Last week, Paul Chou, an adviser to the Unites States Commodities and Future Trading Commission (CFTC), said that the companies working on "blockchain technology" solutions without bitcoin are misguided.
Many in the industry agree including Digital Currency Group CEO, Barry Silbert, Silver Lake Partners founder Glenn Hutchings, Xapo CEO Wences Casares, and ShapeShift.io CEO Erik Voorheesand, to name a few.
We published an article in 2015 that was also in agreement with this assessment.
We published an article in 2015 that was also in agreement with this assessment.
Chou is the CEO of LedgerX, a company building products targeting financial institutions and was appointed as a member of the CFTC technical advisory recently. He says bitcoin and blockchain must remain linked as they are for blockchain technology to become widely adopted.
Bitcoin and the Blockchain
Chou and other bitcoin advocates (including dinbits.com) say without incentivizing the network (paying the miners), the blockchain will lose its effectiveness.
It's sort of like having a Ferrari without any gasoline, it might look really fast and the concept is fantastic, but without fuel it has a top speed of 0 MPH.
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| We finally get to post this again! |
The entire concept behind blockchain technology is providing a trust to govern the transaction of an asset without anything other than itself as that trust. A permissionless system, as it has come to be called.
When you transfer funds using a bank wire, you are trusting at least one bank. Intra-bank wires merely debit one account and credit another using the assets held on behalf of the account holder to another account holder who has trusted the same bank to hold its assets. In this case the asset is cash.
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| Simple inter-bank wire transfer |
When you involve another bank, such as that of the second account holder, then that account is credited, however, the transaction is governed by an agreement between the two banks and/or an agreement between the two banks and a network or system such as RTGS, ACH, or SWIFT.
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| Inter-bank wire with network trust |
The Linux Foundation, IBM, countless banks, and startups like R3CEV are trying to harness blockchain technology without it's fueling bitcoin, essentially trying to separate the two so they can shed bitcoin and swipe the underlying technology by itself. Trying may be mildly putting it, they are spending millions upon millions of dollars trying to pull it off.
“I think the second you separate bitcoin from some of the other elements the use-cases of the individual elements are unlikely to be proven, in my view.”, says Chou, "The only thing that’s proven thus far is bitcoin as an asset class."
Bank of America has gone so far as to file a multitude of patents on blockchain technology so that they can make money on a "future product" because they still "don't even know what that product is". So they basically took what someone else created, stole it, and now plan on profiting one of these days since they have no product or any idea what to do with it.
Why Go There?
Greed. Simply put.
That's the true reason behind the "private blockchain" and "bitcoin-less blockchain" gimmicks in the first place, it has the potential to make them more money. All of these companies stand to profit from it if they can just pilfer the technology and leave costly bitcoin out of it.
Let's face it, greed is what built the blockchain. Greed is what developed the incredible processing power that combines to support it. Greed is what keeps it going and believe it or not, that's a good thing. We've taken something bad, what many would call a human flaw, and extracted something good out of it.
This is not to say that everyone involved in bitcoin or the blockchain is greedy, they're not. However, if greed were not a factor then the blockchain wouldn't be the marvel that it is.
The fundamental basis of blockchain technology is to remove the trust and/or governance required between one or more entities involved in a transaction. When you do that, you end up without a bank involved at all.
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| A transaction on the blockchain |
This transfers simple value, but any asset can be transacted on the blockchain such as stocks, title's, deeds, copyrights, company share's, etc... even other digital currencies can be transacted. This is where industry comes in, and its a multi-million, if not billion, dollar effort putting things in place for all of the above.
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| Asset transaction on the blockchain |
This is because whereas the blockchain provides the basic framework for existence and value transfer, outside of simple assets and bitcoin itself, there is no further functionality to support these assets in full "out-of-the-box". The ability to to add this functionality is certainly there. Building sidechains, colored coins, or other software [applications] that work with the blockchain is how these assets are supported and that is what industry entities such as Blockstream are working towards providing.
Instead of using the term Account Holder, let's call them a simple Entity. An entity can be an individual, group, company, government, corporation, or any other owner or beneficiary of an asset. Insert the aforementioned Solution and we'll just remove the Banks completely to save space. They are irrelevant here anyway.
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| Solution driven asset transfer |
Starting to see a pattern here? Banks may not only be motivated by greed or profit, basic survival may be a key factor. In the 90's they shunned the internet and lost billions by doing so. That money (which is billions annually) now goes to companies like PayPal who were there to step in when the banks would not.
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Naturally, banks would rather see a model look more like the above. What is ironic is that they insert themselves in exactly the same place they currently operate and what the blockchain was built to get away from the need for. In order to do many things such as wire money from one person to another, people have to trust a financial institution (bank, money transmitter, etc..) with the cash they give them, trust them to send it, and then trust the receiving institution to distribute the amount to the actual beneficiary. All empowered by nothing more than paper contracts.
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| ReloadIT by Blackhawk Network |
Regulations and insurance (such as FDIC) do not cover [nor] immediately resolve an issue, technical error, compliance flag, or other problem that can arise during the course of a transaction.
For example, anyone who has frequently sent Western Union online, or in person for that matter, knows all to well the amount of mistakes, flags, and other reasons transactions are delayed. Sometimes for days or even weeks.
Financial institutions offering similar services are just as bad if not worse than banks. These are geared for online commerce and the "unbanked". These include companies and service offerings like PayPal, Skrill, GreenDot, and Blackhawk Network to name a few and they are notorious for freezing transactions and holding the funds in excess of 6 months. In many cases they do not just hold the funds of the transaction in question, they hold the entire account balance and request copious amounts of additional documentation including sensitive information such as suppliers, complete bank statements, and other items in an effort to cover their ass in the event the transaction(s) violate a federal or state law.
At least this is the claim they make. Others think that this is done sometimes to pad financial statements or other questionable practices. However, it's most likely those who have had funds frozen who think this and there is no credible evidence that they have done any such thing.
Blockchain eliminates the requirement to trust these entities by eliminating them completely. Private and other blockchain-like efforts are trying to splice them back into the picture. However instead of building their offerings in conjunction with the blockchain (bitcoin blockchain), they are building their own network(s).
The Unbanked and The Untrusted
Financial institutions made up a word called "unbanked" gearing products toward this market which they feel consist of those who cannot obtain a normal bank account due to their credit rating or other derogatory issues, however, they fail to recognize the statistic and fact that many people do not trust banks at all. They've either been burned in the past, sick of paying the fees involved with other people holding and using their money, or simply that banks are not adequate for their needs.
It's not always a case of the unbanked being those without bank accounts or bank services due to a problematic history, rather it's the banks and other financial institutions that are the untrusted by those refusing to trust them.
Year
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Failed Banks
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Failure Cost
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2008
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25
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$8.84 Billion
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2009
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140
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$38.732 Billion
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2010
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157
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$22.904 Billion
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2011
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92
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$7.945 Billion
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2012
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51
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$2.785 Billion
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2013
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24
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$1.165 Billion
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2014
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18
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$398.8 Million
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2015
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8
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$894 Million
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Totals
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515
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$83.663
Billion
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In 2014 there were 18 banks that failed in the United States alone, another 8 in 2015, and since the inception of the blockchain in 2008 there have been 515 bank failures costing nearly 85 billion USD.
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| Bank failures by year |
This is one way bitcoin itself and the blockchain really shines, it's available 24 hours a day, 7 days per week, to send or receive any amount of value globally within 10 minutes to an hour without restriction. There is no other service on earth that can offer this outside of other forms of virtual currency (litecoin, namecoin, dodge, etc...) and the bitcoin blocchain is by far the most secure and the most powerful of all of them.
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| bitcoin blockchain adoption by year |
As other technology is built on top of the blockchain enabling new functionality or supporting other specific assets, the blockchain will continue to be unsurpassed. At least for the foreseeable future. To add to that, there are proposals and offerings being developed that are completely outside of banking business models in which their networks will likely be useless for.
If you look at the adoption of the blockchain and its bitcoin it almost doubles each year and that goes for its power and security as well. The stronger and more powerful it becomes the likelihood of anything remotely close to duplicating it becomes more and more unrealistic. The blockchain did not reach a single giga-hash in processing speed until mid (July) 2010. On January 1st, 2016 that number was a staggering 1,145,937,208.93 GH.
That's over 1.44 octillion calculations per second.
To put that number into perspective, 1 quadrillion is 1000 trillion or 1 million billions. 1000 quadrillion is 1 quintillion.
1 octillion is 1 quintillion billions and the blockchain runs 1.44 of those per second.
1 octillion is 1 quintillion billions and the blockchain runs 1.44 of those per second.
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| China's Tianhe-2 Supercomputer |
The fastest computer on earth currently is China's Tianhe-2 which took a team of 1300 engineers and scientist to build with a price tag of $390 Million (USD).
You'd need around 20 thousand of those puppies to come close.
Plausible or Pipe Dream?
Anything is possible. However, that doesn't make everything probable.
Lets take contracts and agreements off the table, enforcing those can take years, and leave out regulation because that also takes forever. PayPal has been breaching contracts and breaking the law for years and it has yet to do little more than slightly inconvenience a few of their attorneys on staff bank and money transmitters have been fined for countless offenses there. As history has proven relying on those tools for governance is ineffective and/or time consuming to the point any relief is provided long after it is too late.
The problem you have is governance and security. Its what the blockchain supplies itself. For that you need power, allot of power, 1.44 octillion calculations per second power.
That is not cheap, you need allot of people to participate, and you cannot own it yourself for it to be truly secure and certainly not if you want it to be trusted. It's not just about the power, it's about the distribution.
Either you have to give away billions worth of operating equipment and pay their utility bills (we won't even go there), rent, staff, and other bills or you have to provide something as some sort of incentive for others to do it. The blockchain offers bitcoin. This is by reward and transaction fees transitioning to 100% transaction fees over time by reducing rewards and increasing fees (by value).
None of which any of us will likely see in our lifetime since it's well over 120 years (year 2140) before it will happen.
It's unlikely any bank, group of banks, or group of banks and companies are going to fund anything remotely as close to as powerful as the blockchain just so that they can transfer assets for free. In that sense it may be well after 2140 before any of them would realize ROI assuming it were possible in the first place.
Its really too improbable to realistically consider and even if they pulled it off, they would only have gotten to the point of competing against the blockchain who's base of support predominately dislikes the banking industry. Most of that is self-inflicted by the financial industry itself in its ongoing damage it causes to the entities supporting the very technology they are attempting to exploit.
In other words, the future looks much more like a sidechain than a "private" blockchain.
Apple to Apples
What the facts show us is that there is the point of failure in financial institutions where there is no guarantee that your money is safe or accessible outside of hours of operation. Any funds trusted to them are subject to being held for a variety of reasons and for periods of time of 6 months or more that want to be trusted by way of a legal contract that is generally as lopsided as the law with allow.
So it's not truly reliable.
If there's no bitcoin or token of any kind incentivizing its network and only the problematic tools currently in place are the tools that will continue to provide its "trust", then there is no trust.
So it can't really be trusted.
There are fees involved with the aforementioned holds and other activity so it costs you money for them to make your life miserable. It also costs you money for the privilege to allow them to take your money and do whatever they want to with it until you need some of it back, in which case they may or may not be able to give it to you in any specific form desired.
So it's expensive and inconvenient.
Then there's the improbability of anything they build being as safe and secure as the bitcoin blockchain since the amount of power required to do it is unlikely obtainable in the near term, so this network to-be is guaranteed to be less safe than the bitcoin blockchain from day one.
So it's unsafe and it's not secure
Thus In the end, they are asking that they be trusted to do something they can't do now, won't be able to do in the future, and for something that they are not needed for in the first place.
So it's not useful to anyone.
Not to mention that banks are painfully slow to adopt anything remotely innovative until its "old technology".
So it'll be outdated.
It ends up sounding like these organizations are basically trying to build an unreliable, expensive, inconvenient, unsafe, useless, network that cannot supply any form of trust and is outdated and less secure than a proven system that is already there and available for free to everyone globally.
That's a bit of a tough one to sell.
That's a bit of a tough one to sell.
There's also been thousands of attempts at this very feat in the past and all have failed to match anything close to the blockchain that bitcoin transacts on and most have completely failed all together.
Then why bother?
Again, it's all about greed. Plain and simple. The same thing that built the original blockchain in the first place.
Not just greed on the side of financial institutions. Consulting companies, software makers, and an armada of startups trying to get any sliver of funding they can grasp are talking these companies into implementing anything they can remotely paint or repaint to resemble "blockchain technology".
Ultimately in bitcoins case, greed worked and something amazing happened. In the blockchain bandwagon's case, anything may be possible but it's highly unlikely going to ever actually happen.
That is because these efforts have a much higher probability of failing than succeeding if history teaches us anything. As they do, like their predecessors did before them and successors will continue to do long after, there will be allot of blame to share across the board when the finger pointing begins.
We likely won't get to see allot that actually happen. The so-called "blockchain technology" solutions will either be scrapped or quietly operated as the private database systems they really are by those who survive and avoid the blame.
If you can call it fault deserving of blame that is. It's more accurately described as a growing pain.
Unfortunately, some things you just have to learn the hard way.
Story by dinbits
image by dinbits staff
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