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. This explains why Bitcoin Core, the Bitcoin software client, processes only 5-7 transactions per second, compared to Visa, which reliably processes 25,000 transactions per second.
Just as we cannot record all of the world’s transactions in a single centralized database, nor shall we do so in a single distributed database. Indeed, the problem of “blockchain scaling” is still more or less unsolved, and is likely to remain so for a long time.
Although we can be fairly sure that blockchain will not unseat TCP-IP, a particular blockchain component – such as Tezos or Ethereum’s smart-contract languages – could eventually set a standard for specific applications, just as Enterprise Linux and Windows did for PC operating systems. But betting on a particular “coin,” as many investors currently are, is not the same thing as betting on adoption of a larger “protocol.” Given what we know about how open-source software is used, there is little reason to think that the value to enterprises of specific blockchain applications will capitalize directly into only one or a few coins.
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 collateralized at 100%, which is insane from a cost-of-capital perspective.
Moreover, it turns out that many likely appropriate applications of blockchain in finance – such as in securitization or supply-chain monitoring – will require intermediaries after all, because there will inevitably be circumstances where unforeseen contingencies arise, demanding the exercise of discretion. The most important thing blockchain will do in such a situation is ensure that all parties to a transaction are in agreement with one another about its status and their obligations.
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. Ethereum’s plans for an insecure proof-of-stake authentication system will render it vulnerable to manipulation by influential insiders. And Ripple’s technology for cross-border interbank financial transfers will soon be left in the dust by SWIFT, a non-blockchain consortium that all of the world’s major financial institutions already use. Similarly, centralized e-payment systems with almost no transaction costs – Faster Payments, AliPay, WeChat Pay, Venmo, Paypal, Square – are already being used by billions of people around the world.
Today’s “coin mania” is not unlike the railway mania at the dawn of the industrial revolution in the mid-nineteenth century. On its own, blockchain is hardly revolutionary. In conjunction with the secure, remote automation of financial and machine processes, however, it can have potentially far-reaching implications.
Ultimately, blockchain’s uses will be limited to specific, well-defined, and complex applications that require transparency and tamper-resistance more than they require speed – for example, communication with self-driving cars or drones. As for most of the coins, they are little different from railway stocks in the 1840s, which went bust when that bubble – like most bubbles – burst.
NOURIEL ROUBINI
Writing for PS since 2007