Blockchain is the first great business buzzword of the 2010s. It’s a technological revolution that will transform all industry sectors. It will produce jobs and riches, and your company probably needs one. But is all that actually true, or just hype? Do the people who say this even know what they’re talking about? Read on for an in-depth look at what blockchain technology actually is, and what it’s good for.
First: What Is a Blockchain, Actually?
Before discussing what a blockchain is good for, we must first understand what a blockchain is, and how it is different from any other regular database.
A true blockchain is a database structure that possesses the features of immutability, censorship resistance, and trustless verification. To date, the only way to implement trustless verification has been through proof-of-work (POW) mining.
Immutability and censorship resistance have primarily only been achieved through the use of a highly decentralized network architecture. However, the inconvenient truth behind the blockchain curtain is that POW and decentralization share a common theme. They are very slow, and very expensive. The effectiveness of a blockchain is on a spectrum.
The more secure and decentralized it is, the slower and more expensive to operate it becomes. A traditional centralized database will always be cheaper and faster than a true blockchain.
Blockchains Are Useful if You’re Underserved
Broadly speaking, a strong, secure, and effective blockchain is necessarily a slow and expensive blockchain. So if true blockchains are so bad, why do people use them? The answer is because they need to, and they have no other choice. They are markets which are underserved by the existing legacy systems. Blockchains serve “the underserved” — but what does that mean?
Markets may be underserved for a variety of reasons. More often than not, it has to do with regulatory influence.
Interestingly, the same industry may be either well-served or underserved, depending on the regulatory jurisdiction that it falls under in any given region. For example, in the United States, the methamphetamine trade is heavily censored and is subject to significant regulatory hinderance.
Conversely, under North Korean jurisdiction, the methamphetamine trade enjoys numerous state protections, subsidies, and full access to banking services. A merchant selling methamphetamine in North Korea has little to no regulatory obstruction to his business, and would have no need for a blockchain solution — as opposed to a methamphetamine dealer in another country who would, especially if he is running an e-commerce based business model.
The First Companies to Use Blockchain Tech Were Darknet Markets
Given the heavy level of enforcement and censorship that the illicit drugs industry is subject to, it should be no surprise that this was the first industry to take advantage of the censorship resistance features that true blockchain technology offers.
The rise of darknet markets (DNMs), with Silk Road Marketplace being the first one, is a direct implementation of these features. It would be impossible to have a DNM without a true blockchain (e.g. Bitcoin) to provide censorship resistant payment methods, as was demonstrated with the failure and eventual prosecution of e-Gold.
Is Bitcoin Only Used for Drugs?
With the overwhelming success of the DNMs, it is easy to make the assumption that “Bitcoin is only for drugs”, but that is certainly not the case. There are many more underserved markets besides the drug trade.
One such market is that of political dissidents. By their very nature, dissidents are underserved by their governments, and often times by the financial infrastructure that is beholden to that government.
Perhaps the most famous of these dissidents is Julian Assange, publisher of WikiLeaks. At the behest of the United States Government, incumbent payment processors like Visa and MasterCard prohibited WikiLeaks supporters from sending contributions through their networks. Faced with this imposed economic isolation, WikiLeaks was forced to use blockchain technology (again in the form of Bitcoin) to conduct business and receive funds from supporters.
However WikiLeaks is not the only publisher that has experienced lack of service from Visa and MasterCard. Backpage is a publisher of classified ads with a strict anti-censorship policy, including listings with strong adult content. This lack of censorship was enough to attract the ire of the financial payments industry, and they too found themselves in need of a censorship resistant blockchain solution.
Again, Bitcoin was chosen as the preferred blockchain for censorship resistant value transfer.
Bitcoin: A Tyrant’s Worst Nightmare
Organizations and media groups are not the only ones who can benefit from blockchain technology. Individuals who find themselves underserved by their governments are increasingly using this new innovation to secure their value as well.
One of the more prominent examples of this is Venezuela. When fiat currencies fail, as is the case there, entire populations can suddenly find themselves underserved by the economic institutions they have historically relied upon.
With the collapse of their economy, Venezuelans are increasingly turning to Bitcoin and other blockchain platforms to satisfy even the most basic needs like food and security. Extensive networks have formed to help facilitate the exchange of this new blockchain-secured value.
As these networks become more and more adept at routing value, the incumbent systems begin to face even greater challenges to their authority.
A regulatory regime is only as effective as the the resources it can maintain under its control. One of the greatest new threats to this power is capital flight (i.e. moving money out of the country) through the use of blockchain technology.
Because of the censorship resistant nature of this technology, it is particularly attractive to those who find themselves under the jurisdiction of repressive regimes and corrupt bureaucrats. The blockchain, Bitcoin and increasingly many others, allows citizens to secure or transfer their value independent from the jurisdiction of their local governments.
Be Careful, Blockchain Is Dark and Full of Scammers
The power of the blockchain is a two-edged sword, however.
This inherent lack of regulatory oversight and the availability of highly fluid value transfer also allows for the creation of completely new financial instruments that can be used for fraud and other harmful activities.
One such instrument is the ICO, or Initial Coin Offering. By definition, an ICO is simply an IPO, but without the regulations.
People who want to sell unlicensed securities to unqualified investors are underserved by the incumbent regulatory system and are using blockchain technology as an alternative. Currently, Ethereum is the leading blockchain platform for this particular market.
Do Terrorists Use Blockchain?
With the widespread use of blockchain among drug dealers and financial fraudsters, it is easy to assume that terrorist organizations are similarly underserved and may also be using the same technology. However, that does not seem to be the case.
The unfortunate truth is that international terrorist organizations are very well served by the incumbent systems and have little to no use for Bitcoin or any other blockchain.
Terrorist organizations generally resort to using traditional banking services or paper cash to move money, as well as physical commodities like gold, diamonds, or petroleum. Some even use services like gift cards, PayPal, and even eBay to move money across borders.
Some terrorist groups, like the North Korean methamphetamine industry, are actually state sponsored — thus reducing their need for a blockchain solution even more.
Emerging Underserved Markets
Perhaps one of the most interesting examples of where the Blockchain can help is the emerging legal cannabis industry. While cannabis is legal in some form in more than half of the states within the US, it is still prohibited under federal law. This means that the industry is completely blocked off from any banking services, as well as payment networks like Visa or MasterCard.
This lack of service has numerous consequences for the industry. First and foremost, it forces everyone to conduct business using paper cash. The security and logistical challenges inherent in all cash businesses are made even more burdensome, due to the massive amounts of money that these legal cannabis companies are making.
While the blockchain may potentially offer many advantages to legal cannabis businesses, this fledgling industry still has not embraced the new technology. The main reason for this is most likely a lack of widespread adoption of Bitcoin among consumers.
Legal cannabis companies may potentially also use bitcoin as a store of value, as opposed to the warehouses full of hundred dollar bills that is currently the “industry standard”. However, people are hesitant to take on the massive volatility risk associated with the large price swings of cryptocurrencies.
Although, for an industry that must conduct business under the constant threat of asset forfeiture or criminal theft, holding fiat may be volatile as well.
Blockchain Is Not a Magic Bullet
As exciting and innovative as blockchain technology is, it’s important to keep in mind that it is not a magic bullet for whatever ails you. Especially with the current fashion of putting a “blockchain” sticker on any old thing for instant funding.
So, if your business can function just fine without a blockchain solution, you are most likely better off going without it. Unless, of course, you find your business underserved financially and you are willing to accept funding from investors who really should know better.
Are there other underserved markets not discussed above? Do you think blockchain technology may be good for other things as well? Share your thoughts in the comments below.
Images via Jon Southurst, Pixabay, UNODC, Wikileaks, Reuters