Blockchain: It’s not the thing

Bitcoin, blockchain, decentralized ledgers, smart contracts. This domain emerged just in the past 10 years, and already has attracted technical wizards and bankers and politicians and scam artists and lawyers. Most cryptocurrencies and coin offerings soared, but now are deeply down from year-ago highs.

What to make of this? How to build strategy amidst this uncertainty? Here, we argue that bitcoin, blockchain and the rest of the ecosystem are not the dazzling outcome itself: they’re the tools that enable the outcome. It’s not the thing: it’s what gets us to the thing. 

As we explore some analytical ways of dissecting the issues around Bitcoin and blockchain, we’ll see that the elements of blockchain are likely to endure and have great lasting value, even if current implementations fade away.

A note, and a disclosure:

  • None of this is intended to be or should be considered to be investment advice. You want to buy or sell some cryptocurrency? Get advice from a knowledgeable professional, if you can find one.
  • I have no holdings in cryptocurrencies, in any way, and have never had any. I was a co-founder of a startup, Banyan Infrastructure, that is developing a blockchain-based platform to de-risk infrastructure investments, and am a minority equity owner, but have no active role with that or any other decentralized company or project.

The end of the beginning

The Bitcoin tulip has withered, and may die. Initial Coin Offerings may seem passé but actually are running at twice the volume of 2017. Is the hard work of building a new industry underway, or is this a sidetrack in technical history? Will the tulip emerge with new energy and blossom in some future spring? Here are some recent quotes to summarize the mood of the moments. In general, older writings were more enthusiastic, newer ones downright morose:

  • “Bitcoin is the most dangerous Ponzi scam in 20 years” (Vivek Wadhwa, Inc. magazine, February 2018)
  • “Bitcoin’s exponential growth rate will only slow down when it starts running out of people with phones and computers.” (Alex & David Lightman, February 2018)
  • “... Bitcoin will recover in the mid-term back to its previous support levels at over $10,000” (, quoting a discussion on CNBC , June 2018). 
  • “The collapse of Ethereum is inevitable”. (TechCrunch, September 2018).

This is not the end, we believe, but the end of the beginning. The future - the thing, the destination - is that electronic and decentralized systems rewrite the rules of money, of international finance, of commercial contracts, and more.  Coin offerings have largely now become a way to execute an initial public offering without the overhead costs and regulatory headache of a traditional IPO: a mutation of crowdfunding, perhaps. While the need to use blockchain for this is debatable, it has already become an internationally-accepted practice, and this is emblematic of the erratic ways in which the sector inches toward maturity. 

The key questions to thinking about decentralized technologies is to ask what capabilities are really needed:

  1. What technologies are needed for digital payments?
  2. Where can decentralized ledgers add significant value?
  3. When does it make sense to tie transactions to a decentralized ledger?
  4. When should a currency itself should be decentralized?

1. Digital payments and digital currencies are inevitable, but may not need blockchain. 

Electronic payment schemes first became wildly successful in Kenya (M-pesa) as a means of allowing poor people, without access to banks, to have better security than is feasible with currency. M-pesa transactions now are about the same as the nation’s GDP.  Other benefits include better tax compliance and lower corruption.

In the last few years, mobile payments have achieved similar success in China, where the payment tools Alibaba and Tencent (Alipay and WeChat Pay, in English) have all but replaced paper cash. The same benefits as in the M-pesa case, plus the certainty of government oversight. Clearly, conversion to digital payments at the consumer level - at large scale, with low transaction costs - is feasible without blockchain.

And an immutable ledger is not a great feature for most transactions.  Who cares - ever - if I stop to buy a bag of onions? Or to hand $5 to someone in need?  Even in aggregate, such trivial transactions aren’t worth keeping on any ledger for any long period. (If I get home and find half of the onions are bad: should I do nothing, or go back and argue, or decide to not go to that merchant again? A fancy ledger isn’t that helpful in any case.)

The value of digital ledgers for small transactions

  • Small or even mid-sized transactions don’t need fancy ledgers; a reasonably secure SQL database should suffice. There will - or should - always be some level of transaction not worth counting: either because the value of the transaction is too small (and its impact as short-lived as a bag of onions), or because a healthy society may want to keep some transactions outside the all-seeing eyes of government and corporate oversight.

2. Decentralized ledgers have
great value, sometimes

Decentralized ledgers start to become important when there is a concern that the records (for example, of a financial transaction, but perhaps of a contract or a legal record) will be fudged. The alteration could be accidental (loss of digital media) or deliberate by malefactors. The immutable ledger of Blockchain sounds particularly appealing where there are real assets in question: real estate. As de Soto has noted, a robust ledger of property records (and an independent judiciary) are vital to the accumulation of wealth for farmers, among others. It’s been vital in enabling the financial successes of Britain and the USA. Adding a technically advanced, unimpeachable, permanent record won’t add much value to the already-robust systems of title registration and protection in these nations. 

In contrast: emerging nations lack cleanly written property records or a reliable judiciary. The attributes of a usable immutable ledger could be of revolutionary value in, for example, De Soto’s Peru. He describes a world ripe for the benefits of decentralized ledgers: The poor in weaker economies: “... hold these resources in defective forms: houses built on land whose ownership rights are not adequately recorded, unincorporated businesses with undefined liability, industries located where financiers and investors cannot see them. Because the rights to these possessions are not adequately documented, these assets cannot readily be turned into capital, cannot be traded outside of narrow local circles where people know and trust each other, cannot be used as collateral for a loan, and cannot be used as a share against an investment.” The benefits of decentralized ledgers for real property in many emerging economies seem so strong that one can imagine that the only opposition would arise from those with vested interest in the current, wholly inadequate systems not changing.

The value of decentralized ledgers:

  • The value of real estate transactions, and the presence of an enduring, underlying asset fits with having a system of permanent, unalterable records, maintained at some considerable cost.
  • But the those records do not necessarily need to be intimately tied to a transaction mechanism. (Indeed, since real estate changes hands rarely, and banks change ownership more often and governments change sporadically, and technologies evolve, tying a real estate ledger to a specific transaction means could be counter-productive).
  • The decentralized, trustworthy ledger is the thing of value in the context of real estate. But this can be accomplished by multiple means, including Blockchain smart contracts - but also other multi-copy validation tools. One, for example, pre-dates Blockchain by four or so years: LOCKSS: (Lots of Copies Keeps Stuff Safe). LOCKSS may offer simpler, less expensive means than Blockchain.

3. Tying transactions to the ledger

The core idea of many cryptocurrency / ledger solutions (think: Ethereum) is that the smart ledger is written on the basis of secure transactions. There is no peeling apart of the transaction from the trustworthy ledger. So, whereas high-value, but slow-moving transactions may need a secure ledger (but not one integrated with a transaction engine), plenty of commercial transactions need a more intimate coupling, and fast, fluid completion of transactions.

To see the value, let’s imagine two cases:

  • In case one, a large car maker buys materials - wheels and electronics and engine parts - from dozens of vendors, all arriving just in time, and integrates them at its factory to make cars. Today, this is likely handled via a complex manufacture-and-vendor EDI software platform, bought by and hosted on behalf of the car maker, from a company such as Oracle or SAP. A blockchain might enable the vendors to feel more secure that they - and not their customer - is writing the records, but it’s still the car maker that calls the shots. Further, the constant, multi-year relationships of the firms make dispute resolution a constant.
  • In case two, a large international consortium gathers to finance and build a power grid in an emerging country. There are banks and big power systems makers and software companies, shipping companies, government agencies, local truckers and hiring agencies and builders and … the list is endless. Nobody knows all the other parties; the technical, national and currency risks are great. José-with-a-truck is worried that he’ll get paid his tens of dollars for delivering tools just as much as the tool vendor is worried that it’ll get paid the millions of dollars it is owed. Further, the consortium is ad hoc, and won’t come together again for any other purpose. No party is likely to have enough clout to dictate use of its own software platform, and everyone is concerned that they get paid per the terms of the contracts. Dispute resolution mechanisms need to be transparent. Here is where a decentralized platform with integrated payments becomes essential. It’s a boon to the bankers - who can see that their monies are being disposed in accordance with contract; it’s also a boon to the big vendors - the big tool maker - who can watch their assets moving toward use - and to Joe-with-a-truck, who wants payment to be automatic upon completion of task.

However, once large infrastructure projects emerge that use decentralized technology with successful outcomes, several other consequences will ensue.

  • The technical means for doing this will emerge as standard practice; from APIs against (e.g.) Ethereum, to templatized smart contracts with contract elements standardized and reusable from code libraries.
  • Best practices in large contracts will include using the autonomous link between contract execution and payments, reducing the scale and scope not only a passel of risks but also the legal and accounting overheads associated with managing those risks.

The value from tying transactions to a decentralized ledger

These simple cases illustrate is that a tight connection between a decentralized ledger and transactions - the basis of most cryptocurrencies - is essential when:

  • The sums of money are large enough to support the inherent complexity
  • The projects endure for months or years
  • No one actor (or group of actors) can force a software platform on the others
  • Trust is anemic, because of country risk, currency risk, and the transient nature of the consortium
  • Standards and best practices will emerge to support smart contracts

A further, interesting group of values might be for companies who seek to create better financial instruments for banking that is congruent with the expectations of Islamic law. For, if a transaction is legally tied to an underlying asset, can it then pass the tests of Islamic scholars?

4. When do cryptocurrencies
have value?

Bitcoin was not built as a ledger to support complex smart contracts and multiple transactions, but was instead, at least in large part, a reaction to the fiscal mayhem of the period 2005 to 2008 in which banks and governments gambled, debased and squandered money with profligate abandon until there wasn’t any left. If you can’t trust banks and governments, the thinking went, who can you trust? The answer, it seemed, was nobody and everybody.  A decentralized ledger of cryptocoins, aiming to fix monetary policy. A new electronic cash system that's fully peer-to-peer, with no trusted third party. The properties were to include:

  • Double-spending prevented with a peer-to-peer network.
  • No mint or other ‘trusted’ parties.
  • Participants can be anonymous.
  • New coins are made from Hashcash style proof-of-work.
  • Proof-of-work for new coin generation powers the network to prevent double-spending.

Resolution of payment without a ‘trusted’ intermediary is critical. Consider case two above: the large consortium building a power grid in a not-trusted country. Do major participants need to buy troves of cryptocurrency to be sure to be able to meet their contract obligations? Or, can they take on call obligations drawable in (e.g.) Swiss Francs and transferred as currency into the recipient country, with those obligations resolved by smart contracts? If the latter, then the cryptocurrency holdings can be transitory - for periods measured in seconds or minutes - as funds emerge from lenders in Zurich or London, are recognized against the contract, and transferred into the recipient’s ledger, perhaps in local currency, perhaps in $US. The “buy troves of cryptocurrency” option seems best only if the cryptocurrency’s risks are lower than those of dealing with the myriad of fiat currencies otherwise involved.

The value for a cryptocurrency

It can be argued that Bitcoin's original sin is that it created an ultimately fixed money supply. That can't work for a currency, but is, in theory, great as an asset.

Under what circumstances would use of cryptocurrency work? Is it best achieved by currencies based entirely on proof-of-work (or proof of other IT-related value), versus creating some obligation that ties to a tangible asset - such as gold or oil or diamonds? In principle, Venezuela’s attempt to re-work its currency by creating a cryptocurrency that foots to oil should be better than the hollowed-out collapsed currency, but such is the disaster there that nobody even trusts the “government” in Caracas to not fiddle the books on that.

If, however, there’s another banking crisis, and if governments and banks can’t dig their way out, Satoshi-style currencies may seem better than printed money. If. May. Perhaps. In such a case, a holding of Bitcoin, for example, could make sense as an alternative to a failed currency. Otherwise, it seems that the base case is one in which Ethereum or other cryptocurrencies are most useful as the language of currency within smart contracts, with all externals in fiat currencies. 

Blockchain is not the thing (it’s the thing that gets us to the thing)

In late 1999 and early 2000, the web, and telecom services built on the Internet Protocol (IP) quite suddenly came to the fore, as it became obvious that IP was the platform for all future telecommunications. Skills in building IP-based network services were in high demand. One consequence: for a while, starting in March 2000, Cisco Systems, then the preeminent maker of routers and other IP networking gear, was the most highly-valued firm on the planet. Today, the highest-value firms are Apple and Amazon; Google and Facebook are not far behind; Cisco’s market cap is a fraction of theirs. 

This is not (just) a tale of corporate mis-steps at Cisco. It’s more a tale of how the value shifted from the platform to the services built on the platform. At the moment that Cisco was the world’s most valued firm, its preeminent knowhow in IP networking was seen as seminal in the new Internet economy. That preeminence faded as others learned how to do IP networking about as well as Cisco. Once that had happened, IP networking was a functionality, a tool, a reliable platform on which others could build value. Cisco did not fade away: the point of greatest value creation moved up, up, and away.

35 years ago, the emergence of integrated circuits made IC companies flower and created a moment of high valuation. Then, personal computers made PC brand companies highly valuable. Then, their value was overtaken by software and applications. This is a constant story for information technologies.

So is it likely to be here. The idea of blockchain emerged a decade ago; Bitcoin and coin offerings burst into large-scale awareness in 2017. The ability to build a functioning blockchain product was rare; the languages most used for smart contracts and Ethereum exchanges (Solidity and Go) are two years old. In IP years. Building robust applications, with smooth user interfaces, is becoming more important than building the plumbing on which those apps run. Next: firms that deliver large-scale, secure, consumer- or enterprise-facing decentralized systems and applications will be more valuable than those building blockchain plumbing.

Ethereum may collapse, as the Techcrunch article cited above speculated. Bitcoin may deflate and disappear. But these would be of little issue: decentralized ledgers, smart contracts, Blockchain technologies: all will be the building blocks of a new era of finance and more.

The ‘thing’ - the long-term outcome - is one of financial transactions intimately tied to execution of tasks, and of immutable documents being the norm. These will become features embedded in contracts and finance; embedded and inextricable.

Blockchain isn’t the thing, it’s the thing that gets us to the thing.



2 In 1630s Netherlands, Tulipmania led otherwise sensible folks to spend bizarre amounts on tulip bulbs. Their prices soared and fortunes were made … and then lost as the mania faded.








10 Peruvian economist Hernando De Soto argues that rigorous property rights are essential to the functioning of a market economy.

11 and Disclosure: David Rosenthal, who created the LOCKSS project and much of its original technology, is a friend of the author of this piece.

12 Introducing the original, 2008 Satoshi Nakamura pape - 


14  CSCO market cap in September 2018: $215B (c.f. $569B in March 2000); AMZN and AAPL both currently have market caps exceeding $900B; GOOG ~$800B, FB ~$400B.