Leaving the Valley of Blockchain Disillusionment

– by Eric Holst

We heard this many times in the last years from leading minds of the crypto universe and eventually in early January from the kind of consultants who helped to start the hype train among corporations: After months of inflated expectations how Blockchain may serve as a silver-bullet, pioneers are waking up to the fact, that the Blockchain hype is over.

McKinsey published its report “Blockchains Occam problem” in which it called Blockchain “a Infant technology (…) struggling to emerge from the pioneering stage” and found evidence of real blockchain benefits, despite billions of dollars of investment of companies around the world. However, we need to clarify which expectations were hyped in particular: It was the disillusionment about „Blockchain, not Bitcoin!“. A motto started by banks, consultancies, tech-analysts and the solutionists of private consortia, which claims that Bitcoin is a haven for fraudster, but Blockchain is where the real disruption is happening. The report continues, that Blockchains and Distributed Ledgers have not yet climbed the necessary level for industry grade production application. The reasons are either because of Blockchain limitations (interoperability, scaling, consensus mechanisms without proof-of-work and the tokenization of real-life assets without trustworthy oracles), but also because the problems behind the proof-of-concepts don’t seem to need a Blockchain. I object that the report misses the picture.

First of all, we’re working with an incredible fast evolving open source technology, which changes almost weekly (either in regards of breakthroughs or hacks). Eventually, the developers will get the solution, with enough time, experimentation and failures – but we don’t know yet when all pieces will fall together. Will Ethereum, Hyperledger, Corda, Quorum, EOS, or the attempts of multinational consortia succeed? We need to learn, before we earn.

WHAT MANY GOT WRONG ABOUT BLOCKCHAIN
The main reason for the failure of Blockchain is in-grained in the companies notion of Blockchain and its purpose. It is best to look at the beginnings of Bitcoin to see it: Satoshi Nakamoto never wrote about „Blockchain“.

Instead he/she/them only wrote about „chain of blocks“ and „chain of proof of work“ which are solving the „byzantines general’s problem.“ To enable digital money without a central owner in a trustworthy decentralized networks among potentially untrustworthy peers. Every part fitted nicely together to enable that powerful idea. But diluting the key features of consensus and decentralisation to allow crowdfunding, records of ownership or even for the security of nuclear launch don’t use the full potential. Hence, we can read the McKinsey report in that way, that all companies, with their millions of R&D spending have failed to see how Blockchain works, because none really wanted to understand how Bitcoin really works.

BLOCKCHAIN? WHAT IS IT GOOD FOR?
Blockchains similar to Bitcoin have been successfully with one thing: the representation of the conceptual idea of money. Maybe they are therefore also applicable other conceptual ideas like identity and ownership. The cycles of evolution how to represent, transport and trade value are going back to the early days of trade and seashells as currency. We’re quite familiar with the securitization of precious metals into paper certificates and this works similar with the representation of value on a Blockchain. Digital crypto asset are mostly referred to Tokens and it’s process is called “tokenisation”.

The difference is in the removal of intermediaries and the involved “trust cost”, which can be either quantified in time and costs to transfer and settle money around the globe, or in the power such channels hold. Even if actors don’t oppose the financial system as Satoshi Nakamoto did, reducing friction cost and stepping into the profit margin of incumbents is a business opportunity. Tokens can have many forms and the most successful one was the “security token”, the representation of shares in start-ups and which was the centerpiece in the craze around the Initial Coin Offerings from 2016-2018 (I’m highlighting „successful use-case“ not that the ideas behind those ICO’s were often making any sense). Also successful, even though sometimes looking point- and meaningless, where “crypto collectibles”. They could represent collection cards of “Peppe the frog” or the DNA of crypto kitties. It was a great blockchain-native use case and business model, where the most expensive Pepe card was purchased by auction for $38,500 (350,00 units of pepe cash) and the most expensive crypto kittie for $170,000 (600 units of Ether).

Both examples show, that the tokenization of digital, conceptual and immaterial goods where the best applications so far. We believe that tokenization has almost limitless applications for digital goods waiting for us – such as licenses, registries, assets, visa, anything living on data bank.
Corporations might not have the business model to leverage the FULL Blockchain – but start-ups may create a fit between tech benefits and market needs.

BITCOIN ON THE PLATEAU OF PRODUCTIVITY
Another often noted source of the Blockchain disillusionment is the Gartner hype cycle, which reflects the state of Ethereum, Hyperledger, Smart Contracts, rather well. But surprisingly does the Gartner hype cycle not contain where Bitcoin currently is at – and this is not an invitation to discuss its price. While everyone was shaming the bubble and rather peering on their own experiments during the “Blockchain, not Bitcoin” hype peak, the Bitcoin community worked tireless. Developers learned from the Segwit-discussion, (which tried to solve scalability on the core protocol) how to push the novelties around Bitcoin constructively ahead without compromising its key components. Rather than tinkering on the core layer which ensure Bitcoins security, the idea of a second and third layer protocols emerged. Real innovation is happening behind names like Lightning, Liquid, Rootstock and RGB.

Lightning is the counterargument to anyone claiming that Bitcoin is too slow. It allows low cost instant payments and scalability as a second layer protocol, without transactions being stored on a block. Instead are the connections between nodes functioning as bidirectional payments channels to route transactions across the network. All happens off-chain, while both nodes keep a balance-sheet, until the nodes are concluding their business and close the transaction. Every transaction which was transferred until then is finally settled on-chain again, but only until the nodes choose to settle the bill. Hence coffee payments with Bitcoin can be gathered, until they’re worth to be secured on a block.

Liquid, an invention by Blockstream, steps up to solve the problem of Bitcoin liquidity and the need of altcoins, which were created to obtain faster tradable capabilities. As a sidechan it’s pegged to the Bitcoin chain with its own Liquid-Bitcoin (L-BTC), which can be traded with more privacy and speed than on the mainchain. Furthermore does Liquid enables the issuance of non-bitcoin assets, like tokenized fiat, crypto assets, securities, notarized assets or completely new asset types. The speed is a necessary component for cryptocurrency exchanges, trading desks, brokers and other market makers, to avoid the problem of crypto-to-fiat trade in certain countries, where Bitcoin is priced 20% more.

Imagine “Rootstock” as Ethereum-like smart contracts on Bitcoin. “RSK” is referred to as a 3rd layer and works similarly as Bitcoin side-chain with the main-feature that it supports turing-complete smart contracts from Ethereum. This was a smart move of the developers to makes it easy for any App developer to leave the Ethereum camp. It’s also attractive
to jump on RSK with its 100 transaction/per second throughput, which can be scaled up to 2.000 TPS.

Last but not least is the RGB protocol which makes Bitcoin-based non-bitcoin assets without the colored coins possible. In other words: Crypto kitties on Bitcoin. But it’s very early stage… (however greatly presented at the Building on Bitcoin conference from last summer).

FINAL THOUGHTS
Roy Amara said “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.” Similarly many overestimated Blockchain and underestimate Bitcoin because of its reputation, which has reinvented many times by now. It’s time again to look at it unbiased and experiment with a pioneer-mindset on its potential.