Blockchain Defined: 5 Myths or Facts?
How often do we hear of a new technology claiming to change the world as we know it? Remember when the Segway was going to transform how cities would be designed? Or Theranos was going to revolutionize the medical industry and prevent disease? Or the utopian Hyperloop would transform travel between cities?
Today, we are hearing how Blockchain is going to revolutionize the world. “Blockchain will be the next internet,” or “It will completely change the financial industry,” or “It will replace ride-sharing platforms.” Is this hype or reality?
What Is the Blockchain?
First, let’s understand what Blockchain is. Blockchain is a new technology architecture, enabling secure and direct transactions between people. A transaction can be a simple exchange of money, a sequence of rhythms, or signatures on a real estate contract.
Today, most transactions are performed (and guaranteed) through a centralized clearing house or governing organization. The central clearing house or governing organization collects fees along the way. Visa or MasterCard collects purchase transactions from consumers, charges a fee, and distributes the remainder to the merchants. Similarly, music companies collect acoustic creations and distribute it to consumers, collect the fees, and then distribute what is left over to the artists. These “centralized clearing houses” or “middle men” are often considered an annoyance to the suppliers (merchants and artists). Credit card merchant fees eat into already razor thin merchant margins. Artists feel as though there are not getting a big enough piece of the pie.
Imagine if the merchants and artists decided to transact without the “man in the middle.” Nordstrom exchanges shoes for fur pelts instead of central bank issued dollars. Jay Z sells 99 Problems directly to the millions of consumers. It would be the Wild West all over again!
But wait, what if there were a means to facilitate the direct exchanges without the Wild West, in a controlled and secured environment? Herein steps the “Blockchain Revolution.” Blockchain provides the security and structure of a centralized clearing house while allowing for the direct exchange of goods or services between a supplier and a consumer. Blockchain is a distributed technology where there is no central technology hub (well, sort of). Consumer and supplier information is maintained locally on distributed computers. And the beauty of Blockchain is the way it copies and stores data between the distributed computers. Certain information is shared between the consumers and suppliers, while information other remains private. Furthermore, the Blockchain technology proposes to be more secure than the traditional centralized model.
A simple way to explain the Blockchain technology is the game of “go-fish.” The Blockchain is the deck of cards, and the block is a single card. Each player is a “node” in the Blockchain, the dealer is the “wallet provider,” and the cards each player holds are a unique sequence of blocks. Each player’s hand is held privately until someone wants to validate a transaction. The first player reveals one block of information, “Jimmy, do you have a 7?” Jimmy validates the transaction with a “match” by handing over his 7 of hearts to the first player. The block has now been added to the first player’s chain.
Myth or Fact? Blockchain is completely decentralized
The most popular example of Blockchain technology is the Bitcoin currency. The transfer of the Bitcoin currency is conducted directly from the consumer to the supplier. The money is not transferred through a central bank or clearing house. However, it is somewhat deceiving to say Bitcoin is completely decentralized. The transactions are decentralized, yet the management of the currency exchange rates, the software applications, and people managing the exchange are centralized. For example, Coinbase is the digital asset broker facilitating the exchange of Bitcoin. They are headquartered in San Francisco, where they manage the trading, software, and support of the exchange. Therefore, claiming Blockchain is decentralized is not completely true.
Myth or Fact? Blockchain eliminates transaction fees
The adage “there is no such thing as a free lunch” applies for Blockchain. The Blockchain’s flagship Bitcoin is not free. To purchase Bitcoin, one would need to engage a brokerage firm such as Coinbase. The brokerage firms charge a transaction fee when purchasing Bitcoin. Exchange rate arbitrage results in additional “fees” when trading Bitcoin. Blockchain applications require someone (aka “wallet providers”) to build and support the software intelligence. The building and maintenance of the Blockchain applications require people to be involved who wish to get paid for their work. Someone must pay the piper.
Myth or Fact? Blockchain will turn the banking industry on its heels
Whether you are a fan of our current banking system or felt that the bailouts were frivolous, the banking industry is going to change with Blockchain technology. Yet, the banks need to look at Bitcoin and Blockchain separately. Many of the traditional banks are keeping a vigilant eye on Bitcoin and researching how Blockchain can be used. Large banks can leverage Blockchain technology internally to become more efficient and ultimately to reduce the fees they charge merchants and consumers. For example, the banks could collaborate to replace the traditional ACH (automated clearing house) with Blockchain technology. Reducing bank fees and improving efficiency will lessen the attraction of the Bitcoin movement. The big unknown is how regulators will respond to Bitcoin.
Myth or Fact? Blockchain will replace the internet and other platforms
If robots replace humans, then who is going to make the robots? A Blockchain application will need to use the internet to communicate. Therefore, without the internet, Blockchain developers have no means to communicate or transact. Claims that Blockchain will supplant Uber and Lyft by allowing people to directly interact for ride sharing is far-fetched. The ride-sharing companies value-add is the interface and software application for matching drivers and riders. The need to support a software application for requesting a ride doesn’t disappear with Blockchain. However, the ride sharing companies may decide to change the architecture of their applications to a distributed Blockchain architecture.
Myth or Fact? Blockchain will completely transform other industries
Blockchain is a more likely candidate in industries where friction exists. Friction exists where “the man in the middle” is taking a large portion of the fees. Friction exists where there are numerous parties involved in a simple transaction, causing delays. Imagine a platform where music is exchanged directly between the artists and consumers with Blockchain technology? Imagine buying property where the purchase agreements are authorized by the title company, bank, agents, attorneys, sellers and buyers simultaneously?
In sum, Blockchain technology will help certain industries become more efficient while it will transform others. The reality is, Blockchain technology will be a nice complement to existing platforms and the internet. While the distributed nature of Blockchain technology has security benefits, the scalability of the Blockchain remains an unanswered question.
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