Tech insights: Here's Why You Don't Need Blockchain

Here's Why You Don't Need Blockchain

By Herman Martinus

In my opinion, blockchain is overused and poorly understood in terms of practicality. While vast sums of money have been made from it, very few people seem to have a clear idea about what the technology actually is and how it actually works. In other words, people are risking their resources and assets over something they don’t fully understand. Here are a few examples of where I’ve seen blockchain being poorly employed, and where I think existing solutions work better.

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About eight years ago, I was at university studying Computer Science. It was around this time that I was introduced to Bitcoin mining by a friend. I played around in the crypto space for a while and soon found myself deep in the trenches of this mystic technology. I was sure that this was the beginning of the digital revolution, and was so caught up in the idea of it that I didn’t question the underlying technology as a whole.

I decided to invest in Initial Coin Offerings (ICOs), with the assumption that I only had to bet on one winning horse to be sorted for the rest of my young-adult life. I made money, and a decent amount of it, but I don’t have that money anymore. It disappeared into the crypto-ether, either from bad trades, exchange hacks, or the ridiculous drop in value of these currencies.

I soon realised that this kind of speculation is a form of gambling that was attracting a lot of people who didn’t realise how dangerous it could be.

After this realisation, I set out to better understand how the technology I had been tinkering with worked. I wanted to figure out if it was worth the excitement it was generating, or if sticking to traditional solutions actually made more sense.

I started writing for an online ICO analysis website, breaking down the new surfacing technologies. While this tech was very flashy, it dawned on me increasingly that it wasn’t fulfilling the desired needs, whether that be securely transferring monetary value, or replacing legislative systems like property transfer. Instead, it was providing a more complicated and less accessible platform to operate in than more traditional systems. Some of these systems, where blockchain fails to provide viable solutions include:

  • Smart contracts
  • Currency
  • Interbank payments
  • ICOs

Here’s how these systems have traditionally worked, how blockchain has attempted to change this and why I think this doesn’t work well.

Blockchain in a nutshell

Before we start, I thought it would be useful to explain what blockchain is in broad strokes.

Despite how many crypto-enthusiasts talk about it, it isn’t an abstract idea for managing information.

There’s this narrative that ‘putting’ data into the blockchain automatically makes that data immutable and secure. That’s an oversimplification and a half-truth.

Blockchain is a data structure – a linear-transaction log to be precise. Every time a transaction happens, it gets added to the log, which then gets propagated. The log is replicated by computers whose owners are rewarded for logging new transactions, and thereby achieve consensus on what the ‘true’ data is.

There are two things that make this data structure unique:

  • Any new transaction invalidates every block behind it, meaning historical transactions are tamper-proof.
  • There is a consensus on a single chain, which is achieved by rewarding participants for logging transactions on the main chain.

Where it falls apart

What I’ve just described might sound pretty cool – and it is! However, there are many instances where this technology just does not work. Existing solutions are more efficient, and I would argue, what we should stick to.

Smart Contracts

Blockchain has been used a lot recently with ‘smart contracts’. Essentially, these are self-executing contracts that are written as code, rather than legal text. Because you can encode them directly on the blockchain, they can transfer value based directly on the cryptographic consent of the parties involved. In theory, this means that smart-contracts are cheaper to interpret as their execution is mathematical and automatic. This hypothetical cheapness and speed is what has driven the interest of transactional smart contracts.

Traditionally, we have trusted vendors to do transactions for us

In a traditional system, you pay a vendor and hope that they will give you the piece of software, game, ebook or whatever it may be that you are paying for. You rely on Steam and Paypal (or your bank) to make sure this transition of funds is fair. We trust these vendors and third-parties because they have a track-record of being trustworthy, and have an incentive – retaining customers – to maintain that record.

Blockchain technology cuts out the middleman

In contrast, on a blockchain system, the transfer of money and digital products is automatic and direct, with no middleman needed for the arbitrage. This might be seen as a good thing because you have more control over the transfer of money.

This proposed system, while seemingly fairly straight-forward on the surface, is actually pure anarchy. Auditing software is HARD WORK, with the onus being on the recipient of the product to do this auditing, making themselves the trusted authority.

Essentially, every transaction you make using a smart contract would have to be analysed by you (or ironically some trusted third-party) to make sure that it is valid and secure, as well as non-nefarious – it would be a pity if your Ethereum account was maliciously emptied by a smart contract while trying to buy Transistor, no matter how good the game.

When you take trusted services out of the equation, it’s a lot easier for this transition system to go awry

The largest smart contract to date is the Distributed Autonomous Organization (DAO). It enabled its members to participate and invest directly using their private cryptographic keys, as well as vote on what to invest in, sans lawyers, fees, boardrooms and enormous salaries being paid to CEOs. The DAO “removed the ability of directors and fund managers to misdirect and waste investor funds.” Despite this, the DAO ‘voted’ to ‘invest’ $50 million in a vehicle controlled by some smart people who knew a lot about recursion issues during balance updates.

Some people refer to this incident as a hack. Others reckon that the software functioned exactly as intended: It made decisions autonomously and there were no two ways to interpret it.

The fiasco was such that the members voted to retroactively amend the contract and move the currency back to its original owners. This illustrates that even the most hard-core blockchain enthusiasts want humans arguing about the underlying intention of a contract.

If cryptocurrency ‘investors’ putting together a $150 million investment fund can’t properly audit their software, how are everyday buyers of video games going to protect themselves in a digitally ‘anarchistic’ world?

Trusted systems. We use Steam and Paypal BECAUSE we trust them.

Currency

The most well-known form of blockchain is the cryptocurrency, Bitcoin. There are many different cryptocurrencies, with the premise of them being peer-to-peer transitions of monetary value without the need for a middleman.

Traditionally, we’ve relied on banks to transact currency on our behalf

When we use our card to buy dinner, or use our banking apps to send money for aforementioned dinner to a friend, the bank handles those exchanges of currency. They are secure and almost instantaneous. If my account is breached through hacking or negligence, I can still be quite secure in the knowledge that the bank will mitigate (or at least minimise) the actual losses incurred.

Cryptocurrency, on the other hand, isn’t secure; it’s trustless – let’s discuss

Crypto-enthusiasts really like the idea of transacting value in the form of cryptocurrency. Paying for things and receiving a salary without government or banking oversight may sound appealing to the more libertarian of us; even I find the idea quite discomfiting that all of my transaction information could be stored (and potentially shared) by external entities.

This means that cryptocurrency isn’t secure. Rather, it’s trust-less. Importantly, these are not the same thing.

Before banks, money was trust-less. It was kept by individuals, who hoped that there wasn’t someone stronger or smarter than them who could take it away. That’s the libertarian paradise. Conversely, banks, while having their own problems, are based on trust and are inherently non-anarchistic.

People are losing out because they do not understand this key difference

While I was riding the ICO trains, I was constantly exposed to a particular narrative: “XYZ-token is the best way to transact, ever! Zero fees due to block-lattice hyperdrive technology! Instant transactions! Quantum proofing! It even integrates with your smart-toaster!” It sounded exciting, and made it seem like buying into the technology could open a lot of doors. But, as mentioned before, I didn’t really understand what I was getting myself into. If you’d asked any of us why we were buying Bitcoin (and we were honest), it was because we wanted to make a quick buck, not because we actually wanted to use it. We wanted to own it until we could reasonably sell it. HODL-gang, HODL-gang, HODL-gang.

Now that I am more clued up on how the technology actually works, I’ve realised that cryptocurrency does not actually work as a payment method, or as a useful product:

As a payment method: No one actually wants to accept cryptocurrency as payment. It isn’t super useful in that form and needs to be converted to fiat currency anyway, which is an extra (and expensive) step for any company. This isn’t even mentioning the inherent instability of the currencies. It makes no sense for a legitimate company to hold onto such a volatile asset.

As a useful product: In my opinion, the only actual use that cryptocurrency has is getting around legislation, whether it be tax-evasion, buying drugs, dealing in stolen goods, or getting money out of a country. There is a reason that governments regulate the movement of money: It’s important for a functioning society that is inherently non-anarchistic.

Interbank payments

Another big topic for cryptocurrency is interbank payments. Many people mention Ripple, a means of moving different currencies from anywhere around the globe within a few seconds, as a promising way to transfer money between banks quickly. This system was designed with the intention of challenging the more traditional, slower ones like SWIFT and Western Union.

Existing networks have developed robust systems that have worked well for a long time

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a network for banks and other financial institutions worldwide to send and receive money and other transaction information in a secure, standardised and reliable environment. They manage to do this using robust, well-tested and encrypted systems.

These systems, however, tend to be slow due to the amount of legislation surrounding transferring money internationally, and the protocol of interbank transfers. This is especially bad when the banks do not have a pre-existing arrangement for transacting between one another.

There are means to speed transfers up, but the systems are not solid

Ripple boomed in 2017, growing 36x in value (yep, that number is correct) as an alternative solution that could fast track transfers using blockchain technology. The problem, however, is that banks don’t use crypto-based systems like Ripple, internally or with other banks, because they are not secure enough. Losing a password or security token somewhere in cyberspace can lead to actual and instantaneous losses.

These losses happen a lot in the crypto-world. Imagine a bank accidentally “lost” a couple million Rand due to a developer not making a backup of the private key. This sounds ridiculous until you realise that more leading Bitcoin exchanges than not have had this happen to them. Bloomberg did a fairly good write-up on this.

While I was writing this article, for example, the owner of Canada’s leading Bitcoin exchange (QuadrigaCX) died, along with access to the cold-wallets containing $137 million (~R1,9 billion). That’s crazy! No financial institution should be able to just “lose” that much money, hence why sticking to systems that have worked and kept people’s assets safe for decades is a much better idea.

Initial Coin Offering

ICO is a process to raise funds to support a project or company. Before this came along, companies would traditionally raise money by selling stocks to interested parties, like VCs and Angel investors, for example.

A company holding an ICO now, however, will generate and distribute a certain number of tokens built on the specific application’s blockchain technology (or the Ethereum blockchain and other lesser-known variations), which will then be allocated to contributors. These tokens can be traded on exchanges by the ‘investors’. This is a quick and easy way for tech companies to raise money without giving up equity or voting rights.

The value of the token relies on either the its utility or usefulness, or in some cases equity. These tokens represent inherent value, or are tied to real-world assets. There are other models that have been employed, but these are the most common token types.

The problem with this system is that it’s easy for tokens to lose value and for people to lose out

Here, I’m going to sum up what happens with ~95% of ICOs, using the story of WidgetCoin.

Someone wants to start a widget company and needs to raise money. They don’t want to go through the effort of selling stock as they’ll have legal obligations to shareholders and won’t retain full-control of their company. They realise that ICOs are easy to set up, need no legal discourse (although this is changing, thankfully), and the ‘investors’ don’t really need more than a convincing website to send through their Ethereum.

So, they set up an ICO for WidgetCoin, running on the Ethereum blockchain. Now, there’s a problem: WidgetCoin has no value. Stocks or shares in a company pay dividends to investors, but tokens are speculative assets, so they have to make sure that the price goes up. After lots of thinking and scratching of beards, they decide that the best thing to do would be to make widgets only purchasable with WidgetCoin. Nice.

They launch the ICO and funding is a success. Whoop! After product launch, however, it turns out that no one actually wants to buy widgets in that roundabout way. Exchanging fiat to Bitcoin or Ethereum, sending it to another smaller exchange to then exchange to WidgetCoin is exhausting. The WidgetCoin then needs to be sent to their personal wallet, which they’ve had to set up. Throughout this process, there’s a high chance that money has been lost between exchange fees and minimum deposit/withdrawal amounts.

People don’t want to spend this much time getting hold of widgets and so, WidgetCoin goes bankrupt, all the tokens become worthless, and the people who invested in it lose all their money. The end.

This may sound cynical, but it’s an unfortunate truth of an unregulated market. Many millions were gained and lost on ICOs (and many more still will be).¯_(ツ)_/¯

Takeaway thoughts

The crypto-sphere is interesting because it has grabbed everyone’s attention despite being so poorly understood. It’s the Wild West of the digital age, and like the Wild West, there are going to be a few people who get filthy rich in the gold-rush while many others suffer the effects of an unregulated market.

With this in mind, I’ll leave you with a quote from Kai Stinchcombe, the CEO of True Link Financial, an organisation dedicated to protecting the elderly, as well as people recovering from addiction, from online scams: “As a society, and as technologists and entrepreneurs in particular, we’re going to have to get good at cooperating — at building trust, and at being trustworthy. Instead of directing resources to the elimination of trust, we should direct our resources to the creation of trust — whether we use a long series of sequentially hashed files as our storage medium or not.”


Herman Martinus is a game designer and developer from Cape Town, South Africa who likes exploring systems and the human experience. He does this through games, art, teaching, making, rock climbing, doing talks, hosting discussions, and more (all the while drinking good coffee).

Here are a few of the cool things he’s working on right now:

JustSketchMe - Interactive 3D models for figure drawing
Into Outer Bass - A rhythm based, space arcade game for mobile
Working for GetMyBoat - A boat rental marketplace
Teaching at MEST - Ghana

He tries to keep a fairly extensive historical list of all the projects he’s done, which you can check out here.

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