Blockchain bubble may pop too
The technology behind cryptocurrency may prove to be as much of a bubble as Bitcoin itself, writes
Alittle-known prospective telecoms investor recently became the latest company to cash in on the craze for all things blockchain, the technology behind Bitcoin.
Stapleton Capital, which only listed last year and is yet to make a single investment, changed its name to Blockchain Worldwide. Shares predictably jumped as much as 130 per cent.
Blockchain Worldwide is only the latest in a long list of companies – including iced tea and sports bra makers – to successfully pull off this trick.
Why does it keep happening? Here’s one theory: keeping up with new technology trends is tricky, especially one as apparently nonsensical as Bitcoin.
Its price swings wildly, and it has no obvious use, but it is apparently worth thousands of dollars. It does not appear to obey the traditional laws of markets whatsoever.
This is a problem when you work in high finance or regulation. You’re supposed to understand, explain and trade the markets, but no part of your professional experience can make sense of it. What on earth are you going to do when somebody asks you about it?
Dismissing it as a bubble is a bit passe, so here’s your alternative: Bitcoin, you say, can be safely ignored. But the blockchain technology behind it is simply remarkable.
This position – Bitcoin bad, blockchain good – is the ‘‘smart’’ one if you work in finance, and it has now been repeated so often it has practically become gospel.
While Bitcoin is derided as useless, the blockchain – a decentralised system, controlled by nobody and impervious to fraud – is a brilliantly useful idea. No wonder companies are pivoting towards it.
Blockchain, also known as distributed ledger technology, is described by its most enthusiastic supporters as a technological leap equivalent to the internet. Its fans talk about it in the same tones that the web’s pioneers did – enabling radical transparency and taking power out of the hands of those who abuse it.
Fundamentally, blockchain means records – transactions, documents, and so on – are held and processed by a network. Changes to those records must be agreed and verified by the network, which avoids tampering.
Imagine trades being executed without a clearing house, or identity records that could not be forged. This is supposedly the promise of blockchain: a revolution in information. Trust – the thing that has been so eroded by the digital revolution – would return.
That is the theory. The reality is not quite so great.
Satoshi Nakamoto, the mysterious creator of Bitcoin and the blockchain, developed them more than nine years ago. The technology has been part of the mainstream consciousness for at least half a decade. Yet in that time, few institutions of any real note have actually started to use it outside of their experimental divisions.
Billions of dollars have been invested in start-ups, but most of these appear to be blockchain for blockchain’s sake: identifying something that already exists and putting it on the blockchain, for little apparent reason other than because the technology is in vogue.
There are two explanations for this. It may be that blockchain is in its embryonic stages, and that early adopters will reap the benefits when it goes mainstream. The other more likely possibility is that the blockchain is simply not going to live up to its wild promises.
Storing records on a network of computers, and having changes to those records cryptographically signed, is vastly resourceintensive and time-consuming.
The energy use of Bitcoin, the biggest blockchain to date, is close to that of Portugal, and while other blockchain networks are more efficient, they are still an order of magnitude less so than a payment system such as Visa.
Neither does blockchain’s core appeal – that its decentralised nature builds trust – stand up to much inspection.
As a society, we like centralised systems: in the PC wars, Microsoft’s Windows beat the decentralised Linux software; the web is dominated by centralised systems like Facebook and Google. We have put our trust in institutions rather than taking every decision ourselves, since it allows for efficiency.
Most financial institutions that have adopted blockchain in some way have endorsed so-called ‘‘permissioned’’ networks, closely controlled blockchains in which only a handful of approved parties can participate – which rather defeats the point somewhat.
But if you wanted any other proof about blockchain’s shortcomings, you need only look at Bitcoin.
Financial transactions should be one of the most clear uses for blockchain. But the Bitcoin network’s inefficiencies mean nobody is using it as a means of payment, merely speculating on its price.
It has become fashionable to dismiss Bitcoin as a speculative mania, and assert that the real value lies in blockchain. But the latter may prove to be as much of a bubble as Bitcoin itself.
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