My thoughts on the state of the blockchain space
I was asked to answer several questions for a media feature, but the article was unfortunately shelved, and I didn’t want my responses to go to waste 🙂
I realized while answering these questions, that this was the first time I publicly talked about blockchain really “high-level” — even though it’s something I think about a lot — so I thought it would be a good opportunity to share these “bird’s-eye view” thoughts on my blog (where I tend towards talking more low-level about technical blockchain-related things).
So, here are my warm & hot takes on blockchain, as they stand presently.
In general, there are many institutional processes in our world that rely on numerous trusted intermediaries & middlemen. It’s truly unfathomable what kinds of cost savings would result by removing all of this friction by relegating these outdated processes to a trustless peer-to-peer network.
The financial applications of blockchain are well-exemplified by existing networks like Bitcoin and application ecosystems like DeFi (Decentralized Finance) on the Ethereum network. These use cases are still in their relatively early stages, but show tremendous progress and further potential.
Now, beyond financial applications, the most interesting use cases with the most immediate potential, in my opinion, are: insurance, prediction markets, organizational management & coordination, and dispute resolution. Some existing projects addressing these use cases do exist, however they are still very much in their infancy, even compared to DeFi.
I’ll give a concrete list:
- Transparency. All financial transactions are visible on the blockchain. For example: if stocks were issued on the blockchain, you wouldn’t need to guess how much short interest a given stock has (sound familiar?); it would be directly visible to anyone with access to blockchain data (which anyone can do by simply running a node on their computer).
- Openly auditable financial instruments. If you were to buy a token representing some financial instrument, you could read the contract code directly (assuming you’re familiar with software code; I personally believe the financial incentive produced by blockchain technologies would help incentive people to learn to code, which is a good thing). You know precisely what you are investing in; it’s not a black box.
- No privileged investors. Institutional investors might disagree with this point, but I strongly believe the privilege asymmetry between retail investors and institutional investors is damaging to the financial system and almost always leaves retail investors with the “short end of the stick”. With blockchain applications, there are no “privileged” users (there are some caveats to this, but it would take some time to explain). Unlike in the traditional financial system, where there are many financial instruments unavailable to the retail investor.
- Non-custodial accounts/wallets. With blockchain technology, you always have the freedom to be in sole custody of your funds (via your private key). This means no random frozen bank accounts or barring users from trading at inconvenient times, for example.
- No/limited fractional reserve lending. This would deserve its own multi-paragraph explanation. To keep it short: currently, there are no implementations of fractional reserve lending on the blockchain (for a variety of technical reasons). And even if there were, the fractional reserve rate would be directly visible on the blockchain (which goes back to my original point re: transparency).
First, I’d like to say that I view current adoption very optimistically; that is, I think we’ve had a lot of adoption thus far! Bitcoin has only been around for a little over 10 years, and has left a distinct and revolutionary mark on our world, and continues to do so.
With that said, the two biggest challenges, in my opinion, are:
- Pushback from various traditional institutions in the form of increasing regulations.
- The very steep learning curve required for new users. Safely participating and investing in blockchain technology requires, at minimum: a cursory understanding of programming, computer networks, and cryptography; as well as some understanding of finance and financial instruments.
How can the industry get through these challenges? Honestly, I can’t say too much about the first; law and governance aren’t my areas of expertise, although I do directly work with many very talented people in these fields whom I consult with regularly.
With regards to education: luckily there is a lot of financial incentive that pushes people to learn about the aforementioned topics which they otherwise might not be interested in. Financial gains are a very powerful incentive, whether for good or for bad …
People working in crypto tend to exist inside their crypto bubble — I’m guilty of this too — so I try and interact with professional circles outside of crypto to spread the word.
In order to successfully implement the solutions to the important use cases I mentioned in the beginning, a blockchain needs secure access to untampered data from the “outside world.”
The data that natively exists on the blockchain is ownership data; i.e. who owns what token on the blockchain? This is why you see cryptocurrency as the first and still major application of the blockchain. Expanding the kinds of blockchain applications possible (beyond cryptocurrency) necessitates having additional types of data on-chain (e.g. off-chain price data for more complex financial instruments, flight data for flight insurance, event data for prediction markets & insurance, etc.)
The fact that the blockchain is essentially “walled-off” from outside data has been widely referred to as the Oracle Problem. There are a few projects in this space, in addition to ours, that attempt to solve this problem. We at API3 believe these solutions are inadequate for various reasons, but perhaps most importantly because they underspecify the problem. I wrote an article about it here: https://medium.com/api3/the-api-connectivity-problem-bd7fa0420636
In short, we focus on a subset of the Oracle Problem: the API Connectivity Problem; that is, we focus on getting data and services from Web API providers safely & securely onto the blockchain.
I think I partially answered this question when responding to Question #1. In essence, many of our traditional institutional processes in various industries (e.g. finance, government, law) rely on numerous trusted intermediaries/middlemen. This makes these systems slow, inefficient, expensive, and ripe for corruption. They are very much in need of a provably better technological overhaul. (When I say provably, I mean, for example, in the form of mathematically quantifiable security and trustlessness).
All tarot card images from the Thoth deck.