"Blockchain" technology is inevitable but Bitcoin and other "crypto-currencies" are irrelevant

Blockchain technology as a fundamental re-ordering of infrastructure of money flows in global financial system is pretty much inevitable. Bitcoin or any other “crypto-currencies” such as ether are unnecessary which is why they will remain marginal or disappear.

Blockchain model accomplishes the objective of instantaneous and virtually cost-free transfer of money without the need to invent any new currency to do it. USD and EURO are perfectly fine as they are.

The way it works in the physical world is that if Steve wants to give me $75 he looks into his wallet, takes out $75 in bills and gives them to me and I put them into my wallet.

In the non-physical world, if he wants to do the same thing, he tells his bank to reduce the amount on deposit in his account by $75 and his bank in turns tells my bank that they should increase the amount on deposit in my account by $75. The intermediate step in the process is that the bank account that my bank holds with Steve’s bank or with a clearing institution gets credited with $75 which then is moved to my personal account. All of this is accomplished through exchange of information / messaging of some sort (including SWIFT or ACH) and takes time and clearly involves some friction and infrastructure which means cost. 

What if there was a way of Steve’s and my wallets existing as electronic records and maintained as such in 100 (or 1,000) different places at the same time? When Steve in this system makes an entry to reduce his balance by $75 and increase my balance by $75, this information gets instantaneously updated in all 100 locations of the common “ledger” and therefore there is an audit trail and proof that this indeed took place. The transaction that Steve initiated is a “block” which gets added to the “chain” (the sequence of all transactions in a ledger). This ledger is kept in 100 (or 1,000) places all at once and everyone can look at it to verify transactions and resulting balances.

This is what Bitcoin and others do and as a technology, it is inevitable but it will be done with USD and EURO and not another completely new currency.

The reason why it is inevitable is because, one, it is so darn compelling and two, at this point it is only a computing problem. There are no other show stoppers for it - simply the magnitude of transactions in the world financial system is such that this scalability issue has to be solved in order for what is fundamentally a simple concept to become reality.

To give a sense of it, the current volume of Bitcoin transactions is 200,000 /day while the Visa system handles 2,000 transactions per second (and has computing capacity to handle over 50,000 transactions per second). So Visa handles the entire daily transaction volume of Bitcoin in about 1 1/2 minutes and could handle it in 4 seconds if need be. Visa accounts for about 50% of credit card transactions globally and is currently running 1,000x or 3 orders of magnitude higher volumes than the Bitcoin system does. 

In order for all of the world transactions, including funds transfers and debit transactions to be handled by a blockchain system, the scale of capacity of the system would probably have to be at least 100x what Visa can do today to start with and it would need to have the capacity to grow from there.

While a “hard problem” it is also just a matter of computing power, speed of transmission and algorithms safeguarding the integrity of the entire system. 

Decisions would have to be made about how many “nodes” there would be that keep the entire blockchain (is it 100 or 1,000 or 10,000) and there would have to be a system agreed upon by all participants as to how the software would get updated or altered and so on. Not much different in principle than what ICANN was in the early days of the Internet. Or other similar “standard setting” entities are today. 

Some more data that gives perspective on the issue are that the current size of the blockchain “ledger” for Bitcoin is around 100 GB (so fairly trivial) and current number of wallets registered on it is around 8 Million. Just as when one backs up computer files to the cloud, smart algorithms make it possible to avoid having to transmit the whole 100 GB file between all the nodes each time a transaction gets added in one location. Only the changes from a previous synchronization are updated.

Just as clearing systems used to update once a day and now do it 3 times a day or whatever, the time between synchronizations can be driven down over time. Perhaps you start with one minute or less and move down from there. Again, that is a technological issue and even at its current very small scale Bitcoin has already run into scalability issue where sometimes it takes transactions up to 40 minutes to be “verified” (similar to Visa merchant terminal saying “approved” when you pay with your card at your table in a restaurant or in a store). 

Compared to the resources that serious financial institutions and IT companies can put behind a system, Bitcoin is like go-carts compared to a Formula 1. Just by involvement of different players one would get a couple of orders of magnitude improvement in system capacity even today. Some years down the road as all of the computing capabilities increase, this becomes not only possible but inevitable. 

Another big issue would be the “switchover moment”. It would make most sense if a massive switchover occurred at one time from all the disparate other systems to one comprehensive new one. This is not the kind of a thing that could “grow organically” - the very nature of it is that it should be global and all-encompassing. One could imagine that it would take some time to build the system, test it, get the buy in and then get ready for one massive switchover.

The most likely path is that a consortium of financial institutions and IT companies will create a system which will then solicit backing of other financials institutions, Central Banks and other government authorities for broad acceptance and regulation of the system. 

Comments

Popular posts from this blog

Why is Al Gore lying and why isn't anybody calling him on it?

Understanding Bitcoin, Ether, cryptocurrencies, blockchain and "distributed ledger"

"Make America Great Again" was less about "Great" and much more about "Again"