Growing Pains for Blockchain

You may not have been able to buy a taco at South by Southwest using Bitcoin, but it wasn’t for lack of trying.

The tech community remains as fascinated as ever by the idea of creating a new financial system and currency from scratch, built around blockchain technology, as seen in the multitude of events devoted to blockchain at the SXSW festival. But after the “crypto winter” of 2018, when a market bubble in cyber coins deflated, the industry agrees it’s time to move blockchain from a techbro sideline to a proper business use case.

Many of the insiders at SXSW said the crypto winter has cut both ways: It ate up a lot of capital, but also took the focus off Bitcoin and its rivals and put it into other adaptations where blockchain can help data protection and information technology. They are thinking of new use cases, and about how to scale up the blockchains so they can expand beyond cryptocurrency and payments and into everything from supply chains to fact-checking news online.

The cryptocurrency market ran up prices during 2017 and peaked at a total capital of $542.83 billion in January of 2018, according to coinmarketcap.com. But the bubble burst in early 2018, and as the year progressed and cryptocurrencies failed or lost value, the market bottomed near $45.14 billion in December 2018. It has been rebounding modestly in recent months; by April 30 the total market was worth $78.43 billion.

The cryptocoin market went slightly off the rails in 2017 and 2018, as speculators piled on to initial coin offerings, or ICOs; many did not understand blockchain or the crypto currencies. Celebrities started promoting cryptocurrencies “who didn’t know how to read,” said Jason Schenker, chairman of The Futurist Institute.

“I knew we were kind of at ‘peak Bitcoin’ when I drove near where I live… and on the side of the road I saw a sign that said ‘Bitcoin ATM’ and when my 90-year old great aunt asked me if I should be getting in on Bitcoin,” said Schenker, author of The Promise of Blockchain: Hope and Hype for a Disruptive Emerging Technology (Prestige Professional Publishing, 2018).  

“Twenty-seventeen was pretty extreme, out of control, even,” said Joseph Lubin, founder of the Ethereum blockchain and CEO of ConsenSys, a blockchain company. Last year was crowded with many blockchain projects, some that were weak and bad, “even fraudulent projects,” he said. But once cryptocurrency markets corrected, “disappointment stopped the bad projects and the fraudulent projects from happening,” he added.

A cruise, or a kamikaze

Having survived the “crypto winter,” blockchain is seeing more talented people coming into the market and more mature projects, said David Schwartz chief technology officer of Ripple, a blockchain payments system. Thousands of blockchain projects are in the works at the moment, said Schwartz; he acknowledged some may be “garbage,” but added the good use cases will surface.

“If I could get one message through: Don’t think that because (cryptocurrency) prices are low there aren’t still fascinating new projects, new technology,” said Schwartz. “It’s a super exciting space and that hasn’t changed.”

Bitcoin was the minimum viable product of blockchain, said Schenker. One of its biggest values is in sharing information, as well as reducing transaction friction, he said.

“Think of blockchain as a computations engine. You can put a combustion engine in a cruise ship or a kamikaze submarine,” said Schenker. “Blockchain is the tech that makes it all go.”

In its simplest form, blockchain is a ledger where blocks of data are connected in a chain and changes can only be made by consensus of the users. Rather than be held in a central location, the chain is decentralized and blocks are scattered, making it nearly impossible to change values in the chain, since all blocks have to be adjusted. This makes the blockchain information safer, since there is no single point of attack for a hacker to breach.

“It enables automation of trust and guaranteed execution of agreements. What industries need trust and agreements?” asked Lubin, rethorically. Thanks to blockchain, companies can collaborate with other companies without exposing their proprietary information, which can be a strong suit in an increasingly competitive business environment.

In an environment where technology is moving so fast, organizations need to avoid hierarchies and silos to be nimble, so information should be decentralized as well, said Lubin. His company funds a number of projects including Civil, a WordPress-based publishing platform that uses blockchain to support ethical journalism, and a solution for teamwork called Sobol that allows groups of employees or team members to self-organize.

“We can build platforms that facilitate collaboration,” said Lubin. Blockchain “will allow us to build competitively, so collaboration becomes more important than competition.”

Handholding and regulation

Some potential use cases of interest to media and marketers include digital tokens to access verified information, which is already being explored to replace content paywalls. Blockchain can also be used to send micropayments to users who verify correct information online and to reach consensus and verify information. Civil uses currency tokens to help journalists fund their newsrooms; it has attracted partners including the Associated Press.

Blockchain still faces a number of hurdles on the way to becoming mainstream, however. For one thing, a knowledge gap persists.

“This is the right time to get involved,” said John Hargrave, CEO of MediaShower. Blockchain is more exciting, more intellectually fascinating and is attracting more money for development than even the Internet during the early dot-com days, he said. The technology is evolving faster than the early Internet, “but we’re still early days,” said Hargrave, author of Blockchain for Everyone (Simon & Schuster, 2019).

“There are many people who will need handholding,” said Lubin. “It’s incumbent on us to build systems that are easy to use” to help public adoption.

ConsenSys built an open source game program called SeedQuest lets players encode a cryptographic key as they interact with a video game, so they can create a secure token, but don’t need to remember long strings of numbers. ‘We’re trying to build tools for normal people to have more control,” Lubin said. 

Regulation is another possible obstacle, both rules that could hold back development and a lack of rules to set guardrails, say experts. The rules are not clear, because even experts don’t completely understand how blockchain will work on use cases, say experts.

The lack of bright-line laws regulating cryptocurrency and blockchain leaves some flexibility to deal with the emerging technology, said Valerie Szczepanik, senior advisor for digital assets and innovation at the Securities and Exchange Commission.The SEC it’s trying to strike a balance between protecting the market from bad actors and curtailing innovation, she said. 

The anonymity that blockchain and cryptocurrencies allow has raised worries about money laundering and funding crime and terrorism, so many countries are considering regulation, said Szczepanik. She noted she has been seeing requests for comments regarding investor protections, disclosure, secondary trading and other topics related to cryptocurrencies.

But Szczepanik added she has also seen recently studies about the distributed ledger technology based on analytics and real science. “As a regulator I’m encouraged,” she said. 

“There’s definitely a lot of recognition around the globe about the risks and about the benefits,” she said. “There’s a lot of excitement around the globe about how DLT can be used to create efficiencies around data analytics and the like.”