Wrapping your head around the Blockchain. Ouch, it’s heavy!
Why am I writing this?
My motive right now
As a UX Designer, I’m really concerned with trying to figure out what the real problem is and coming up with the best solution all things considered (as much as possible). Understanding Distributed Ledger Technology (DLT aka Blockchain) Crypto/ Smart Contracts is important to me since I might have some “Blockchain” based projects coming on the near horizon. This is touted as a solution for certain problems. So I wanted to know why we should use DLTs, Crypto and Smart Contracts in the first place from a user standpoint?
I’ve read a ton of articles and white papers. Played around with crypto as a user and a dev. Heard lots of talk about how it was going to free the masses from evil government control and other evil doers that can’t be trusted. They say, “It’ll add trust to a trustless environment!”, which seems to be a bit of a stretch since there are always things you need to trust on a practical level. But yeah, I got the theory and yes, many people have Trust issues. Really though, it’s often justified…
However, I wondered how much of an issue it actually is for most people? How much value would adopting these technologies really bring for the vast majority or a specific minority? How much of the tech adoption is just hype and speculation trying to fit the new shiny cylinder into a square hole? Or is the hole round but not the right size yet?
Some background (feel free to skip this section)
As a web geek, I’ve been pretty interested in blockchain and crypto for a while. I saw Bitcoin years and years ago and even had the chance to try it out on my old desktop. I thought it was interesting but didn’t do anything with it because, well…I was busy with other things at the time.
(Sigh, my wallet feels deep regret…)
When I found Ethereum a while back before it exploded and checked out their Smart Contracts, it got me going down the rabbit hole of smart contract theory and “Blockchain”/DLTs (See the “A Boring Definition” section down below). While I liked the concept, I wasn’t sold that it would scale over time and be able to process many transactions. I believe time has validated that impression. In addition, the DAO debacle was a real wet blanket and highlighted the trickiness of getting contracts right. However, I didn’t reckon with the hype machine and “easy money” ICOs fueling massive speculation.
(Sigh, more wallet regrets…)
Ethereum may still work out that scaling problem…we’ll see…
I liked IOTA (focused on IoT data transactions), which popularized the “blockless blockchain” scaling solution called DAG (Directed Acyclic Graph, they call it the Tangle) which is used by a few other platforms too (Byteball, RaiBlocks/Nano, Burst, Cybervein, Spectre, etc.). It’s like using a tree format instead of trying to order your transactions. IOTA has its own issues or benefits depending on your point of view (a Central coordinator, original crypto algorithm, lack of mining fees). Can I use parentheses any more than I have? (I think so!).
Let’s try to separate the wheat from the chaff
Towards that end, I’d thought I’d take a step back and try to synthesize what I’ve personally learned so far, try to define what are the real use cases that this tech is actually good for so my efforts are focused and effective. To look past the hype and define a mental model framework, identify assumptions and problems, possible solutions and whether DLT based solutions are the right fit or something else might be more appropriate.
This isn’t meant to be the definitive end to be all analysis of the space. It’s more my ruminations trying to figure out what it all means from a strategic standpoint and what is worth doing and not doing. I could be right, wrong or somewhere in between. Any constructive feedback is appreciated, Unconstructive feedback, not so much…
A Boring Definition of DLTs (but perhaps less complex than most)
Distributed ledger technologies (DLTs) are essentially multiple synced databases which are additive and not subtractive or updatable. This is commonly referred to as Blockchain, even though not all DLTs are blockchains. For example, new information can be added by any participant and, once confirmed by the majority, is made to be vanishingly difficult over time to alter. This limitation is both their strength and weakness over conventional synced databases that are also distributed or centralized. It also enables things like cryptocurrency and smart contracts. People often conflate cryptocurrency like Bitcoin and Ethereum with blockchain. Those are built on blockchain tech but you don’t need crypto to make blockchain work. More on those later.
Who, what, where/when, why (but not how). Let’s put things into an Agile Story format!
“When I am involved in a high risk situation with people or organizations that may not be generating trustworthy records, I want a reliable set of historical information that cannot be changed so that I can have solid reference for action or in the event of a dispute.”
This begs some questions…
What can be untrustworthy?
Bad, malicious participants. Corrupted or incompetent data entry. Centralized authority that has the power to dictate changes. It seems like a pretty pessimistic, cynical outlook to me but it’s perhaps a realistic view of the world.
What qualifies as reliable?
Records that are created based on data that is objective as possible and have been vetted and agreed upon by the vast majority of participants. Or, is an accepted standard by all or most participants (individuals, organizations, companies, even governments) which does have the value of increasing interoperability by using a single “point of reference”/DLT.
Where is that information coming from and how do we know the information entered is accurate?
This varies a lot. In some cases, such as a price of wheat that is sourced from many reliable places allows us to be fairly confident of its accuracy. In other cases, such as a bit of information on the position of a certain ship at a certain time to verify delivery and corroborating information which can be easily changed (input) then the information might not be very accurate. Agreed upon sources of reference are called Oracles. It can be as the old saying goes, “Garbage in, garbage out” so it’s important to trust your source integrity. Ironic, huh?
What situations are high risk?
- When dealing with illegal activities and the courts are not an option.
- When people have high incentives to cheat and undermine the facts of a situation to their benefit and others disadvantage.
- There is a high chance of the various participants getting fundamental facts wrong very often.
- Doing business with random strangers over the internet. Although people manage to do this everyday with regular fiat right now.
What actions will I take based on this information?
If I trust the information shown, I will move forward and purchase or send money, take other actions like transmitting a file, or disputing the information with others or in court.
How will I dispute the data if there is a discrepancy either internally in the DLT or in the real world?
There is no real disputation internally. You could make a copy of your own DLT I suppose but if you’re the only one using it, that’s a bit useless. In the real world, we’re back to the courts and maybe “other conflict resolution methods” if you’re involved in something less than legal.
Current real world issues
“Please have patience while our system is experiencing technical difficulties”
Aside from theory, there are other other factors to consider which may or may not be solved now and in the future. These include slow downs because of network scaling, miner incentives, speculation leading to variable performance (and crypto prices), etc.
Garbage in, garbage out
As the old adage goes, a big issue is in how data is entered into a DLT that is not wholly part of the DLT itself (like transactions). If the data somehow makes it in that is erroneous, then the DLT reference is not accurate or reliable.
Smart contracts are an “extended feature” of some DLTs and have many of the same pros and cons. Instead of financial transactions or data that cannot be changed, it also allows for other irrevocable actions to be taken based on the code; although revocability could be built in.
I could, in a “smart contract” (aka an automated function) that auto executes a certain action based on it like a money transfer, change data to note a delivery elsewhere, or send a notification that something has not been done.
Foretelling the future
How that action is taken sometimes depends on external information called oracles. Oracles are a fancy name for an agreed upon reliable source of information. For example, the price of wheat might be pulled from one or more sources and used to determine a payout depending on whether the price went up or down. Commodity projections are another example. The outcome of a sporting event could be another. These are generally globally known facts that are probably difficult to fake.
Garbage in, garbage out once again
However, if we’re dealing with more obscure facts that could be manipulated at the source or in the code itself and the incentive to cheat is high enough to justify the effort, then the contract could essentially be compromised. This means that the contract might need to be constructed in such a way as to let either party back out to keep the status quo if a discrepancy is found between the real world and the oracle. Legal action may also be needed if possible but not fruitful depending on where the parties live and how anonymous they were.
It can be complex and tricky depending on what needs to be done. The Devil is definitely in the Details in this instance.
Enough with the boring database tech. Let’s talk money!
The people’s cash or the people’s Monopoly money?
DLT tech also enables “reliable” cryptocurrency because once something has been entered as a credit or debit it’s there forever. This means it’s essentially digital cash. However, it might be worthless as random certificates printed from a xerox machine or as valuable as gold depending on its intrinsic value or how many people agree to its use. Once again, cryptocurrency is not the same as DLT/Blockchain even though people often conflate the two.
Hands off my stuff!
It can be an anti-government measure so as to not pay taxes, not be tracked, protect your funds and be able to more seamlessly move value across international borders.
However, how much of a problem is this? I don’t know. Basically both DLT and, by extension, Crypto could be seen as risk management methods.
As Joseph Heller says in Catch-22, “You’re not paranoid if people are really out to get you.”
So the question is, “How much are They are out to get…You?”
Depending on the situation, various people may prioritize one or more of the features.
If you’re in a nation with a stable and valued currency you would use it to avoid taxes and tracking and seizure if involved in illegal activity as defined by that country. You might also use it for international transfers. Or, you might not like the government being able to devalue your currency by creating more.
If you’re in a nation with an extremely unstable currency and/or officials who are likely to take your assets for themselves due to greed or politics, then storing your assets in crypto might make sense, even if it is extremely unstable. As long as the situation is worse in your country, then it may be worthwhile to put at least a portion away so it may be used elsewhere or easily hidden. Here, the value lies in “Hedging”. People in this situation may be the most motivated to do this.
In both instances, what you get may be worthless or worthwhile. It’s a serious gamble right now due to speculation and crypto instability. A bit like buying or selling gold in a volatile market.
Another possibility is the use of crypto by a state or people that currently use a non-native fiat currency and would like to switch to it for structural reasons (e.g. less control from another nation state).
A Common Reference
Once two parties use a common cryptocurrency, they can easily exchange value internationally or for the sake of convenience (dodging complex bank transfers, etc.). Quick transfers help to even out the chance of volatility between native currencies and perhaps lower fees domestically. Converting the currency into native currency may lead to a loss of gain for either party. If this isn’t a concern, using digital fiat, particularly if it gets more efficient, might be a better alternative or just good.
Types of Crypto Distribution
I think that “crypto” can be divided between three types of distribution:
Can be used anywhere to purchase anything. This is the vision of many enthusiasts. First it would need to be stable. Then people would need to agree to use it over their typical currency. Then they’d need to deal with or integrate with their government’s concerns and large employers.
Good within a certain system. May be a speculative asset or can only be used to purchase certain kinds of things. May derive its value from demand measured against a major fiat currency. May need to be often translated back again to reap the full value. I vote for this being the most viable. Particularly in spaces where pure virtual value is exchanged.
Not real crypto in the pure sense but issued by governments as the digital equivalent of their cash or regular credit. As stable as fiat (whatever you think of that), but probably taxed, controlled and tracked by the government. Provable as “cash” and convenient but not outside central control.
One of the big advantages of Government fiat is that they mandate the use of their currency for all typical transactions within their borders. DLT Crypto is an agreed standard which may or may not be able to be used in everyday transactions.
Questions many people might have about crypto in order to adopt
- Can I spend this to get something I want?
- What can I get for it?
- What needs can I fulfill?
- Who will accept it from me?
- How much risk will I take if I choose to have it? Do I have something worthwhile?
- Can I make more of it? How?
- Can I rely on it?
- If it’s worth something, should I save it or should I spend it?
- Will it be worth more or less by the time I decide to spend it?
- Will it be worth more or less by the time I receive it in exchange for a good or service?
How do we determine how much value to place in a particular crypto and then how it measures up against goods and services that we acquire and sell? Right now, most crypto’s value is basically derived from the fiat that is put in or taken out and the hype around it fueling boom and bust demand. There may be no inherent value to using the crypto in their network, with the exception of Ethereum, Burst, IOTA and other smart contract platforms which enable processing/work/data to be purchased other than transfers of currency back and forth. Although, other non-crypto work based platforms could leverage pure processing crypto-platforms to make the currency relevant and contain value.
How do I accept something that may decrease drastically in value from day to day (as opposed to slowly over years with stable fiat)? How does government regulation and possible prosecution factor into stability as well? How is participant consensus reached and how does that affect price and usage? In my opinion, we need a value benchmark that isn’t a placeholder for fiat and hype but representative of real labor and innovation. This will have some volatility, but it will be based at least on concrete value. Some crypto may stabilize on its own if adopted by enough people but I’m not sure how.
Paying everyday bills (mortgage, rent, food, utilities, debts, health care) and getting paid (from small businesses, clients, government, enterprise). How can that happen? It’s a chicken and the egg syndrome of the Network effect. In order to be truly useful something has to be used by a large number of people but people will only want to use it if it’s used by large numbers of people. The question is how to make it useful at a core level, incentivize people to use it and then scale. Or, do we give up ubiquity in favor of using niche crypto to purchase certain things and not others; deriving value from inside the niche or exchanging it for other crypto or fiat?
Social Impact of a Universal Crypto
Envisioning the Brave New World
Ok. So we have a crypto that’s accepted everywhere. Governments can no longer control or track our assets and transactions. We keep what we earn and spend whatever we want whenever and wherever we want. They can’t undermine our stores of wealth by printing more money (although we might lose more to speculation or technical changes).
Some societal questions
How do we pay for social services like roads, fire departments, schools, police, military protection, etc.? Is it something that we now do voluntarily or on a case by case basis as perhaps advocated by some libertarians? Is that actually viable or something the vast majority of people want? What happens if you don’t have any crypto or very little? If your house (and other people’s accidentally) burns down?
What about people that are part of the current System?
For people that are employed by the government, how do they get crypto? Or perhaps those jobs are no longer necessary? People receiving benefits they’ve paid into? How about the person who works for a corporation? Does the corporation pay them in crypto? Does this encourage or discourage corruption?
I don’t know the answers to any of these issues but I think a discussion about them is important.
Things probably won’t work the way you think they should
If the way everything else works in life is any indicator, idealism will probably need to be tempered with a measure of pragmatism. No system will ever be perfect.
I believe Niche Crytpo/DLT stands a much better chance of working on a limited level. It won’t have the upending that the purists are looking for but will allow people to manage either risky situations a bit better with accompanying technical difficulties in execution and its own set of risks such as variable value and the inability to change your mind once committed.
Universal Crypto seems like a tougher effort to bring into being on a practical level.
Navigating government taxation and regulation is also challenging.
With that said, use cases that require both a DLT and a crypto solution for risky transactions, as opposed to other more conventional solutions, may be far and few between; in particular with volatility of many cryptos right now. If one could create something stable then I think use cases would be greater.
Governments will probably push their own cryptos and they’ll work with mixed success depending on their own value and perceived stability. China is in the process of doing this right now with their Digital Yuan initiative. Maybe by the time you’re reading this it will be used more broadly. This is actually their main strength in that a government’s mandate to its citizens to use its currency has value on its own as well as the summation (however that’s arrived at) of the nation’s economic activity. If they allow the securitization of assets using their tokens or someone else’s then that standard and legal acceptance may increase the overall utility of DLTs and crypto.
Maybe a third party crypto or a variety of niche cryptos will be designated and allow some taxation and tracking usable in some situations and not in others.
The reality is that something will probably come about that no one is particularly happy with but works to a degree.
Towards virtual quasi-nations
Linden Labs aka Second Life pioneering
In my opinion, something like the quasi-government approach taken with the native currency, the Linden, in the old Second Life game/VR world may be the more robust route to get to a working cryptocurrency.
There, people were issued a stipend of virtual currency and then could “earn” more from others when creating goods and selling services and land. For many people, this stipend actually came from real world payments in fiat like dollars and euros, etc. Essentially, they were paying to play or get hosting (in the case of owning virtual land). Linden Labs (the owners of Second Life) also would engage in some currency manipulation like a central bank but I’m not sure if it truly affected the markets in the same way as the U.S. Fed does.
Nonetheless, it was possible to exchange value within the system, create more value based on your efforts (or lose it), and even support yourself in the “real world” by receiving fiat for Lindens in an outside online exchange.
Efforts here created real “original” value for real people as opposed to simply inputting value and extracting it based on demand and supply. Efforts in other creative systems like Medium, Youtube, etc. also can create “original” value.
Creating Internal Value within the DLT (my not particularly well thought out idea for a problem that may not exist)
While the concept may be too pie in the sky, I think creating real virtual value (either in terms of original content or processes), whether is from content or services on the Internet, is the first step towards creating stability and thus confidence leading to ubiquity.
What’s the goal?
However, is creating a DLT and crypto the point? I suppose it can be from a regulation dodging standpoint and “last resort” hedge for those in dire straits. In that respect, many payment exchange currencies have succeeded albeit with mixed success due to usage, scaling and volatility.
Less about interference and more about value creation
But DLTs and crypto may also be a means to make the virtual “real” thru common consensus, not an end unto themselves. It might be less about avoiding interference and more about rewarding trustworthy creative production and collaboration to make goods and services (with a healthy dose of cynicism and pragmatism).
This may mean that the crypto is useful and valuable internally within its domain and somewhat useful and valuable outside depending on the interest of people in the goods and services available there. This domain value sets a baseline on the worth of the currency.
A Parallel State
Essentially, if a virtual global “state” may be created, which has its own currency valuable within its realm due to creative activity and easily accessible by all, then by default you may be left with what becomes a Universal Currency or at least an Alternate/Parallel currency. At the very least, creating “real” inherent value or at least a stable “unit of measure/exchange” that the crypto represents based on digital/virtual/internet activity is what will lead to long term societal usefulness.
In Agile Story format, again!
“When I am creating something on the Interwebs, I want to codify it so that I can have solid reference for action, monetization or collaboration”.
- Make something (like text, media or a 3D model) or enable some process to be done (like an app)
- The nature of the DLT makes what’s been created or occurred to be “real” as in updating a shared reality.
- Use the currency to figure out its value within the system.
- Because these virtually “real” items are being valued against other items in the system, the currency begins to take on some base minimum values within it. So, (x) content or services are worth an amount in comparison to another set or type to items.
- Now the currency begins to be worth something relative to what can be redeemed for it within the system.
- Depending on how valuable people find what is available within the system, it begins to take on value elsewhere as a “store of value”, medium of exchange, and unit of measure.
Perhaps the problem does not actually exist or this is not the solution for the situation.
Reality Check Time
Although we’ve gone over various pros and cons of DLTs, their associated extra features, and possible avenues for adoption and implementation. I think it’s good to step back and ask:
- Is there an actual problem with using regular databases for record keeping?
- Do most people really have a problem that needs records that can’t be changed and/or a distributed ledger system?
- Is trust so low that it merits this approach?
- Is using fiat that much of a problem, even internationally?
- Is the overhead of smart contracts, possible cheating and lack of recourse to courts worth implementing over more conventional contract approaches that involve courts or perhaps a more centralized solution?
DLTs are needed to create a historical record in a risky environment. There are a lot of technical problems making this work right now. How much of that risk is real and how much is paranoia depends on your situation and inclinations. Smart Contracts can auto execute actions based on agreed upon terms set in code and external triggers. Sources for those triggers (oracles) may be compromised in some cases enabling cheating.
Cryptocurrency enables you to use the ledger to do an end run around interfering authorities and others plus hedge your risk in unstable nations. It can also ease the friction of international and personal transactions where fees and complexity are high. Many crypto currencies are fueled by speculation and not underlying value. I divide Crypto into three types. Universal Crypto, Niche Crypto or Fiat Crypto. Fiat crypto is pointless from a crypto-ideological perspective but might be more efficient than what we have now and might aid in asset securitization. Price stability is a real obstacle to adoption, since people are actually hesitant to give and take crypto because it might quickly be far or less valuable than at the time of transaction.
In my opinion, creating real Value is the first step to Stability and then Ubiquity. What impact that might have on Social Services due to the lack of tax revenue and regulation is another matter. Real long term value can be fostered in the DLT, Crypto and Smart Contracts by enabling value creation through either content production or processes to be created within itself not from hype and speculation. With that said, we need to ask ourselves, does it solve our problem best? Does that problem even exist for the particular situation we find ourselves in?
Not short enough for you? The super TLDR;
This is an attempt to synthesize from a user standpoint why one would use DLTs, cryptocurrencies, and smart contracts. They’re basically risk management/anti-centralization tools right now. The question, “Does my problem require this risk management approach?” Lots of technical implementation problems. Price volatility makes crypto tough to actually use in everyday transactions. I theorize that it could be something more than an anti-interference tool if it can create real value for users internally in a system; which then might spill over externally and be picked up for adoption en masse.