A Few Questions…

The following post answers some questions recently posed to me. I hope this provides you with some valuable answers.

 

 

Question: “What do you think about blockchain?”

 

Depending on which blockchain, I think blockchain has an amazing potential to solve many real-world problems. Let me strike at the root of what blockchain is and is not good for. The term “blockchain” is used to differentiate between the ‘bitcoin’ unit and the underlying ‘technology’ that allows bitcoin to function. Because a secure, robust blockchain uses a large amount of energy to operate expensive computing hardware, it should be engaging an important problem. Any problems that can be solved more efficiently in another way are not problems that requires a blockchain.

 

 

Question: “What problems in the world can we solve with blockchain?”

Question: “Why use blockchain to do it?”

 

I’ll answer both of the questions simultaneously.

 

The most fundamental problem that a blockchain solves is the Byzantine General’s Dilemma (BGD). It’s essentially the problem of decentralized consensus and goes something like this:

How does a group of generals reach a consensus on when to make a coordinated attack on a city when they are positioned around it and must rely on using messengers to pass through the city and deliver messages from one general to the other? Assuming some smaller number of them are possibly traitors and will deliberately send the wrong message to spoil the attack, or that some messages could be corrupted by the enemy before reaching the other generals even if the original sender was not a traitor? In this hypothetical scenario the attack time must be agreed upon by a sufficient number of the general’s armies. If sufficient consensus is not reached, the attack will surely fail as there would not be enough attackers to overcome the resistance.

 

This has been a problem that was considered unsolvable until 2009 when bitcoin protocol was released. It was a VERY tough problem to solve and the solution involves not just brilliantly designed computer code, but also requires the economic factors of using vast amounts of energy to make it more expensive or risky to attack the network’s consensus than it is to join it in a cooperative way.

In my opinion, one of the most important problems that the world faces right now is that of trust. The world’s economy is running almost exclusively on a private centralized ledger that is controlled by a relatively small group who must be trusted to do what is in everyone’s best interest, not just their own. The Federal Reserve Central Banking system has never been publicly audited and their ledger is kept a secret to all but a privileged few.

 

Until 2009, this centralized structure was the only way for the system to work, despite the potential problems of relying on trust.  A centralized structure has a weakness in that it is potentially vulnerable to a take-over by bad actors that have a strong incentive to do whatever it takes to gain control and therefore benefit from that control. Aside from that, who among us is strong or pure enough to resist the “ring of power” even if they had the best initial intentions? How does one resist the temptation to enrich themselves and/or friends at the expense of everyone else? Few will ever be this angelic and even if they are what about the next leaders? It’s a big risk at the very least, wouldn’t you agree?

Humans are extraordinarily good at gaming systems to their advantage if it’s at all possible. The fact that the bitcoin blockchain solves the BGD dilemma and provides a ledger that is decentralized, does not require third party permission to use,  and is able to be publicly analysed makes it incredibly valuable and therefore worth the amount of energy expended to support it.

Unfortunately many of the proposed alternative blockchains are not anywhere near as potentially useful. They do not solve the BGD because they are centralized or otherwise flawed (like not using a proof of work mining algorithm).  Some do solve BGD as they are almost exact clones of Bitcoin, but they will not likely be able to compete with the economic and network effects of the original blockchain. Some blockchains propose to use a decentralized solution for a problem that could be more efficiently solved other ways so would render them unlikely to be able to compete. Many blockchains that have been created have been created only to draw investors money to enrich the developers. It’s a common and profitable trick, so having discernment as to the value proposition of any particular blockchain is essential to a savvy investor.

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