4 Big Problems with Blockchain Today

Blockchain was invented to solve a curious “side-effect” of the digital world: the double-spending problem. Because digital information can be reproduced relatively easily, it was previously difficult to build a decentralized digital currency without the threat of an unscrupulous user simultaneously spending their currency at two or more vendors at the same time.

But Bitcoin, the first application of the blockchain, still has a number of barriers to overcome:

• There is no real need to replace today’s core banking systems: We can already pay for things online for most use cases, through trusted agencies (e.g. banks); unless the blockchain proves to have a sustainable cost advantage in payments processing, which is not clear due to the “processing waste” from the proof-of-work requirement, there is no real impetus for Bitcoin to replace traditional currencies
• Tragedy of the commons: The lack of a sole corporation with the interests of pushing forward Bitcoin creates a “free-rider problem”, resulting in underinvestment in developing positive network effects for the blockchain platform
• A currency needs to have stable value to be useful: As a new currency, with limited real use, plenty of speculation, and uncertain regulation, its value has been extremely volatile
• Decentralization is a problematic governance structure: Decentralization removes the ability to enact monetary policies to manage the economy, and easily enforce against money laundering and fraud

Smart contract advocates claim this will be the “killer use case” that blockchain needs to shift users from the core. But zealous advocates ignore imperfection and the need for discretion in contracts – the world was never a pure mechanized, rule-driven society. Provenance still needs to prove how it adds value over a traditional database, and determine how to link the digital token traded on the blockchain with the actual physical goods.

The bottom-line is: can blockchain produce a use case that has enough incremental benefit to compel enough users to switch from a solution that already mostly works? Sometimes, Betamax does not win.

Two years ago, I wrote an article about how blockchain will transform payments the way the Internet transformed telephony. I want to be right about that, but first, I think the community needs to have a clear answer on how to overcome the above problems.