The hype around cryptocurrencies is weird. Let’s talk about it.
There have been dozens of attempts to move financial transactions online, and some were more successful than others, and, like PayPal, are humming along processing billions of dollars. Blockchain advocates and cryptocurrency enthusiasts say they have something better.
First of all, the technology is not that interesting at all. Let me repeat that. At – all. It does not significantly progress… anything. It is an application of an existing, grown technology to an area of economy where… something very similar already exists. All the world payment systems are exactly that – a ledger and some communication, plus a system to prevent fraud. The only clever use of (existing!) technology is the use of private keys, however those are just as much a plus as a limiting factor – as the more services there are, the more likely that some will not use the key you use to authenticate. Current OAuth-based solutions like those used by Google or Facebook are built in a similar fashion, but its the user that self registers so the roles are turned around. It is clear that the best part of blockchain still needs work. Blockchain solves some problems linked to old electronic payment systems, like eliminating double spending or the famous Byzantine General Problem, but many remain.
Blockchain technology does not fundamentally alter the basic of how transactions are made – one party balance changes, another party balance changes accordingly. According to more even-keeled advocates though, blockchain certainly brings one kind of value – some informational uncertainty in regards to the financial ramifications of a transaction is gone, as the transfers are basically instant and they do not require intermediaries. Now we got to the key word – intermediaries. Intermediaries are important for any transaction online, as they build a reputation capital that make parties more secure. They also give a form of feedback to transaction participants, which blockchain does not – you essentially have no idea if the technology worked unless you… ask the other party somehow, which clearly defeats the original purpose.
This is why ideology is important when talking about blockchain, and especially specific cryptocurrencies and their founders. Too often entire discussion on the merits of technology is extremely lacking in analysis of external consequences of its implementation, and about the ethics and ideology that underpins it creation. Most people view technology as neutral, as ideology-free. Nothing could be farther from the truth here.
In case of cryptocurrencies there is a pervasive distrust of government issued money and government controlled financial systems, which are seen as a threat to human freedom that is derived from a very limited conception of property rights. Even more, property rights formulate a basis for freedom in general, and outside control over any process of exchanging property is inherently evil. Using intermediaries that are under the state control is frowned upon.
Short note here – the main arguments here do not hold much water. First, for most people on the planet banks are a trusted intermediary and blockchain advocates do not show reasonable harm being done (I will gently not dispute the “government always baaad” crowd, this is a tech blog for Pete’s sake!) because of such system setup. Next, the immediacy of transfer is improving from year to year and there are good immediate transfer option available already. Since they have not been widely adopted yet, they are seen as secondary payment options for most just as cryptocurrencies.
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Wide adoption is impossible right now, and the only answer to this is the Moore’s Law. Since all ledgers need to be the same, scaling comes quickly into play if anything resembling wide adoption happens. Bitcoin processes just a couple transaction per second, which is truly laughable compared to world international systems and is a testament to why only a tiny minority of people use cryptocurrencies. Add more nodes, more copies of the ledger and more users and you are guaranteed to reach unpractical transaction times.
Finally, security. For all the hype about how secure blockchain is, there is a multitude of ways a system like that can be hacked and exploited. There are no foolproof systems, and central authorities like banks exists because it is their job to constantly monitor and enable secure transactions, and when fraud is detected, act and possibly recoup losses for the harmed party. High profile cases, like $300m of Ether that was just lost show that a system without anybody handling responsibility for its crashes and mistakes is a system that will always put huge risk on individual investors.
To sum up, cryptocurrencies may in ten or twenty years take up a large chunk of international money transfers – all depends on solving some technical issues and working towards broader implementation. Until then, limit your and your company risks and avoid it unless you are aware of the slightly larger risk exposure you are accepting, and you are willing to take it.