Book Review: Bubble or Revolution

Autumn 2021

What do you know about Blockchain? If you’re like me you probably have a vague sense that it’s something to do with Bitcoin, and that it’s a distributed way of authenticating information without the need to trust any particular authority, but you’re probably a bit vague about the details of how it works or why that might be important.

I read this book to find out more, and I have to say it was exactly what I was looking for. Rather than coming from a place either of total scepticism or unthinking enthusiasm, the authors do a great job of explaining these technologies in non-technical terms and outlining what they have to offer.

Cryptocurrencies

Any product has strengths and weaknesses which result from the design decisions which were made while it was developed, and that’s true of Bitcoin and other cryptocurrencies. As the authors point out, those design decisions lead you to different conclusions about Bitcoin depending on whether you see it as a currency (which it does very badly), a way of making payments (which it does well for high value payments you’re prepared to wait a long time for), or as an investment (where it may have huge potential as a potential alternative to gold).

“…the thing that makes currencies good is stability, while the thing that makes investments good is growth.”

Bitcoin is unlikely to become a meaningful currency, but other cryptocurrencies might if they’re designed in ways which suit the needs of states. Whether or not that’s a good thing for the rest of us is a different question. The authors speculate that China will likely soon test a tokenised currency in Africa, and then launch it in China with the aim of making it the dominant cryptocurrency.

Diminishing returns & centralisation

Mining Bitcoin might seem like a great way to earn free money, but the power required now puts it beyond the reach of ordinary people. The “pickaxe” theory equates this to the gold rush, arguing that there’s little profit to be made by participating in the craze, but lots to be made by selling equipment to those that do.

Because the full blockchain is now too big for most people to store, we’re becoming reliant on the few who do, defeating one of the core aims of Bitcoin. On top of that the software is owned and maintained by a small group of people who are employed by a single company.

Mining pools are increasingly consolidating power, raising the spectre of a possible “51% attack” (basically, if you can mine blocks quickly enough you can rewrite history). Already, Chinese pools mine 88% of the world’s bitcoins.

“A powerful central government and a handful of big companies could control the future of Bitcoin. This is not the world that Satoshi envisioned.”

Beyond a record of transactions

Blockchains can do more than simply store a secure record of transactions. They can run code, store data, and really do pretty much any kind of computation. Ethereum is a cryptocurrency built on the idea that this kind of mechanism is useful.

One potential use for this is so-called “smart contracts” which can be set up to automatically perform certain actions (such as paying out) when particular conditions are met, but smart contracts have been criticised as being neither smart nor contracts.

Reasons to use a private blockchain

More generally, blockchains can be used outside of cryptocurrencies, and many organisations are deploying their own.

Does that mean you should jump on the bandwagon and start putting blockchains throughout your business? Probably not. Blockchains, like any technology, are only good for situations that play to their strengths:

Decentralised
Trustless
Transparent
Tamper-proof

It doesn’t make any sense to put your customer database onto a blockchain, but it might be a good idea for your supply chain, especially in markets (like food) where it’s important to be able to trace very accurately where product has come from.

“Anything that you can conceive of as a supply chain, blockchain can vastly improve its efficiency — it doesn’t matter if it’s people, numbers, data, money.”
Ginni Rometty
CEO of IBM

The efficiency gains possible are real, but in practice implementing a private blockchain can be very difficult, not so much for technical reasons as for social ones.

A paradoxical success

In the end, the success of cryptocurrencies may hinge on them abandoning their original philosophical goals:

“The technology designed to upend the monetary system and cut out banks and governments is being integrated with the monetary system, adopted by banks, and regulated by governments.”

Perhaps the most exciting thing about blockchains is their potential to revolutionise the mundane but important business of supply chain optimisation. That may not be a revolution, but it’s not quite a bubble either.

“…crypto…will change the world, not through anarchy…but through sheer efficiency.”

Stephen Hampshire

Client Manager

TLF Research

stephenhampshire@leadershipfactor.com

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