The challenges with blockchain

Crypto and particularly smart contracts as well as the oracles that support them are not going away. We are about to see a rearchitecting of backend systems across all major industries. We all know this. But why does not everyone see the same?

First of all, because no one can predict the future. Even if something appears obvious to me or to you, there may be many other factors that start to play into it at a later point in time.

But something became clear to me over the last few years I’ve worked in crypto. People who don’t see the transformation unfolding usually don’t know a lot about blockchain technology. I have yet to meet people who fully understand it and still don’t believe it will happen.

We are about to enter a decade of tremendous change. But what is it that makes it so difficult to explain blockchain?

Explaining blockchain to people requires a certain understanding of the history of money, the current state of technology, politics and even some imagination.

But the single biggest problem is that there are almost none practical use cases. It’s not hard to explain the internet to people today. Pull out your smartphone and order some food. Book an Uber or an Airbnb. Open Facebook and contact someone on the other side of the world. You can even watch a live stream at the top of a mountain — with only a click of a button.

But there aren’t yet any kind of end user applications that everybody is using on the blockchain. So we have to explain it theoretically. It’s almost like the internet in 1991. Back then, the internet technically worked but there simply wasn’t a popular web browser like Chrome or Internet explorer. There wasn’t a popular email service provider like Outlook or Gmail.

It was very hard for people to imagine the effect it would have on their lives. Not even people working in the tech industry could see the full impact it would have. But some people realized that something was about to change.

Today, I believe, we are again at the very same point in time.

When we try to explain Blockchain to people we have to start with Bitcoin, because it started the whole movement of a decentralised web. It was the first use-case on the blockchain, but unfortunately for us the game-changer lies rather under the hood. Most people simply don’t care if a central bank sends the payment from my wallet to the other person’s wallet — or if thousands of computers do it simultaneously.

Unfortunately, the word “Bitcoin” turns off so many people because most of them just see it as money. Speculative, non existing, evil money with nothing “real” backing it.

There is this awkward gap that exists between the people who get it and the people who don’t.

It almost seems like we don’t have a common language anymore. That’s why I try to break it down in easier words.

Technically, there are two major things humans exchange with each other:

- Information

- Value

The main difference between information and value lies in its functionality.

One can be copied, the other can’t.

- John sends a photo, a text, a video or an audio to Peter. Now John and Peter have it. And both can send it to even more people. The information gets copied. All participants have the exact same.

- If John sends value, for example money, it better shouldn’t be a copy. Money can be either here or there. It can’t be in two places at the same time.

However, value can be a lot more than just a digital money. It can also be stocks, options, real estate — and contracts. Basically everything that should only be at one place at a time — even if its value is very, very small.

The Internet is the global standard for the exchange of information. Before that we had private networks. Those were already useful. You could email your colleagues, you could share files within your private network or your company’s “intranet”.

But today, with the help of TCP/UDP, IP, HTTP and other protocols we’ve connected those networks together. That’s the internet we know today. That’s what makes it so interesting and so useful, because the entire world is on the same page.

Until recently, we didn’t have a standard for the exchange of value. That’s why it is so difficult to send money or other value outside of countries. And It’s also hard to exchange different kinds of value with each other. Or buy or sell only a small percentage of a house — or trade a fraction of a famous Picasso painting.

This is because the databases are not connected to each other. People have to manually check if you really own the house on one database, and manually check on another database if you really have transferred the money to the correct destination address.

If money or value is sent from one person to another — we always need one or multiple middleman services because we can’t just trust each other. Banks have helped us for a long time, but the entire system operates like private networks. In the last decade more and more private tech companies tried to improve the system through the use of the internet but eventually still just created their very own networks and databases for transferring value.

Lawyers and notaries also perform middleman services during sales processes. What we actually could need is some kind of global database — a ledger — that will keep track of all those activities so that everyone is on the same page. Just like the internet.

And that is what we have today with blockchains.

The world’s first decentralized database that nobody controls alone and everyone can access.

Instead of one computer verifying a transaction and checking if there is enough value in your account to execute the transaction, thousands of computers do it at the same time. Not one person or one company controls the database but thousands of computers do so all over the world.

This makes it impossible for bad actors to cheat — or at least on the blockchain itself. Code is law. Everybody can use it, everybody can connect to it. No matter if you send a billion dollar or a single cent. No matter if you are rich or poor. No matter in which country you are or what kind of value you send.

The blockchain is just like the internet, but this time it’s not for information but for value.

Bitcoin — some years ago — was seen as some kind of decentralised internet money. Everybody could send money from point A to point B without a bank in the middle of the transaction. Fascinating. But this was just the beginning. Today, it is more seen as digital gold and therefore as a store of value.

A few years after Bitcoin, Ethereum invented so called “Smart Contracts”. It allows users to send all kinds of value from point A to B. Think about all the financial products that exist today, shares, options, loyalty points, user generated currencies or complex contracts in venture financing. Think about your house in your country’s land registry database. It should only exist once. That’s value that you own. And that became-technically-transferable.

Think about the hundreds of different databases your government uses right now. And all the databases of private companies. They are all controlled by central parties. In developed countries you can more or less trust them. If you buy a new house they will write that down in their own database. Yes, it might take weeks and will cost a lot of money but eventually it will be written down.

But in many parts of the world this is a huge problem. The bank might refuses to send out the money to the destination you want it to go. Or the bank doesn’t send it as fast as you want it to be — even though it is your money.

What if some people inside a corrupt government don’t want you to own the house anymore? They will just delete the entry of that database, or change it. It will be hard to proof it.

The truth is not in your hand, but in the hand of a central player.

This is the problem. They are controlled by someone else and they are not connected to each other. For end-users the consequence is that the process on them is usually slow and expensive.

Removing the middleman from the database has very, very deep implications for our society. It means that suddenly the world connects. You can transfer value within seconds with no central party stopping it. Suddenly, you can trade stocks for real estate — or options for art — with everyone in the world.

But it also means that in a first move responsibility goes from central parties to end-users. And this is where many end-user applications will be needed to bridge it somehow. But behind those applications will be a growing global decentralised database — a blockchain — that makes the transfer of value (whatever this may be) fast, cheap, instant and secure.

Removing the middleman means that, technically, we don’t need Uber anymore, because what the company does is connecting two users to each other on a central database. Google and Facebook, who both earn a lot of money through collecting data from users and sell it to advertisers, could technically be replaced through different blockchain applications. All of those online services are just a middleman service.

The bank that sends money from one account to the other account is also not needed anymore. This doesn’t mean that just everything disappears but that new things will be created. Banks will do consulting or find other fields to generate revenue. There still needs to be customer support for online services. And you can not let all people handle financial services on their own. But behind the scenes many things will get a lot easier, faster and cheaper — and decentralised.

If this is going to unfold like I imagine it today, then we are going to see huge companies either die or transform into something entirely new. Entire industries will be transformed because most middleman services for online businesses will be facilitated through the blockchain. The single biggest losers in this decade of transformation could — ironically — be the tech companies themselves, unless they once again adopt to the new world.

We are about to see a rearchitecting of backend systems across all major industries. We all know this. But why does not everyone see the same?

Serial Entrepreneur | Founder EventScouts