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A Narrow Path that Leads Nowhere  - Blockchain's Fatal Flaw

16/5/2016

 
​Every survey about the future of banking and investing lands on the same conclusion. Our industry needs to become easier, faster, and more customer-focused. So why have we become fascinated by blockchain technology, designed to be complex, slow, and invisible to customers?
​Every survey about the future of banking and investing lands on the same conclusion. Our industry needs to become easier, faster, and more customer-focused. So why have we become fascinated by blockchain technology, designed to be complex, slow, and invisible to customers? 
​Welcome to the first of our “narrow path” pieces, in which we look at a series of transformational technology initiatives, and try to understand for each its narrow path to success or mainstream adoption. 
Blockchain technology is this century’s QWERTY keyboard – technology designed to slow things down and make them harder.
Which problem does it solve? Which use cases fit? If there is a ‘Goldilocks’ zone for habitable planets (“not too hot, not too cold, just right”), what are the characteristics of the Blockchain Goldilocks zone?
 
Technology adoption fails for many reasons, but in these narrow path analyses we only care about evidence of a fatal flaw, of weakness-by-design. Maturity, standardization and adoption challenges are all legitimate concerns, but they are life cycle effects, not causes.
 
Fatal Flaw Candidate nr 1 – blockchain technology uses expensive, economically and ecologically wasteful computer resources to solve a problem which is irrelevant in the societal consensus for regulated financial services.
 
Blockchain uses complex cryptographic puzzles to create an open (‘permissionless’) environment where computing power is spent to unlock rewards for validating transactions.  This is central to its value proposition of offering a decentralized consensus mechanism to replace traditional validation by a central authority.  We do not need the explicit ‘trust’ mechanism of a central bank or clearing house because the computing power needed to falsify the technology-driven validation process is prohibitively expensive for any single actor.
 
This is important – blockchain technology is this century’s QWERTY keyboard – technology designed to slow things down and make them harder. It does so for a good reason, and so far, it has been successful in its design goal of making it hard to falsify records by making the validation of transactions hard-to-compute.
 
Our question is: does the design goal of permissionless validation matter for the problems we have in the banking and capital markets world?
 
In the real world, banking and capital markets are industries regulated by governments to protect personal and corporate money, pensions, investments, and the integrity of transactions. Other than on the fringes of crypto-anarchy, there is no mainstream societal driver to reduce that level of control and regulation. Fraud, error, and deception are part of the human condition, and they cannot be wished away by utopian visions of dispassionate algorithms managing the financial system for the greatest common good. In other words, we accept that some bankers cheat, that some of their customers cheat, and that we need policy and enforcement to protect us from ourselves, our neighbors or our bankers.
 
Blockchain was not designed to make things simpler: it was designed to make fraud in anonymous transactions too expensive to carry out. That is a great design goal, but one that does not matter for institutional and regulated securities markets.

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