Blockchain—The Next Big Thing No One Understands
Can you guess what these historical events have in common with blockchain technology?
* At the turn of the century, a breakthrough Internet communication technology called “peer-to-peer” (P2P) debuts and is deployed mainly to assist like-minded individuals in sharing music over the Internet. That is, music they have already purchased and owned, but are supposedly willing to lend out on a case-by-case basis. The leading exponent of the tech is a program called “Napster.”
The basis for the tech is that, instead of simply using the Internet for two-way communication—from user to site, user to user, or site to user—this new concept distributes the data over all the users of the program who have their computers switched on at any moment in time, whether or not they are actually using the program and whether or not they are even aware of what is happening.
* The music industry correctly interprets this new tech as disruptive and potentially destructive to its 100-year-old (and very lucrative) licensing model. The industry brings in every lawyer, paralegal, and bounty hunter it can wrangle to shut down Napster.
It is ultimately successful but, unfortunately, by then, most of the damage has been done. Competitors immediately spring up—companies like Kazaa and Limewire—to fill the void left by Napster. And an upstart entrepreneur named Steve Jobs pulls off one of the most brilliant marketing coups of all time. In a series of ads, Jobs vaguely alludes to the fact that all his “Mac” models are ready, out-of-the-box, to burn music CDs (CDs that contain music tracks in the space-saving MP3 format). Mac sales skyrocket.
* Jobs’ marketing coup essentially saves his company and, moreover, the success of the campaign inspires Jobs to create a portable device that plays only MP3 music. He calls this device the “iPod.” The rest, as they say, is history.
Even better, as Jobs’ street cred shot up (along with the stock price of his company, Apple) nobody seems to notice that the implicit message in the entire campaign is that you need to first use these quasi-legal file-sharing networks to retrieve the MP3 files before you can burn your CD! (In other words, history has conveniently overlooked that one of the greatest marketing sagas of all time was based on condoning and even encouraging piracy.)
* Wait, it gets better. One of the founders of Napster-clone Kazaa, Niklas Zennström, a brilliant Swedish programmer, correctly interprets the controversy surrounding the use of P2P (to share music) as ultimately threatening to his business model. So he does what all genius programmers do; he sits down and figures out yet another use for P2P that will be both legal and profitable.
His end product is something he names “Skype,” the first voice-over-Internet (VOIP) application, which ultimately will prove as disruptive to the phone carrier sector as Napster was to the music business. Only this time, the tech use is legal. Skype will change hands several times after Zennström cashes out, ultimately ending up with Microsoft and with an asset value greater than some third-world countries.
* Does this new tech hold up in the real world once it finally has a legal application to support, you ask? Answer: Definitely, yes. By the present day, not only is Skype still going strong, but also literally hundreds of competitors have sprung up in the VOIP space, offering highly competitive products that, even now, remain vexing to traditional phone companies. (One consumer device, for example, is called the “Ooma.” You can buy it at any major electronic retailer and the cost of the one-time purchase includes a free, basic landline—via VOIP—in the unit price. Additional services are an extra fee.)
Some experts have also suggested that Microsoft’s acquisition of Skype may actually have made the pioneering software less competitive because, typical of the software baron, the new owner immediately incorporated Skype into its operating system (OS) “suites”—which means constant automatic updates, whether you want them or not, and other heavy-handed OS-related features that really have absolutely nothing to do with phoning.
* Turns out that the uses of P2P tech were not limited merely to sharing music and beating the long distance carriers! By the second decade of our new century, a file-sharing (“pirate”) site appears on the Web, which, the owners claim, cannot be taken down by any court in the land. (Ever since the dawn of P2P, “copyright trolls” have profited handsomely as increasingly desperate copyright owners have become ever more willing to chase file-sharing sites through the courts and ultimately, by injunction, have them obliterated.)
This new site claims that the servers that control the site are themselves “distributed” through the Web (i.e., every user of the service is also a compulsory distributor) and therefore, like in a sci-fi movie, there is no single site, no single server, no single agent or provider, to which an injunction can be served or executed. (More info at www.sedr.cc.)
* Same approximate time-frame, the central planners who, from approximately 2011 to 2015, had been so successful in keeping gold prices down while treating the world economy like a science experiment, are dismayed to learn that a new technology called “blockchain” has been deployed to launch a new Web currency (sometimes called a cryptocurrency) named “bitcoin.”
The so-called blockchain technology, it turns out, is merely the latest iteration of the original P2P concept in that the systems controlled by the software are also distributed throughout the entire network. The point of blockchain is that it is, in theory, 100% safe to use, even though there is no middleman (i.e., no banking agent, such as a credit card company or Paypal). The inventor of the system insists that blockchain is not only immune to interference or takedowns, but it is also “smart” enough to prevent any cheating in the system.
* To the horror of the world’s bankers, bitcoin and its early adopters strike a chord with users and in spite of a number of attempts to “disappear” the currency and the people associated with it, bitcoin perseveres. A growing number of vendors on the Web (and also off the Web) agree to accept bitcoin transactions in place of “legal tender” (i.e., central bank paper and its variants). Competitors to bitcoin spring up.
* By 2015, a bizarre pattern is seen to emerge. While bitcoin, the first mass-market application of blockchain, is hated and reviled, blockchain itself is like Cinderella at the ball—everyone wants a dance.
Fearful that failure to adapt will doom them to the same fate as the music industry (which even now struggles on a daily basis to enforce its century-old licensing rules) tens of millions of dollars of venture money is thrown at self-proclaimed blockchain experts and startups by established banks and brokers.
One could argue that it is not so much that they are looking to make money with it—these are, after all, already the richest and most powerful institutions on the planet!—but rather that their focus seems to be to protect their existing monopolies.
(Nor is it clear that this approach will even work. Prior to the computer age, a manufacturer who felt threatened could buy-out an upstart competitor and then shelf the threatening technology.
For example, in the 1970s, a young Texan named Tom Ogle figured out a way to deliver gasoline to a car engine as a vapor and triple the expected mileage. The first investors in Ogle’s business were from the oil lobby. That technology was never seen or heard from again.
It is far from clear, however, that a technology like blockchain—which already exists on computers all over the world—could be restrained, even if you actually wanted to.)
So…How Does This Story End?
What is the final chapter in this tale? The truth is that the final chapter is not written yet, and that is what makes this story so interesting.
Most recently, another well-known entrepreneur named Reggie Middleton (best known perhaps for winning the stock-picking contest on CNBC not once, but twice!) decided to put his money where his mouth was and started a company with the specific goal of using blockchain to completely eliminate the middleman (the agent, the intermediary) in all financial transactions. In other words, he wanted to replace the financial sector as we know it.
Middleton, who is nothing if not outspoken, insists that the banks who are throwing bundles of cash at blockchain are doing the right thing for the wrong reasons; that is, they are more interested in protecting their monopolies than in developing solid applications that will provide utility to society at large.
According to Middleton, they are correct to be afraid. He points to the fact that over the last century, banks were still offering essentially the very same menu of services they were peddling back in the 1800s, but simply charging more for them.
If properly deployed, he suggests blockchain could be used to allow people to buy and sell goods without eBay; to move money in seconds without Paypal or a bank or a wire service; to buy or sell stock without a broker; to sell a house without an agent…in fact, according to Reggie, there is very little this software cannot do. And he says these transactions will be faster and safer than the old-fashioned way, virtually idiot-proof:
“[…] The Bitcoin and Blockchain technology now parallels what the internet was in 1993. Most people didn’t get it and if they did get it they strictly thought of the internet as email; fast forward and look where we are now with the internet. Bitcoins and digital currencies are a way of transferring value.
“[…] The banks are taking Bitcoin technology and trying to incorporate it into their business models. It will make many processes faster but at the same time, you do not need banks to make transactions anymore. Therefore no matter how much more efficient banks become, if they become obsolete than [sic] the increased efficiency is of no good. The banks are following the same route with banking as AOL did with the internet. Ultimately the end result will be no different as well.
“[…] We are launching an HTML client which allows you to hold assets in your device on a webpage. It is like having a bank account on a webpage that sits on your device and it cannot be stolen unless it is stolen from you directly. Additionally we will be launching applications of block chain technology to capital markets. We plan to have applications for credit, peer-to-peer swaps and for real estate transactions…there are legal issues but we can get past these issues by putting actual cash within the block chains. It will increase the ability to facilitate cash flows from various kinds of investments. It is a way of eliminating banks from the equation.” (Source: “Gordon Long Interviews Reggie Middleton,” Safehaven, February 26, 2016; emphasis added.)
So What D’yuh Think? Is Blockchain the New iPod?
As with all disruptive technologies in their infancy stages—and make no mistake, blockchain is still wearing diapers—there is a lot of disagreement among the “experts” as to what is really going on here.
Generally speaking, it seems Middleton’s criticism of the manner in which the banking cabal is harnessing the tech seems justified. Millions and millions of dollars later, it appears as though all the banks have done so far is set up a few simulated blockchain networks with several of their competitors, exchanged some data, attempted some transactions, and then, with a great deal of back-slapping, determined that no major errors were made along the way.
No offense, Mr. Banking Sector, but the tech to do that already exists, and you already have it.
Similarly, it also appears as though the self-congratulatory rumblings from the various government agencies that are also playing with blockchain may be similarly premature. The thrust and content of the current spate of discussion papers on this topic suggests that governments (so far) are welcoming blockchain mainly for its virtually perfect and error-free record-keeping abilities. From the point of view of a government agency, what better way to apply its various taxation and regulatory rules to a transaction than to start with a 100% perfect and error-free record of that same transaction?
However, here again, the government agencies (just like the banks in the example above) may be overlooking the obvious. In other words, there is a very good reason why blockchain was first adopted by a cryptocurrency seeking to avoid government oversight at all costs. Because, unless you are specifically invited into a specific blockchain loop, the data in the system is completely unavailable to you.
So, to toss out a metaphor, government enthusiasm for blockchain can be compared to a skeet shooter who is trying to adapt a machine-gun to his favorite sport. It might do the job, but it will be very hard to control and not especially accurate.
At the end of the day—and I emphasize, once again, that this is a brand-new technology that no one seems to fully understand—Middleton’s sweepingly broad forward vision might actually be closest to the mark.
For example, one enterprise that has already successfully adopted blockchain tech into its business plan is Nitrogen Sports, an online betting sportsbook started in Costa Rica in 2013. Once blockchain-enabled, the site has, according to peer reviews, become the #1 net sportsbook in the world. (Source: “Review Nitrogen Sports,” Bitedge Reviews, last accessed March 11, 2016.)
The site essentially does exactly what Middleton predicted a successful blockchain app would do—it pays out winners and takes money from losers, almost instantly, with no financial intermediary or red tape, yet with 100% accuracy and the full trust and confidence of its users.
Significantly—and this is a caveat for those high-spending banks and government agencies singing the praises of a tech they barely understand—no major bank or financial agent is involved with the Nitrogen Sports enterprise and no government agency has as yet been “invited” to scrutinize its ledger.
There is a lesson there, I think…?
More recently, a group of entrepreneurs have attempted to use blockchain tech to bypass many allegedly “corrupt” banks and politicians in West Africa and create a system that simply delivers dollars where they are needed. This particular experiment is recent and ongoing. (Source: “African Blockchain Initiative,” News One, last accessed April 13, 2016.)
This recent comment from Charles Hugh Smith seems to hit the nail on the head:
“Nobody can predict precisely how blockchain technologies will disrupt centralized banking and currencies, but we can predict the blockchain will disrupt the current cartel-state arrangement that benefits the few at the expense of the many. The cartels and state organs are frantically trying to co-op, outlaw, corral or control this disruptive technology.
“Here’s an analogy: North Korea has managed to co-op, outlaw, corral or control the Internet, and how prosperous and productive is North Korea? We cannot let the banks and central banks/states co-op, outlaw, corral or control blockchain technologies. If they ‘win,’ our economy will stagnate and the slide to complete implosion will be unstoppable.” (Source: “The Future of Money,” Zerohedge, April 4, 2016.)
In short, history may well record that blockchain was the major tech breakthrough of the early part of the 21st Century.
But, from today’s perspective, it still has an awful lot of growing up to do.