An Expanding Cryptofinance Ecosystem: Picking The Right Tool For The Job

May 2nd, 2016 Posted by Cryptofinance technologies 0 comments on “An Expanding Cryptofinance Ecosystem: Picking The Right Tool For The Job”

Although great for pounding nails, a hammer isn’t the best tool for every job. Just like the hammer, blockchain technology does some things very well, but isn’t ideal for everything.

If 2015 was the year of bitcoin, then 2016 is the year of the blockchain. The rebranding of the technology has helped propel it into the boardrooms of nearly every major financial institution, negating the negative stories associated with the early years of bitcoin.

What is a blockchain though? I find that after over a year of working in cryptofinance, still nearly nobody has a clear understanding of what the technology is, or what it does. It shows up on the cover of mainstream publications, it’s trumpeted by CEOs as the next big thing, and whispered about deep inside the windowless innovation departments by managers looking to deliver a hammer to whatever problem their CEO wants solving.

The blockchain is a public ledger of all Bitcoin transactions that have ever occurred. It’s constantly growing as transactions are made, and a new ‘block’ of transactions is added every ten minutes. Blocks are added to the chain in a chronological order, and every transaction ever made on the blockchain is identifiable from the very first. Each computer connected to the bitcoin network performs the task of validating these transactions, and are rewarded by doing so.

So what good is this ledger for financial institutions, insurance providers, and every other business looking to join the hype? How is it applicable to how business is done today? Well, the bitcoin blockchain is distributed, and allows for transactions to occur without a trusted third party (such as a bank) or having to even know the counterparty. The public ledger is incorruptible, as the ledger is held by every computer connected to the network, and agreed upon by participants. Banks and other institutions see the opportunity as much as they see the threat. The ability for anyone in the world to easily transact digitally with minimal counterparty risk makes one of their primary functions obsolete. I believe most financial service providers are starting to realise this, and after witnessing the creative destruction caused by the internet, want to adopt whatever it is that will insure their place in a digital future.

Banks understand what the technology can do, but most don’t fully understand the technology. This has led to the advent of ‘private blockchains’. These so called ‘private’ blockchains use the process native to bitcoin, while operated only by nodes which they control. This demonstrates that the core concept of technology isn’t understood — distribution. The security, resilience, and value of the bitcoin blockchain is all due to it’s distributed consensus.

Private blockchains are the result of trying to use a hammer for every job. They, like the intranet, will most likely disappear with time. Cryptofinance is more than just blockchains, it’s simply the convergence of financial technology and cryptography. The future of the bitcoin blockchain will not be to record every beer bought or to act as a global ledger for all transactions. There are a myriad of technologies under development right now that will help solve the shortcomings of the bitcoin blockchain. The bitcoin blockchain was never expected to be cheap, efficient, or fast. It is distributed, and distributed systems are nearly always less efficient than centralized ones. Because of this, blockchain technology will be used in parallel with other technologies.

The blockchain will be used for it’s strengths — security, resilience, and as an incorruptible database. Large transactions will occur on the blockchain, but it is likely that the majority of transactions will occur by other means which don’t require the expense of consensus from a globally distributed network of bitcoin nodes.

Which technologies will take on this role are yet to be known. What we do know is that consensus based technologies such as blockchains, are inherently too slow and expensive for an efficient widely-used transaction system. Therefore, a deterministic solution that has the ability to handle the required volume of transactions would allow for the perfect complement to a blockchain. While a blockchain can use its distributed consensus to maintain the correct state of the ledger, symbiotic technologies will be able to work in tandem to lower cost and increase efficiency.

The difficulty won’t only be creating these technologies; it will be in educating those intent on using a hammer to solve all of their problems that there are other better tools for them.

Disclaimer: Blog posts reflect the views of the respective authors, and do not necessarily represent the official view of Monetas.