Centralization of Decentralized Protocol — Is Blockchain Real or a Gimmick?

The Marketing Blockchain

A few days ago, a Blockchain startup reached out to me. Blockchain, Emergent Consensus, Smart Contracts, Proof-of-Work, and a bunch of other terms that were fashionable in Dec of 2017 rushed back from the deep abyss in my brain, where I buried all these things, along with a few dollars. It’s now been a year since cryptocurrencies started collapsing. The fundamental question, however, remains — is Blockchain just a gimmick?

Last year, as I dug into the technical details of Bitcoin, while simultaneously being bombarded daily with Blockchain posts on the Internet, one thing became apparent — there’s a tremendous amount of disinformation out there. Just like no one could figure out derivatives, which allowed banks to stuff them with garbage, that eventually led to a subprime crisis, neither could most people figure out what Blockchain really means, which allowed fraudsters to pump out all sorts of crazy stories about how Blockchain can save the world.

The Blockchain noise drowned out the central of achievement of Satoshi Nakamoto — the creation of decentralized currency, which people can trust without having to trust any one human or machine. It is easy to take trusted currency for granted if you live in a first-world country, but it is a really big deal. Without a trusted currency, economies cannot function, and countries like Venezuela provide a stark reminder of that. Currencies, after-all, are backed by governments comprised of highly fallible humans. Bitcoin was the first currency that was able to achieve trust while bypassing the human element altogether.

Decentralization, however, is an inconvenient term for any Corporation, since a Corporation is by definition centralized. You can’t really market “decentralization” to anyone except for anarchists. But you can market “blockchain”. And so the Marketing Blockchain was born.

The Marketing Blockchain could end world hunger and achieve world peace, cure diseases and detect fraud. No task was too big or daunting for it. The Internet was in awe of its power. Confused, but in awe.

The Bitcoin Blockchain

In reality, however, the Blockchain meant something very specific and non-sexy. It was the solution that Satoshi Nakamoto implemented to solve the double-spending problem — a way of ensuring that the same $10 cannot be spent twice and guaranteeing transaction order without having a single trusted entity (e.g. server).

Double-spending problem takes some effort to wrap your head around because it only arises when there isn’t a central authority. Typically, if Bob has $10 and he gives those $10 to Alice, the bank writes that transaction to a database, updates Bob’s and Alice’s balance, and that’s pretty much end of story. If Bob now tries giving $10 to Joe, the bank will see that Bob’s balance is at zero and reject the transaction. This all works because we’re trusting a centralized entity — the bank — to record transaction order and update balances correctly.

But what if you take away having a trusted centralized entity? Bob can transfer $10 to Alice, then delete the transaction or update the transaction time to sometime in the future, and then transfer the same $10 to Joe. Who is to say what really happened and when?

Bitcoin’s Blockchain solves this problem by encoding some number of transactions in Blocks, cryptographically signing them, and forming a Chain of these Blocks, starting from the very first Genesis block created in 2009. In order to sign a new block and make it part of the Blockchain, computers first have to solve a “find the right number” kind of puzzle, which can only be solved brute-force by iterating through all the numbers. This process is called Mining. There’s a non-trivial amount of Bitcoin rewarded when a Miner solves this puzzle (currently 12.5 Bitcoins), which gives Miners incentive to do this in the first place, and turns it into a sort of a game. Since there isn’t a central authority in charge, machines vote on whether the new Block can join the official Blockchain (hence the 51% attack). The whole system is designed in such a way that while it’s possible to have bad actors in the system, rewards far out-weight the risk, ensuring that there will be enough good actors in the system to nullify the bad ones and preserve the integrity of the Blockchain.

Bitcoin’s Blockchain solution is far from ideal. In order to solve the cryptographic puzzle, Miners consume an incredible amount of electric power, that is completely wasted, and leads to large transaction fees. On top of that, the mining reward is structured in such way that Miners win it infrequently and in large amounts, making it impractical to run your own hardware on small scale, and leading to the formation of giant Mining Pools. In other words, as an unintended consequence, Bitcoin’s solution to decentralization leads to the formation of large centralized entities. These criticisms not withstanding, Bitcoin’s Blockchain was the first solution of its kind. Most importantly, it worked.

The Blockchain Conundrum

When something works, people will try to make money from it. And this is where we enter the Blockchain Conundrum — a fundamental contradiction between the actual Bitcoin Blockchain and the Marketing Blockchain that has evolved as a marketing spin companies put on it. At the heart of the Blockchain Conundrum lies a simple fact —Bitcoin Blockchain, the solution to the double-spending problem that arises from a lack of trusted entity, has zero applications for any organization outside of payments. Any organization acts as a trusted entity for its customers. Therefore Blockchain offers a solution to a problem that is fundamentally not there for companies.

With this in mind, you can safely dismiss a number of ideas and efforts. Private Blockchain — a solution to record transactions offered by some company — is completely non-sensical, since you’re already trusting the company. Hyperledger Fabric by IBM sits firmly in that camp. Using Blockchain for supply management is non-sensical, even if Microsoft published an on it, because once again, you’re trusting the company doing it. Taking a makes sense, but if they teach it truthfully, you should walk away with the exact opposite sentiment than “Ultimately, you will walk away with a proposal for an application of blockchain technology in your organization.

Bitcoin, not Blockchain

I’ve heard the following sentiment repeated by many people: “Bitcoin is no big deal, but Blockchain is.” It is, in fact, the exact opposite. Bitcoin’s Blockchain - the algorithm used to solve the double-spending problem - like any other v1 algorithm — has numerous deficiencies. To address those, Ethereum, for example, is actively working on switching from a Proof-of-Work to a Proof-of-Stake model that will achieve distributed consensus in a radically different way. The point isn’t the algorithm, really. Bitcoin was created out of thin air and in a span of a few years it has achieved something remarkable — trusted currency without government backing. In doing so, it has shown us what is possible. Even as cryptocurrencies continue to plummet, the Pandora’s box has been opened and will never again be closed. In some form or another, cryptocurrencies are here to stay.

Ultimately, the Achilles’ Heel of cryptocurrencies today is not their implementation. It is the lack of a bridge between cryptocurrencies and traditional currencies. To be sure, a few centralized exchanges such as Coinbase exist, but in having to trust a centralized exchange, we lose all the benefits of cryptocurrencies and expose ourselves to old-fashioned risk built into any human-run system. When a truly decentralized and fully transparent exchange becomes mainstream, I believe cryptocurrencies will start creeping into the real-world.

In the meantime, we have the Blockchain.