Blockchain is Overhyped

By | April 5, 2018

Courtesy of Lawrence Baxter, Ryan Clements, and John Lightbourne

The buzz surrounding Blockchain, the distributed ledger infrastructure upon which Bitcoin operates, and how it will transform commerce while reducing transaction costs is at a crescendo. As John Oliver recently hilariously lampooned, many investors assign instant value to any firm with Blockchain in its name, mirroring the kind of “capital euphoria” seen during the Dot-com bubble.

Reflecting however on what is really entailed, the glamor of the Blockchain project, at least for complex financial use cases, is not that clear.  Our understanding of the potential of Blockchain has assuredly evolved, thanks to projects like Ethereum, to contemplate a virtual environment executing programs across a peer-to-peer network and beyond the failure of centralized servers or the reach of most hackers.  Yet large-scale institutional Blockchain projects for complex financial use cases have been slow to emerge outside a few, mainly closed and permissioned test initiatives and general expressions of interest. This is hardly surprising.

The technological demands of designing a protocol for complex financial uses are high enough in themselves. Coordinating widely disparate parties, adverse interests, and the enormous investment of highly skilled labor involved to create these “hyped up” use cases, is a potentially much larger cost. After all, continuously reducing complex legal transactions and documents to executable code that works across a broad range of commerce requires many “specialists” including lawyers, computer scientists, and business stakeholders.

Blockchain enthusiasts tend to overlook this stark reality by clinging to a fiction that just because certain technological principles can be boiled down to “white papers,” implementation is inevitable. Yet even if we could program all contingencies and discretionary rights into the complex smart contracts inherently necessary to bespoke agreements, which is unclear despite DTCC’s “success” in programming a more standardized CDS, the pre-contractual costs of coding the smart contract, given the current state of technology, would very likely outweigh the marginal benefits.   And this doesn’t begin to account for the costs associated with the legal uncertainty of how liability is allocated when (inevitably) self-executing code produces adverse economic consequences that are misaligned to the parties’ intentions. Further, it’s questionable whether it would be desirable from a legal or business perspective to incorporate certain discretionary rights in code. Given the complexity, and scope, of the U.S. market, experimenting with nascent technology is questionable given an uncertain return.

Another frequent refrain from Blockchain enthusiasts is how Blockchains quickly eliminate existing transaction costs by removing “costly” intermediaries. This is often nonsense.  Leaving aside enormous new computing costs, existing transaction costs in finance are already relatively low. Where they are not, the costs are due to bespoke engagements that require the kind of specialized, and expensive, expertise that will continue to be necessary to automating and distilling negotiated transactions to code. Additionally, the upfront costs, to be amortized over many years, of Blockchain development and genuine application to actual transactions are also very high. As with the development of e-commerce, proponents also have to be willing and able to sink large sums of capital, and fund its implementation over many years, in the hope that somewhere in the future they will see returns to justify the investments. Given the current short-termism that pervades the financial world, we doubt for the time being that there will be many takers for moving beyond an experimental level. Also, high profile security breaches due to lapses in smart contract coding (like the DAO) likely gives firms pause, despite the assurances of technologists.

Instead, viable use cases will likely come from smaller initiatives where the costs of failure, and technological requirements, are lower.  Perhaps as the technology matures, and sequentially complicated financial use cases are proven, we may slowly see smart contracts assume a role in complex financial transactions in a mature market like the U.S. So maybe one day we will have a real Blockchain-based economy—just not any time soon.

3 thoughts on “Blockchain is Overhyped

  1. John Mathew

    Hi,

    I don’t agree with your words totally. The main advantage of using Blockchain system is that it provides an advanced level of transparency to the network after all the blockchain ledger is being shared with all the nodes.

    The advancement of Blockchain technology is unquestionably dispelling all the doomsayers. Blockchain will support a large variety of applications. The foremost renowned is cryptocurrency like Bitcoins and Ethereum. Blockchain-based applications embody any business transaction. For example; Business order following, offer chain, Banking, and Finance, E-learning, Healthcare, on-line searching portals, Insurance, Travel, Music, Renewable energy, Contract validation so on.

    Reply
  2. Andre Peter

    You are right. However, I wouldn’t say that Blockchain is over-hyped. The exceptional thing about Blockchain is the concept behind it. The core of the technology is that it is a decentralized digital ledger of transactions that is being run by thousands of independent computers across the globe, which means it is 100% secure (can never be hacked). When it comes to finance, security is something very important.

    Reply
  3. Jane Larson

    One can never call blockchain an over hyped technology. It would be one technology that gave the face of digital currencies and data a great boost. It has seen a great global inclination in a very short duration. The technology has a lot of scope and power that it can develop both big and small business organizations at a rapid pace. Using this technology in the most efficient and right manner is what https://www.blockchainexpert.uk has done. Standing as the most successful organization in using Blockchain technology to empower organizations and their vital data, they have been delivering very great results.

    Reply

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