Last year I was on a CNN Future Cities Panel in Singapore along with a member of the Singapore government and several startup companies. There the topic of blockchain came up and one of the participants made the assessment than blockchain was a solution looking for a problem, partly in response to all the hype about blockchain at that time and the lack of successful implementations aside from Bitcoin. In August of last year, Gartner published a report which claimed that blockchain had reached the peak of the Gartner Hype Cycle for Emerging Technologies.
By now everyone should have a basic understanding of blockchain technology as a distributed ledger. Bitcoin is the best known application of a blockchain technology, and has been widely publicized as the currency for ransomware and the purchase of illicit goods on the internet. While Bitcoin is based on blockchain technology, there are other types of blockchain technologies, that are more scalable, more efficient, private and public, and more focused on doing good rather than rewarding bad behaviors.
A year ago, Bitcoin was starting to see some problems. As the volume of transactions in bitcoin increases, the blockchain becomes longer and longer increasing the time to process transactions. Here is link that shows the increasing transaction times and its erratic behavior over the past month. There are peaks in average confirmation times close to 5 hours and one as higher as nine plus hours. As the volume increases, transaction times will increase even further.
The other problem with bitcoin’s blockchain, is known as “counterparty risk”. When you pay for something using Bitcoin, there is no guarantee that the other party will deliver the promised asset. How many companies who paid the $300 in bitcoin ransom to “WannaCry” ever received the decryption key to unlock their data? While there seems to be some code of honor among ransomware thieves to deliver the decryption key, it only emboldens their future activities. There are other blockchain initiatives that address this problem like Hyperledger and Ethereum whose Crypto currency Ether, began to surpass the valuation of Bicoin in the beginning of this year.
Bitcoin blockchain also has other limitations like the number of transactions per block, and the total limitation in the number of Bitcoins. Every block introduces 50 new coins in the system. This quantity (50) halves every 210,000 blocks so this geometric progression comes to 21 million Bitcoins in total. Bitcoin has already had two halving events and the current payout is just 12 bitcoins per block. It is estimated to halve again in about 3 years. What happens when you run out of new Bitcoins? The miners who create and propagate the block chain in exchange for bitcoin, will need some other way to get compensation for their efforts or leave the mining business. What happens to the price of Bitcoins in fiat currency? Some believe that it will implode while others think it will continue to increase like a Ponzi scheme, where the initial investors will get richer and richer.
Increasing the number of transactions per block would make Bitcoin more scalable, but since transactions in a block chain cannot be modified, creating a new block size with more transaction would require a new blockchain. This is known as “forking”. On the first of August, Bitcoin got forked, meaning that a new cryptocurrency, called Bitcoin Cash was created and has begun to be mined as a separate blockchain from Bitcoin. Bitcoin cash is built on the same blockchain network as bitcoin, but the new software increases the number of transactions per block that make up the network to allow it to process more information and increase transaction speed. Prior to August 1st, many in the Bitcoin business community like Circle warned against the potential negative consequences of Bitcoin forking and were advising their users to convert to fiat currencies like dollars or euros before the fork. Now almost a month after the fork what did this do to Bitcoin?
After an initial dip in price, Bitcoin rallied and accelerated even higher to hit $4,305 by August 18! (The price of Bitcoin on January 1, 2017 had hit, what was then an all-time high, of $1000”.) Bitcoin Cash was initially slow in getting miners to participate in creating and propagating the new blockchain, but was up to $499 by the same date in August. Meanwhile, Ether, the cryptocurrency for Ethereum, which was poised to overtake Bitcoin in valuation earlier this year is still in second place with a price of $320.
Crypto currencies can be exchanged at various online exchanges. These exchanges are beginning to act like a central ledgers, which is contrary to the distributed ledger reason for having a blockchain. Also the cost of a Bitcoin transaction is rising. The median transaction value is about $500 and incurs about a $4 fee. This is based on value of transaction and amount of data in it. Just two years ago, the costs were almost negligible. So what started out as “free money transfers” to beat banks and credit cards, is looking a lot like the same old thing. https://bitinfocharts.com/comparison/bitcoin-transactionfees.html
The crypto currency hype trend continues and seems to be accelerating. While cryptocurrencies are leading the blockchain surge, the use of blockchain in other areas are still mostly in proofs of concept stages. However, once we see some first movers deliver new blockchain solutions, we may see another surge in blockchain hype. I think we are a few years away from the “Trough of Disillusionment” before we see the “Slope of Enlightenment” and the “Plateau of Productivity” per Gartner’s Hype cycle for emerging technologies. Is it possible that Blockchain will skip the intermediate stages and go directly to the Plateau of Productivity? There is a lot of confusion about the future of Blockchain, fueled by a lot of speculation.
See what Hitachi’s David Pinski, Chief Strategist Financial Services – Center for Social Innovation Hitachi, has to say about Blockchain for the Real World at Hitachi’s Next 2017 event, September 18 to 20 in Las Vegas. Register now.