You’re only seeing the tip of the iceberg when it comes to blockchain

Jonathan Wolinsky is the senior managing director and chief scientist at the Genesis Project, the company behind the private blockchain platform OpenBlock.

In this opinion piece, Wolinsky and his colleague Robert Wolinsky focus on the ability of the blockchain technology industry to deliver on its promise: the creative destruction of blockchain innovations of the crushing, market-squeezing Bitcoin type.

In recent weeks, the hot topic in the banking and blockchain technology sectors has been the hackers’ manipulation of the SWIFT (Society for Worldwide Interbank Financial Telecommunication) messaging platform to facilitate the heist of $81 million at the Bangladesh Central Bank, and the oft-heard buzzwords “blockchain” and “distributed ledger” as a combination of the “white knight” technology that will correct all of SWIFT’s details.

SWIFT is a global interbank messaging service that connects 11,000 financial institutions in more than 200 countries and regions around the world. SWIFT processes 25 million messages per day, with a value of approximately $5 trillion. However, due to SWIFT's importance in the global financial system, SWIFT's activities cannot occur in a vacuum. To be frank, SWIFT's hacking problem is a global banking industry problem.

To address this and other issues, SWIFT and many major companies in the securities and banking industries have come together through alliances and partnerships since 2014 to study how to reduce or eliminate the costs of interconnecting and improve security and reliability. These companies have chosen distributed ledger blockchain technology as a means of long-term sustainability in a market that is increasingly challenged by digitalization.

Of course, this is nothing new in technology collaboration, or even competition. So, we can just look at it as good public relations. However, despite the collaboration, it is becoming increasingly clear that the so-called "new" is the "blockchain" that has been talked about, but it may be more about selling out the "old" rather than delivering the "new".

Recently, I co-wrote a counter-argument with colleagues at my company, “Can Trust-Based Private Blockchains Be Trusted?” Our starting point is simple: permissioned and trust-based blockchains that lack proof-of-use protocols do not deliver immutable historical records, they are just distributed databases posing as blockchain technology. Since the publication of this article, many blockchain R&D initiatives, including R3CEV, have stated that they are not building blockchains at all. Investors should take note.

So what happens next?

The short history is in order. Since the development of Bitcoin, there have been two distinct scenarios. In the first scenario, Bitcoin was defeated or even disappeared under the blow of the market. Conceptually, Bitcoin is a new concept with a lot of promises. Despite this, it is difficult for enterprise management users to use it correctly immediately, let alone use it properly.

Think about this. When it comes to being involved or tangled with a public blockchain, whether the Bitcoin trademark and its history of constant changes, inherent turmoil, software rigidity and forks, shady management, and attempts to perpetuate Bitcoin will cause market disruption is a real and big question, especially for those in the C-suite. The reality is obvious, there is some incredible innovation missing - Bitcoin was designed to be a digital currency, not to be an enterprise platform.

This moment in history came in 2013, when the vendors of the second generation of blockchains said, “We don’t need a public blockchain with an open platform, we can build “private” blockchains without the limitations of Bitcoin, and make them better! Let’s separate the blockchain from Bitcoin and build private, permissioned blockchains.”

Soon, the "Blockchain will change the world" meme will make it easier to sell anything through the world's "blockchain". The idea of ​​blockchain as a discrete element has been passed on, and so far no new efficient non-digital monetary activities have been seen. Capital is starting to flow into what are called "use cases" for blockchain technology.

However, in their enthusiasm to harness blockchain technology and improve the efficiency of enterprise users, many emerging “private” use case innovations are rapidly abandoning the blockchain data structure and evidence utility protocol.

Without the market squeeze and network effects of public blockchains, it is difficult to justify the inefficiencies of blockchain databases and their associated energy costs of evidential utility.

So what's left?

Once you remove the technology that makes Bitcoin what it is, what remains is a shared or common protocol platform comprised of currently “permissioned” parties within the walls. Yes, access to a common platform can increase some computational efficiency between parties, but it is not a true P2P blockchain experience that can be used to change the world, improve markets, and generate the highest efficiency – this type of fragmentation is what people think of when they hear the word “blockchain”.

Blockchain technology is a truly holistic technology portfolio

The blockchain structure becomes redundant and without a trustworthy environment that we least realize. The data structure of the blockchain by itself - blocks of information linked together by cryptographic signatures - is not a particularly efficient way to store and publish information. However, when combined with a protocol with evidential utility, this ordinary blockchain transforms into a permanent record with great potential.

Adding an objective mechanism for determining the validity of records and reaching consensus protocols, proofs, says “goodbye” to the need for and trust in a central authority or permissioned administrator to keep records of multiple parties true, and says “hello” to efficient p2p transactions without transaction risk to counterparties,

In the case of blockchain technology, the benefits gained are an efficient face-to-face environment by eliminating counterparty risk, facilitating the exclusion of most fickle rent seekers. These benefits outweigh the cost of using inefficient data structures and the energy costs required to securely guarantee a permanent historical record through a protocol with proof of utility.

However, when participants in second generation blockchain technology reintroduced trusted third-party permissions, or trusted nodes, to maintain or "guarantee" the validity of records, the inefficient blockchain data structure provided little value. So blockchain vendors naturally removed the blockchain data structure or modified it into a fake blockchain without the real immutable properties, resulting in data shared online that is strangely the same as the existing system, even though it uses a new, common protocol.

It should be noted that fake blockchains may have cryptographically signed blocks but lack the finality and external verification capabilities provided by a protocol with proof-of-stake that guarantees the immutability of records and achieves the famous self-enforcing efficiency of blockchains.

Although this access requires payment, Bitcoin pays approximately $400 million to $500 million per year for providing this immutable record.

Second generation blockchain technology players are repeatedly trying to reduce costs with various software, validator cycles and cycle workspaces like proof of stake, without realizing or caring about the externalities and resource consumption associated with the protocol having evidence utility is the basis for providing immutability of the record. Without this, the blockchain becomes just your ordinary information sharing environment protocol.
Of course, a common protocol for sharing information is beneficial, especially for systems that lack a common protocol. That's pretty obvious, but it's not the typical efficiency provided by real blockchain technology. Regardless, the Bitcoin-style, trustless blockchain efficiency would be a type of "efficiency" being sold without delivering the "blockchain" together.

By 2016, the story was starting to turn around. Not only did R3CVE admit that they didn't create the blockchain, but Ripple, Blythe Masters' Digital Asset Holdings' Hyperledger, Chain, IBM and many others were probably looking to use the old plain-old (permissioned) information-sharing system with various round-robin consensus software, dressing it up as something revolutionary.

Of course, it’s only to gain this efficiency from a non-trivial protocol environment to a normal protocol environment, not to convey a shattering, outside-the-walls, creative disruption of Bitcoin-style blockchain innovation.
So, with a little magic, what’s “old” becomes “new” again.

Blockchain splits are not a magic bullet

While all these profound ideas are coming out of the blockchain technology intellectual community, there is still a small group of blockchain enthusiasts, entrepreneurs and data scientists, not alchemists, who understand the meaning behind blockchain.

In the world of digital currencies, Bitcoin is a technological haiku, a masterpiece of simplicity, balance, and reason. We cannot easily overlook this amalgam of proportions, because, just as the unique function of haiku is to transform profound ideas into simple sentences in the world, the function of blockchain can do the same well: it can eliminate the risk from the counterparty, and enable the other party to ensure the integrity of the transaction as promised before without additional work. Such is the simple elegance and penetrating power of blockchain technology.

To be sure, Bitcoin's "high art" blockchain innovation is a "trustless" or "self-enforcing" environment that works through a protocol that has proof of ownership. Without it, all you have is a bunch of computers communicating as they were before.

As an aside (but perhaps with a deeper meaning), it’s possible that the inventor of Bitcoin chose the Japanese pseudonym Satoshi Nakamoto for his perfect haiku composition as a reminder.

Where can we find this “high artistic content” in Satoshi’s current transcribed blockchain verse?

Nowhere to be found!

It’s been only seven odd years since the world of “blockchain” exploded, once a depiction of elegance, now a catchphrase for a pop culture currency that has entered the Middle Ages. The catchphrase has now raised $1 billion from venture capital firms, corporates, angel investors, and incubators. Many are comparing it to the dot-com’s halcyon days.

Yes, slogans work for some things. But slogans for blockchain are not the right kind. Because when it comes to blockchain technology, we usually only see the tip of the iceberg.

The decline has been rapid. In just seven years, a large number of blockchain sellers and their academic researchers have transferred and structured this "high art" into several components, selling various units as "blockchain technology", which either excludes or redefines a component that is used to promote ordinary distributed classification into divisive haiku art, through immutable records, this "untrustworthy" and "self-enforced" environment becomes possible.

I would rather digress for a moment into a technical discussion to illustrate the absurd idea that blockchain components are malleable, interchangeable, or removable when we expect this type of fragmentation to be associated with blockchain technology. Blockchains consist of three main chain components: (1) consensus, (2) authentication, and (3) immutability. To make it clear, the technology behind these components was hyped decades before Bitcoin and “blockchain.”

Both the principle of consensus (built on the underlying application logic) and the technology of authentication (provided by public key cryptography) are commonly used in distributed systems. However, before Bitcoin, the third building block, immutability (provided by evidence utility), had never been used in conjunction with the other two technologies. When these three are combined, it becomes something so new and surprising that it almost creates a miracle. In other words, evidence utility connects the other building blocks together to form what is now known as the "blockchain".

Of course, not everyone is happy with the technology behind the hardness and immutability of proof-of-use protocols and its costs, especially promoters. Therefore, in the rush to commercialize, many promoters water down the definition of immutability in order to push blockchain technology to their ideal state. Unfortunately, the flexibility and self-enforcement that blockchain technology is known for cannot be transferred without the historical immutability provided by proof-of-use protocols.

The most common response to previous discussions has been a dismissive response disguised as a matter-of-fact response: “We’re not building a ‘blockchain’, we’re building a ‘distributed ledger’.”

That is, they discard the inefficient blockchain data structure and immutable record of evidence and return to trusting third-party verification platforms, only to once again reinforce modification and virtual central authority.

To apply another concept, however slowly, blockchain promoters are simply back where they started, in software engineering for hire rather than the kind of Internet reinvention that sophisticated investors typically expect to be worth the huge investments they make.

Where should investors go from here?

Until now, proof of concept for use cases has guided investment. There appear to be numerous use cases for common protocol systems across sectors and industries. However, in order to achieve rationality, adoption by all participants requires the existence of common protocols.

There are two problems here.

First, experienced financial individuals instinctively realize that accumulating an entire industry like herding a group of cats is not going to happen. The second problem is that investors are not investing cash to build ordinary protocol software, they are investing in (ledger) blockchain technology.

So investors need to take control before they lose too much money and ruin their reputations, because most if not all blockchain investors are getting zero returns from investing in "blockchain technology" disguised as generic protocol use cases. If you are one of those people who thought you were investing in decentralized blockchain technology only to find out you only got a "distributed ledger", then I'm sorry to tell you that you have been fooled. This is not the whole internet re-started, adapt and cut your losses as soon as possible.

Turning to the next topic, I recommend the following two principles.

First, investors need to distinguish between projects that have undergone a Bitcoin-style split into new markets from so-called “blockchains” (use cases) that are merely repackaging ordinary protocols that empower existing players; second, if the blockchain technology industry insists on pretending to be building blockchain technology, then investors should also “pretend” to invest money.

As for the guys at SWIFT, be careful what you wish for. A true implementation of blockchain technology will bankrupt you!