Blockheads over blockchain
TECHNOLOGY has created lots of jargons that most of us don’t understand. Most of us have mental blocks against new things that we do not understand. Some people are born clever. Some become clever through hard work. But many appear clever by using jargon others don’t understand.
Are we fooling ourselves by trying not to look foolish over new technology? Or, are we mentally blocked by blockchain?
Most brilliant ideas are actually very simple.
But common sense is not common precisely because experts exist to make life very complicated – otherwise there is no need for experts. You consult a lawyer because he or she can make life very complicated for everyone, but simplify it for you for a fee.
The revolutionary idea behind blockchain is that we do not need the present system where everything must go through a topdown node that knows everything about us.
The Internet changed everything because it claims that you can disintermediate every middle man. We need banks because we trust them more than other parties that we do not know. We pay the bank to pay our bills, and the bank transfers the money to the other party’s bank through the central bank’s books (because they trust the central bank more than each other).
In other words, financial business is a trust business, where all transactions are booked through a top-down ledger system that are ultimately written across the books of the central bank.
Since we use dollars to settle international trade payments, ultimately, we settle more than 60% of global transactions across the books of the US Federal Reserve Bank.
This global system runs on a unipolar ledger system because the rules were essentially set by the Americans after the Second World War, with the US dollar as the principal unit of account, means of payment and store of value.
In the same way, we trust the state because the government protects us from criminals, provide us with education, medi- cal services and retirement benefits. For that we pay taxes and we accept the right of the state to be the monopoly issue of fiat money.
The Internet (invented by the US Department of Defense, no less) changed the game because everyone with a smart device (phone, PC or now TV) can engage in peer-topeer (P2P) direct transactions with each other, without an intermediary.
The old joke was that in the Internet, no one knows that you are a dog. The reality is that Google, the state or any hacker know that you are not a dog because they (can) monitor your activities on the Web.
P2P transactions became more popular after the 2007 global financial crisis because many people lost trust in banks and governments. That trust was lost because the bad bankers or “banksters” who profited from selling trashy products to innocent investors got away with billions.
Trust in the state was lost because none of these banksters went to jail. Indeed, many of them are still enjoying millions, if not billions, in inflated bonuses and egos, delighted that central banks keep printing money to keep the asset bubbling to their great benefit.
Of course, P2P transactions thrive because there has always been a dark side of the Internet, where people want to avoid taxation, regulatory oversight or just to keep things more private. Governments legitimately need to monitor the Internet because it can be used to fund illicit activities, such as tax evasion, money laundering and terrorists. Cybercrime is rising everyday and someone needs to protect the innocent from such public bad.
What blockchain promises is a “Trust Protocol”, which is a technology that prevents hacking and improves security.
Blockchain works on the cloud (private network of computers) and verifies and approves each transaction as it moves from one ledger (block) to another along the chain of distributed ledgers (hence blockchain).
Because the system checks and stores the transaction within each chain, it is very difficult to hack part of the chain without knowing the encryption key at each part of the chain. If you believe the hype since the invention of blockchain technology, it can “re-invent financial services, re-architecting the firm, improve economic inclusion and entrepreneurship, re-build government and democracy and freeing culture” (Tapscott and Tapscott, Blockchain Revolution 2016).
Since the mysterious Satoshi Nakamoto unveiled cryptocurrencies using blockchain technology in 2008, there has been an explosion of interest, adoption and issue of initial coin offerings (ICOs) that so far has created cryptocurrency valued at varying times of up to US$600bil. ICOs raised US$4.5bil in funds between January 2017 and February 2018, with unverified claims that 80% of such ICOs are fraudulent. Indeed, as a Korean ICO claimed recently that up to US$32mil of digital coins were stolen or lost, the aura of “uncrackability” or total security has been lost. As the cyber currency market reaches this scale, central bankers and financial regulators have finally woken up to both the potentialities of this new technology, but also its threats.
The Bank for International Settlements 2018 Annual Report goes to the heart of the trust issue: “Trust (in cybercurrencies) can evaporate at any time because of the fragility of the decentralised consensus through which transactions are recorded. Not only does this call into question the finality of individual payments, it also means that a cryptocurrency can simply stop functioning, resulting in a complete loss of value.
“Moreover, even if trust can be maintained, cryptocurrency technology comes with poor efficiency and vast energy use.
“Cryptocurrencies cannot scale with transaction demand, are prone to congestion and greatly fluctuate in value.”
The empire has struck back. Of course distributed ledger technology is being gradually used for improving security of existing bank and exchange businesses.
But the hype over blockchain technology being the transformer of whole industries and the economy is just snake oil. Investors in cybercurrencies should realise that once the regulators start banning and inspecting these ICOs and cybercurrency operations, they will find fraud, losses and manipulations that ultimately will lead to tears.
Trust in blockchain, as in anything else, needs to be earned, not created through hype. We do believe in human creativity, but only blockheads believe that blockchains will be the road to riches for all. Buyers beware.