Blockchain’s best years are ahead

Bitcoin price graph

Cryptocurrency is, essentially, a by-product of the blockchain. It comes about when people make the effort to validate a block of transactions and is a reward for their efforts. Simply put, if cryptocurrency values are too high, far too many people are motivated to mine for cryptocurrency and the most trivial transactions will be getting verified. If they’re too low, too few people are motivated to do so and the system collapses since it depends on having enough miners to ensure a decentralized system with lots of nodes. Speculation, will constantly pose risks to blockchain development if cryptocurrency is allowed to be bought and sold speculatively.

The speculators got involved because of the hype. The hype happened because it became fashionable to produce blockchain “Handbooks” for everything and talk about how it was going to change marketing, advertising, banking, supply chain and everything… about 95% of those so called use cases make absolutely no sense at all.

The core of blockchain is a decentralized, immutable ledger to replace trust based systems. However, at this point, that ledger is really expensive to maintain – it takes a lot of processing power and electricity to confirm one block of transactions and add it to the chain. Therefore, we should be really careful what kinds of use-cases we build for blockchain. Trivial ones that are being subsidized by an inflated cryptocurrency valuation need to disappear so that the few cases which really require such a solution come to the fore.

If blockchain is a replacement for trust based systems, where do we really need it? For a large number of real-world transactions, trusted institutions or middlemen exist.  When we make online travel bookings with trusted travel companies like Agoda or CTrip we show up at the airport or hotel knowing that the transaction did take place and that if there’s a problem we can call someone to fix it – in the vast majority of cases, they do. Replacing this system with blockchain doesn’t help a great deal, certainly not in proportion to the cost of validating the transactions with current “proof of work” methodologies. That applies to ecommerce and other platforms as well – Alibaba, eBay, Amazon all work well because they provide  a trust based system.

Banks have been mentioned as a target for replacement by blockchain but the two things that mitigate against this are mining cost and time. Blockchain works on a roughly 10 minute block verification timeline, which means transactions are not recorded in real time – so if you bought currency at a particular moment, it may not get verified for a while, creating some uncertainty around the exact moment at which the transaction happened and the rate at which it was made.

Where do you really need immutable, updated records? This is a good starting point for thinking about blockchain applications.

Think about situations in which someone can show up with an old / fake paper record – say for owning a piece of property or a copyright. Being able to look up copyright / property ownership records online in a blockchain supported database will ensure you see the latest information and verify that it has not been interfered with in any way.

Large food retailers are starting to use blockchain to keep records of how produce traveled from source to shelf – all the various stages it went through and all the companies / logistics steps along the way. If you found a batch of strawberries that made people sick, an online database supported by blockchain would make it a lot easier to figure out where they came from and prevent the problem from getting bigger. The value of that kind of record keeping is perhaps much more than just a proportion of the specific transactions being monitored – in the event of a food crisis having this kind of traceable information is immensely valuable and can save lives.

A stable blockchain system where the reward for confirming a block of transactions doesn’t fluctuate because of speculation is key to being able to maintain this kind of database.

Is it possible to make cryptocurrency immune to speculation? In the original construct of a public blockchain where anyone can be a miner, this may be hard to control, but this is where private blockchains make a lot more sense – although in some ways that goes against the principle of a decentralised ledger.

Striking a balance where blockchain mining is somewhat restricted, but still to a large closed pool of miners, and establishing a different reward system where players pay for block verification as a service rather than speculating on cryptocurrency could make the development of blockchain solutions for real problems much faster.

It’s early days, and the first cryptocurrency boom and bust have cycled through faster than the dotcom boom and bust in its time. However, the real development of the internet, online businesses, ecommerce and so on all happened long after the dust from the first bust had settled and I don’t doubt that blockchain’s best years are ahead of us