And What Has the Blockchain Ever Done for Us?
We've already seen 10X improvements in gold, international wire transfers, and crowdfunding.
Originally appeared in Coindesk on May 21 2018
In Monty Python’s “Life of Brian,” there’s a famous scene in which John Cleese’s character is stirring up a group against the Romans.
He’s trying to get them all frothed up about the supposed righteousness of their cause and the uselessness of the Romans, until reality intrudes. One by one, members of the crowd begin listing off all the things the Romans actually have brought to the community, from roads to medicine to sanitation, thereby contradicting his criticism and undermining his point.
I’m reminded of this scene when surveying much of today’s commentary on blockchain technology. There’s no dearth of intelligent and thoughtful people claiming that the blockchain is bad, or that it has no use, or that it’s bad and has no use.
It’s an odd situation, because while businesses in the blockchain sector are already empirically generating billions of dollars in revenue, the value of digital currencies and assets is often said to be driven largely by speculation on future rather than present utility.
But even if we grant this claim for the sake of argument, stating that most of the value of blockchain lies in the future is not the same as saying that (a) the present-day utility of the blockchain is zero or that (b) the blockchain sector will never live up to its valuation.
In this piece, we review some of the reasons why new technologies like the blockchain are often heavily criticized en route to ubiquity. We then discuss the specifics of how the blockchain has already provided quantifiable 10X improvements in at least three multibillion dollar verticals: the gold industry, international wire transfers and crowdfunding.
Finally, we talk through a few objections, and conclude by discussing the areas where the blockchain may provide yet more near-term 10X advantages.
Highly valuable technologies typically experience relentless negativity on the way to the summit.
High growth is matched by high volatility and even higher expectations, leading to hype cycles and periods of apparent overvaluation until eventually the technology is globally ubiquitous. Then the new critique is no longer about faddishness or lack of utility but about inescapable monopoly, until the next disruption appears on the horizon and the cycle begins anew.
One example of this with the earlier internet revolution can be seen by comparing IT Doesn’t Matter (published in the trough of the dot-com bubble in 2003) to The Shallows (written after social media and web 2.0 had re-emerged and proven themselves in 2011).
The first book argued that software was no longer a source of competitive advantage and that the internet revolution had been overhyped. The second book, by the very same author, argued that software companies were now too successful and the internet revolution was causing a fundamental shift in society. While the theses were mutually contradictory, the one common thread was unremitting negativity toward the then-new technology called the internet.
Another more recent example is with Facebook and social media.
Despite piling up 500 million users in six years, in 2010 people were still calling the company a bubble that would never live up to the outlandish $33 billion valuation that people had placed on it. This narrative still held as late as August 2012, as Facebook’s stock plummeted after the IPO and it was an open question as to whether they’d be able to monetize on mobile. By 2017, of course, Facebook made $15 billion in net income in just one year.
Now the questions of whether social media is a fad or Facebook is overvalued have silently faded away. The new question is whether Facebook is an unstoppable monopoly that requires government regulation. This may be a legitimate question; however, it is a wholly different one from the contention that social media was a mere trifle or passing fad.
The blockchain is already midway through a similar path. Lest we forget, Bitcoin was initially dismissed as something that could never work due to its deflationary mining schedule. Decade-old macroeconomic textbooks were quoted like holy scripture, as if “Econ 101” was relevant to Nakamoto Consensus and the solution of the Byzantine Generals Problem. Tulips were waved like cloves of garlic. Endless processions of the prominent were trotted out to denounce the heresy.
Hundreds of obituaries and dozens of “bans” later, of course, Bitcoin is now worth many tens of billions of dollars. It hasn’t just survived but has thrived, and has given rise to Ethereum and dozens of other coins and chains.
But it’s far too early to declare victory.
No longer dismissed as a passing fad, and not yet attacked as a dominant monopoly, today’s argument against the blockchain sector is that it’s a bubble without real use. After all, the blockchain space as a whole is worth hundreds of billions of dollars, but where is the utility? What are the daily use cases? What justifies this value? Why is it not just a bubble now and forevermore?
The blockchain has already 10X'd gold, international wire transfers, and crowdfunding
So let’s talk about the successes of the blockchain to date, as those often go without saying. There are at least three multibillion dollar sectors where the blockchain has provided quantifiable 10X improvements over the preceding technologies. These are digital gold, international wire transfers, and crowdfunding.
Bitcoin is >10X lighter, faster, and more liquid than physical gold
First and perhaps most obviously, Bitcoin is a better gold.
Wences Casares of Xapo gave the canonical presentation on this several years ago. Being digital, Bitcoin is infinitely lighter than gold of the same value. Large amounts of money can be quickly transported across borders, easily 10X faster than the equivalent amount of gold can be moved. And Bitcoin is significantly more divisible and liquid than a gold bar. To quantify the latter aspect, consider the amount of time to sell a physical gold bar for the equivalent in fiat currency, versus the time required to sell the equivalent BTC online.
Even given Bitcoin’s recent issues with transaction fees and wait times (arguably partially obviated via Lightning), the technical advantages vis-a-vis gold are obvious and at this point well-nigh indisputable. The gradual replacement of gold by Bitcoin on many balance sheets and in a wide variety of financial contexts is now just a matter of time and institutional inertia.
Given that the total value of gold is estimated to range into the trillions of dollars, scaling the digital gold application alone can justify the total market cap of the blockchain sector.
Cryptocurrencies are >10X the speed of wire transfers
Second, consider international wire transfers.
In 2018, a typical international wire transfer between two banks takes days.
But if two startups or contractors on either side of the world want to transact and if both parties are aware of cryptocurrency, Ethereum is increasingly their medium of choice. The reasons for this low-profile revolution in global money transmission are simple: An Ethereum transaction appears on-chain in seconds and settles in minutes, works 24/7 in any country, allows instantaneous generation of receiving addresses, and is now fairly well known in the tech community. Thus, if you can email someone, you can send them $50,000 in ETH about as quickly and easily as you can send them an attachment.
This allows medium-scale international deals to close in real time. The vendor emails over an Ethereum address, and the customer Docusigns a contract and sends the ETH. Receipt is confirmed over the phone as both parties hit refresh on Etherscan. The sheer speed of the transaction increases the velocity of business and the trust between geographically distributed partners. Forget same-day transfer; this is same-minute transfer (or same-ten-minute transfer if you want to wait for 30 confirmations).
We’ve personally seen this exact use case many times. While it’s not obvious how many people are using Ethereum in this way, it is obvious that it’s far better than wires for those that are. To gauge how widespread this use case is, we spoke to Peter Smith, CEO of Blockchain for this article, who noted that “a significant fraction of our tens of millions of users are using the Blockchain Wallet to enable large, fast cross-border transactions. We may publish statistics on this in the future.”
In theory, this use case will soon face competition from banks, who will adopt SWIFT gpi and bring settlement times down. But in practice, international wires still take multiple business days to clear while Ethereum reliably clears within minutes — and has for years. Ethereum also saves both parties a trip to the bank during business hours, as ETH transactions can be sent between any pair of devices at any time of day.
In this case, the real world utility of a blockchain-based technology has actually been underhyped. It is already 10X faster than SWIFT, and has been for some time.
Ethereum has 10X'd the scale of crowdfunding
As a third example of what the blockchain has already done for us, consider crowdfunding. Most folks in tech know of Kickstarter, Indiegogo and GoFundMe. But when considered internationally, the sector is even bigger than you might think. It was estimated to be in the billions annually and growing fast even before January 2017. And then came the year of ICOs and token sales.
With almost $9 billion worth of token sales and ICOs consummated within the span of about a year, we have entered a completely new age for crowdfunding. To put this in perspective, just three years ago Ethereum itself raised about $15 million in what was then one of the largest crowdfunders of all time. But the advent of ICOs and token sales completely demolished all previous records. As with gold and international wire transfers, the use of blockchain technology empirically introduced a 10X improvement, allowing international crowdfunders on the scale of hundreds of millions of dollars to occur for the first time. And thanks to the blockchain, tens of millions of dollars from all around the world could now be sent and received within 30 seconds.
Please note: remarking on these totals is meant to offer neither praise nor criticism of the specific projects which have raised these funds. It is simply important to note that blockchain-driven improvements in crowdfunding technology have enabled financings of an unprecedented scale and speed, literally 10X larger and faster than what came before. And while many regulatory issues still need to be worked out to fully mainstream ICOs and token sales, it is quite possible that the blockchain will go on to transform not just crowdfunding, but venture capital itself.
The three application areas outlined above — digital gold, international wire transfer, and crowdfunding — demonstrate that blockchain-driven 10X innovation is already here. The remaining obstacles are related to execution and distribution. The fundamental zero-to-one innovation in these areas is no longer in question and has been obvious to people in the space for years.
One counterargument is that these 10X improvements may indeed exist, but not everyone can yet avail themselves of them.
Note, however, that this is a significant step back from the claim that “nobody has come up with a use case for blockchain after 10 years,” as the number of parties that can benefit from these three use cases includes every entity with gold on the balance sheet, every business with transnational trade, and every organization raising money online. While scaling the blockchain-driven 10X advantages out to all these entities will doubtless take some time, it will also reliably generate billions in value.
Another counterargument is that the new technologies are not superior in all respects.
What about Bitcoin’s volatility? What about the fact that everyone doesn’t yet accept Ethereum in lieu of a bank-based wire transfer? And what about the regulatory issues surrounding crypto crowdfunding? Each of these is a legitimate objection, for which we can furnish an answer.
To address volatility we need companies to sell the traditional instruments for managing volatility, like collars. To get more folks to accept crypto as a means for international wire transfer means getting more users for exchanges on both sides. And to address the regulatory issues surrounding ICOs and crypto-crowdfunding, we’ll have to spend time with policy makers and heads of state.
But these kinds of objections miss the forest for the trees. A new technology is typically not mildly superior to an existing technology in every respect but is instead 10X better on one key axis. That 10X improvement draws customers and provides the capital and rationale for fixing the other defects.
The early iPhone camera is a good case in point — while far worse than a dedicated digital camera in most respects, it had one 10X advantage going for it: its ubiquity as a bundled piece of a network-connected smartphone. That led to a rapid rise in use and a concomitant rapid investment in the feature set of network-connected, phone-based cameras.
We’re seeing a similar phenomenon with blockchain-based technologies, where their 10X advantages mean they are gaining ground despite their largely remediable flaws.
There is no dearth of articles on how the blockchain will eventually disrupt everything. I actually believe we will see most of the envisioned use cases come to pass, though some will take years or decades to fully play out and will go through multiple iterations before succeeding. But that long-term bullishness comes from an empirical reckoning with the concrete successes that the blockchain has put on the board to date.
It is only because the blockchain has already done so much for us that I expect it to do so much more.