beloved tech companies.
Nothing captures the flavour of our unsettled and untrusting times like blockchain technology, a way to create a tamper-proof ledger that everyone can agree on without anyone being in charge. It was specifically created a decade ago to support the cryptocurrency Bitcoin, but enthusiasts see much wider applications, like helping people manage their online identities and assets.
Easier said than done
Some compare this to the advent of the internet. It’s unclear, however, if some of blockchain’s more stubborn obstacles — like scalability and governance — will be cleared any time soon. The future will have to wait.
“It’s not proven either way. It may never work. Right now, we don’t have the technology that cuts out the middleman,” said Hanna Halaburda, a senior economist at the Bank of Canada and visiting professor at New York University. Halaburda, who has written extensively on blockchain, clarified that the views expressed in this article are her own and not necessarily those of the Bank of Canada.
“Getting rid of trusted third parties is actually very difficult,” she added.
Experts say a work-around for some of the tech challenges may eventually be found. After all, the market value of cryptocurrencies alone hit over $800 billion recently — that’s a lot of motivation. And having a way to preserve “the truth” is pretty handy. But the question is, why are people so willing to overlook what appear to be intrinsic problems? Are we simply stuck in a different sort of paradigm — one that mirrors our burning desire to get rid of hated intermediaries and our trust in math-based solutions? Is it necessary, or even desirable, to encase information in digital cement?
At the moment, public, or permission-less blockchains, mainly support virtual currencies — with over 1,500 cryptos all vying for attention — and oddly, collectable kittens. The big hope is that this technology will eventually allow for the removal of all gatekeepers, including social networks like Facebook. With the development of the blockchain platform Ethereum, which keeps track of computer programs, you can even write chunks of code, so called “smart contracts,” that allow for self-executing agreements. This opens up all sorts of possibilities, leading to major cost savings for both individuals and enterprise, proponents say.
But even after several years, developers haven’t yet managed to work out some vexing problems that are putting the breaks on mass adoption of blockchain. Apart from scalability — the limits on possible transactions — another systemic challenge is the massive energy drain of the most popular consensus and verification system. The fact that no one entity is supposed to be in charge makes problems much trickier to solve, particularly when taking into account the various cultures of participants. The lack of consensus on increasing block size (see below for definition), and on-going internecine fighting, is montypythonesque at times.
Skeptics point to the fact that Visa can reportedly process as many as 50,000 transactions per second. Bitcoin and Ethereum — by far, the most popular examples of blockchain technology — supposedly manage just ten to twenty, with transaction fees of around $20. For that fairly modest feat, the network requires as much energy each day as some medium-size countries.
“This is in fact one of the big technical issues,” said OMERS Ventures CEO John Ruffolo, referring to whether blockchain can be scaled, in an email interview.
But no one wants to miss out, least of all investors. Quoting Amara’s Law, (we tend to overestimate how quickly it takes for technologies to be adopted and then we underestimate the impact of such technologies once adoption occurs), Ruffolo added, “we believe this is the case with blockchain. It has been the case for the Internet, AI, electric vehicles, the list goes on and on.”
Many of blockchain’s strengths are also its weaknesses. Much to the horror of drug dealers and other technically-challenged criminals, details of transactions between users is visible even when identities remain obscured. One person’s transparent and immutable digital ledger-wonderland is another person’s legal nightmare.
“By far, the biggest concern is privacy,” said Carlisle Adams, professor at University of Ottawa, and former senior cryptographer at Nortel Secure Networks and at Entrust. Adams is confident technical wrinkles eventually will be ironed out, but the permanence issue is more difficult to resolve. “You have a transaction associated with you that could potentially live forever. It could come back to haunt you.”
How blockchain will conform with Europe’s new privacy legislation, the General Data Protection Regulation – or GDPR –, which stipulates among other things that people have a right to privacy and to be forgotten, is anyone’s guess.
So far, there are few real-life examples of enterprise using permission-less systems in a major project, and little evidence that blockchain provides an overall net benefit when compared with existing centralised systems. Faster, cheaper and more efficient remains elusive.
The outlook is somewhat different for permissioned, or private systems — where participants know and trust each other, and crucially, can agree on rules. From tracking food shipments to stock clearing and settlement, many processes that are stuck in another century could become more efficient. While these could save logistics and financial services providers a lot of money, they are unlikely to rock anybody else’s world.
Permission-less, or public blockchains have “captured the public’s interest because of [their] transformational potential," said Wendy Gross, Co-Chair of Osler's Technology Group in Toronto. “But at the moment, beyond cryptocurrency and related applications, we are not seeing many practical implementations or broad adoptions of use cases for permission-less blockchain.”
What is permission-less blockchain? Definitions vary considerably, but most agree it is way to store data on a global ledger, which is validated by many unrelated computers, or nodes, that are financially motivated to keep one true version. Unlike regular databases, information cannot be edited and deleted at will, and there is no central authority — just “many eyes.” The goal is to create a secure, verifiable and permanent record of transactions and other data.
In the most common form of permission-less blockchain, Bitcoin, “miners” collect transaction requests as they are disseminated across the network, verify their authenticity and integrity, and bundle them into one-megabyte chunks called “blocks.” For such a service, miners receive a payment (a certain number of Bitcoins). To obtain this payment, miners compete in a “contest,” which has certain parameters set so that a winner emerges every 10 minutes (on average). This entails solving a difficult mathematical puzzle that requires brute force to win (i.e., using as much computing power as possible.) The winner gets Bitcoins, and the right to add this block to the chain. Energy, in the form of electricity, is wasted in this fairly pointless quest, but it keeps people motivated, on the same page and crucially, in agreement. In other words, it creates consensus on the “truth,” in this case, that the transactions are valid.
To what extent blockchain really is decentralised, secure and immutable is up for debate, but the idea is that once a block has been given the thumbs up by the community, it’s added to the chain with some cryptography, which more or less ensures that it can never be replaced or reversed. There is always the chance that one entity gains a 51 per cent majority of computing power and thus gets to make the rules, but this is really, really difficult/expensive to achieve.
The system works until lots of transactions are proposed. Given that the original blockchain system calls for every node in the network to process every transaction, this leads to big headaches. Fees go up and the system slows down. As the chain gets bigger, more and more space is needed to download and store the transaction requests, and increasing amounts of computing power are required to solve the puzzles. At this point, only really large servers are capable of doing the job, leading to ever increasing threat of centralisation. It is estimated that about two-thirds of the computer power needed for Bitcoin is concentrated in China, where cheap electricity is accessible. Russia is also reportedly keen on expanding in this space, as Chinese authorities attempt a crackdown.
Many solutions to the bottleneck problem are being proposed and trialled, including increasing block size, having fewer nodes, side chains, random selection of block verifiers, etc. But it’s challenging to get all three crucial elements — decentralisation, scale, and security — at the same time. If you have less verification, you will increase speed and get rid of bottlenecks, but you also risk increased fraud.
“That’s the price you pay,” added Halaburda.
So far, blockchain’s fans are holding firm, with many companies, large and small looking into solutions. “Teething” issues will eventually be resolved, proponents say, it’s just a matter of time. Many admit that it will take years and many attempts to solve the problems, but they are betting it will.
“Patience,” said Yessin Schiegg, CFO of Swiss-based Status.im, in an email. Status is building a decentralized mobile Ethereum browser, instant messenger and wallet. “Remember how long it took for the internet to stream videos or to have a well functioning search engine? It also did not scale quickly, remember the 56k modems pulling text line by line?”
For others, the true benefit of blockchain is the fact that enterprise and governments are paying attention to cryptography and digitisation and trying to find solutions to IT problems. “If it makes people feel better, they can just call it blockchain,” joked Halaburda.
Agnese Smith is a regular contributor based in London, UK.