From the hype curve: blockchain disillusionment sets in

Jim Bowes
CEO of Manifesto

Blockchain, or distributed ledger, technology had a rapid rise to prominence due to its association with Bitcoin.In the ten years since its invention, it’s been touted as a game changer, that will allow a huge range of transactions to be conducted peer-to-peer, remove the need for middle men, reduce inequality, restore trust and improve democracy.

Evidence is scant. But after the dust has settled on the broken dreams, and the disillusionment lifts, blockchain might yet have a profound impact on our lives.

Blockchain first burst onto the hype scene around 2010, as a footnote to Bitcoin’s growing popularity. At that time, the cryptocurrency was chiefly known as illicit online marketplace Silk Road’s payment method of choice and the only way you could donate money to Wikileaks. Needless to say, the most vocal and devoted advocates of Bitcoin (and by extension blockchain technology) were rooted firmly at the anarchist/libertarian end of the political compass.

The finance community, which has its fair share of anti-authoritarian types, saw past the dizzying price fluctuations of Bitcoin to the potential of the underlying technology – essentially an innovation in accountancy – and immediately set about trying to find other uses for a secure, indelible ledger of peer-to-peer transactions. If financial contracts could be programmable and self-executing, imagine the profits to be made disrupting the authorities – be they banks, governments, lawyers or Facebook – that were presently responsible for mediating these kinds of transactions.

In the years that followed, the price of Bitcoin has risen and fallen dramatically, amidst an uncountable number of new cryptocurrencies. Some of those are genuine efforts to find a usable form of crypto cash that solves Bitcoin’s speed issues. Others are shameless attempts to cash in on the cryptocurrency hype, and others still are the Initial Coin Offerings of businesses looking to raise capital, as in an IPO, but without the attendant regulations.

So, while it’s unfair to say that nobody’s yet found a use case for blockchain, ICOs and dark web markets don’t touch the lives of the vast majority of people. Can the reality of blockchain ever live up to the hype?

What is blockchain?

I’m certainly not the first to have a crack at this definition, so let’s not reinvent the wheel. Here’s what Bitcoin expert Jimmy Song said in a recent Medium post entitled ‘Why Blockchain is Hard’:

“The main thing distinguishing a blockchain from a normal database is that there are specific rules about how to put data into the database. That is, it cannot conflict with some other data that’s already in the database (consistent), it’s append-only (immutable), and the data itself is locked to an owner (ownable), it’s replicable and available. Finally, everyone agrees on what the state of the things in the database are (canonical) without a central party (decentralized).”

The great genius of blockchain is that it solved the double-spending problem that plagued all prior forms of digital cash (where the same token is spent more than once, due to copying or counterfeiting), without the need for a central authority to verify whether a token has been spent.

As Jimmy notes, out of the five key attributes of a blockchain ledger, or database (consistent, immutable, ownable, canonical, decentralised), the last is blockchain’s raison d’etre. If you don’t mind having a central party in place to make a final call on the veracity of the data, then you don’t need a blockchain.

Blockchain as white elephant

In the middle ages, the kings of Thailand would bestow sacred white elephants on their favoured subjects as a blessing. However honoured, the subjects soon found that having a large, expensive-to-keep animal that they couldn’t put to work was also a curse. Lots of companies now experimenting with blockchain, because they’ve been sold it as a panacea to their IT problems, might be experiencing a similar headache.

While slapping the word ‘blockchain’ in your press releases might improve the value of your shares by a point or two overnight, Jon Holt and his team at Notbinary, working alongside the Centre for the Digital Economy to research wider uses for blockchain, outlined the major problems with distributed ledgers in a recent article:

  • Distributing a ledger potentially consumes over a hundred times the energy of single databases. Scaling up from relatively niche use could be impossible
  • Bitcoin is curated by miners. These workers are remunerated (in coins) for their work. Any future distributed ledger application would need to establish a commercial model to reward those doing the maintenance
  • Bitcoin, supposedly secure, has had major trust/security breaches. What would we do if Companies House or Land Registry were moved to distributed ledgers, and attacked? What are the implications for sovereign security, or maintaining civil order?
  • People take comfort in recourse with humans when things go wrong. If the distributed ledger loses data, or is hacked or seized, to whom would citizens/customers complain?

I think the security issues might be overstated. The major breaches Jon’s referring to happened when the databases of Bitcoin exchanges (i.e. third parties) were hacked, not the blockchain itself. To date, there’s only been one major vulnerability detected (and exploited) in the blockchain protocol, and that was eight years ago. However, his other points are serious enough to seriously limit the number of potential use cases.

Blockchain as world’s largest electricity consumer

The Bitcoin network is using 68.53 TWh of electricity per annum, more than the Czech Republic, Colombia and Switzerland

In fact, the first of John’s points raises the question of whether Bitcoin itself is a sustainable use of blockchain technology. The alarm bells about Bitcoin’s energy consumption started ringing last year when it was found that the total power used by the network in November was higher than that of the entire Republic of Ireland. And it continues to grow. The latest estimates from Digiconomist are that the Bitcoin network is using 68.53 TWh of electricity per annum, more than the Czech Republic, Colombia and Switzerland.

That gives Bitcoin an estimated carbon footprint per transaction of 468.64 kg of CO2, which is 566,864 times larger than that estimated for the average Visa transaction. The craziness doesn’t end there: a new academic analysis out this month predicts that Bitcoin miners will be gobbling up 0.5% of all the electricity produced in the world by the end of 2018. The author suggests that that figure could someday reach 5%, effectively wiping out decades of progress on climate change.

Why is all this power needed? As John said, Bitcoin is kept running by miners, who earn Bitcoin based on the work they put into maintaining the blockchain. Adding a block of transactions to the chain requires solving a computationally intensive cryptographic problem. New Bitcoin are created as part of this ‘proof of work’ process and these go to the miners. But the hardware required to perform these calculations is very powerful and very energy hungry. The author of the above report estimates that miners are spending about 60% of what they earn on electricity bills.

If Bitcoin continues to grow at its current rate, you’d have to imagine that governments will step in at some point to put a stop to this incredibly inefficient use of resources.

And there’s a related problem: the ‘proof of work’ required to add new transactions to the Bitcoin blockchain limits the number of transactions that can be processed at a time. You can add a mining fee to your transaction to speed things along but, as anyone who’s tried to pay for anything with Bitcoin knows, while BTC may be fast and cheap compared to an international wire transfer, compared to a credit card transaction it’s either wince-inducingly pricey or painfully slow.

What about Ethereum?

Ethereum is almost as controversial an implementation of blockchain technology as Bitcoin. Essentially, it’s a platform on which developers can build decentralised applications. Before Ethereum, if you wanted to build a blockchain-based app you’d either have to build it on an existing blockchain, like Bitcoin’s, which would massively restrict what you could do, or design and build your own blockchain. Ethereum provides a platform with a single blockchain on which you can run pretty much any code you like, making the prospect of deploying decentralised apps much less costly and time-consuming.

Like Bitcoin, the Ethereum blockchain is kept running by miners who earn Ether, a cryptocurrency which is used to pay for transaction fees and services on the network. Also like Bitcoin, this means that miners run up great big electricity bills. Ethereum’s network already uses more energy than Cyprus. However, Ethereum has plans to move away from a ‘proof of work’-style way of generating consensus, which relies on miners expending lots of computing power, towards a ‘proof of stake’-style algorithm, which instead relies on a consensus of virtual miners (or validators) who will lose money if they don’t follow the rules. If it works, it will reduce Ethereum’s power consumption to a tiny fraction of what it is now. But that’s a big ‘if’: the new system, dubbed Casper by its creators, has recently been criticised as “fundamentally vulnerable” by a prominent security researcher from VMWare.

When might you need a blockchain?

If you don’t trust all the people making changes to a database, or a central authority to ensure it remains truthful, then blockchain could come in handy

As we’ve seen, if a traditional database would serve all your needs, then you really don’t need blockchain. But what if a database would be likely to fall foul of attacks or censorship? In that case it would be handy to have redundant copies in many, distributed computers. There are already organisations working on putting patient health records on blockchain, and to create secure, transparent online voting systems.

Similarly, if you don’t trust all the people making changes to a database, or a central authority to ensure it remains truthful, then a blockchain could come in handy. This is why lots of companies are investigating using blockchain to track the journeys of elements in their global supply chains, parts of which are controlled by third parties. And it’s why there’s a lot of interest in the financial world in ‘smart contracts’, which self-execute when the network reaches consensus on whether the conditions have been met. It also suggests a use for blockchain technology to establish the provenance of digital content (including software and artistic works), and maybe even shake up social media by helping us all get paid for the content we create.

But, as the articles I’ve linked to show, most of these applications are at a very early stage. Blockchain is a technology in its infancy and, at the moment, relies on a method of generating consensus (‘proof of work’) which is slow and energy intensive, and essentially prevents long-term applications on a large scale. It’s only a matter of time before some clever crypto researchers and engineers solve this problem (Ethereum’s ‘proof of stake’ system might even get there in the next few years), but until they do, the use of blockchain will be limited to cases where the need for additional security, or the lack of trust among peers, justifies the extra expense and effort of maintaining and developing distributed ledgers.

In summary, blockchain’s plateau of productivity is still some way off.

Jim Bowes
CEO of Manifesto