wyc's domain


When to Use a Blockchain

Posted on August 4, 2017
Tags: business, blockchain, disruption

I think that the core value crypocurrencies and blockchains currently provide is a distributed system of trust. I also think that we people in developed nations have been spoiled by our trustworthy institutions, relatively speaking. I don’t know too many people in US/UK/AUS/JP hesitant to put money away in the consumer banks, take out mortgages, or file disputes in the state courts. Those systems work well enough, with acceptable speeds for most use cases.

Drawbacks

While crypto technologies are improving, they have some glaring drawbacks:

Legacy Barriers to Adoption

These are all being worked on through technology improvements and new blockchains, but they’re still issues that prevent blockchains from displacing existing systems. I think they could one day change everything in an Innovator’s Dilemma fashion, but not anytime soon (5-20 years). There is already staunch opposition to using clearly superior technologies due to cultural factors, for example:

So in the case of blockchains, not only is there an overwhelming opposing cultural force, but also they happen to make inroads in sensitive industries such as finance/contracts, and the technology is not superior on many levels. This would make adoption very difficult.

Where It May Work

However, some people don’t have such trustworthy-enough institutions. It’s apparent how successful BTC has been in turmoil-ridden South American nations such as Venezuela and Argentina. This story has been challenged, but the recent volume chart for the bolivar is exponential. The inflation is out of control, and consumers don’t trust any of the banks or institutions. In this environment, the blockchain is leaps and bounds better than anything else that these consumers have access to, so it’s immensely valuable. A consumer may happily wait several days for transaction clearance. He wouldn’t care that the transfer is final. He’d do whatever awkward dance it takes to operate and secure a Bitcoin wallet.

In other words, BTC is competitive as a currency in markets where the incumbent currency no longer provides utility as a store of value. Hyperinflation is surely one way to achieve that failure. BTC can be a better alternative in that case, and it may be especially so when governments prevent open and fair exchange to more stable currencies such as USD or EUR.

I think characteristics of an ideal market for blockchain technology today could be:

Its most compelling value is the provision of trust where there is none. An example where this might work well is in the specification and mediation of international contracts for small businesses. There is currently little accountability after getting burned in an international transaction with a small entity, as a small entity. If there were a standard trusted registry of company identity, reputation, transaction histories, and contracts, then it could go a long way to building systems of trust that enable more fluid trade afar.

Blockchains are definitely not useful in many circumstancs, and for better or worse, the hype seems to be drowning out the real businesses cases for this technology. The dimensions of value that this technology offers will only increase both in breadth and depth as projects such as Ethereum gain traction and maturity. It’s important to focus primarily on what utility is created, and to whom.