Predictions that bitcoin and other cryptocurrencies will fail typically elicit a broader defence of the underlying blockchain technology. Yes, the argument goes, more than half of “initial coin offerings” to date have already failed, and most of the 1,500-plus cryptocurrencies also will fail, but blockchain will nonetheless revolutionise finance and human interactions generally. In reality, blockchain is one of the most overhyped technologies ever.
For starters, blockchains are less efficient than existing databases. When someone says they are running something on a blockchain, what they usually mean is that they are running one instance of a software application that is replicated across many other devices. The required storage space and computational power is substantially greater, and the latency higher, than in the case of a centralised application.
Another false assumption is that blockchain represents something akin to a new universal protocol, like TCP-IP or HTML were for the internet. Such claims imply that this or that blockchain will serve as the basis for most of the world’s transactions and communications in the future. Again, this makes little sense when one considers how blockchains actually work. For one thing, blockchains rely on protocols like TCP-IP, so it isn’t clear how they would ever serve as a replacement. Furthermore, unlike base-level protocols, blockchains are stateful, meaning they store every valid communication that has ever been sent to them. As a result, well-designed blockchains need to consider the limitations of their users’ hardware and guard against spamming. A third false claim concerns the trustless utopia that blockchain will supposedly create by eliminating the need for financial or other reliable intermediaries.
This is absurd for a simple reason: every financial contract in existence today can either be modified or deliberately breached by the participating parties. Automating away these possibilities with rigid trustless terms is commercially non-viable, not least because it would require all financial agreements to be cash collateralised at 100%, which is insane from a cost-of-capital perspective. It is high time to end the hype. Bitcoin is a slow energy-inefficient dinosaur that will never be able to process transactions as quickly or inexpensively as an Excel spreadsheet.
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