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Eight misconceptions about blockchain

I have dared to try to answer the small and very big questions that most often cause misunderstandings about blockchain. So here are some of the typical questions and misunderstandings we encounter:

This is a guest post by Franz von Weizsäcker (Twitter | Linkedin).

Misunderstanding 1: "Blockchain is Bitcoin"

No, of course that's not true, because a blockchain is like an account book, and bitcoins are like the euros on it. However, you can do a lot more in the 'Blockchain' accounting system than transferring money from A to B. A transaction using a blockchain can, in addition to money, also contain the Korean peace treaty, virtual kittens or perhaps more useful things like climate risk insurance, which could also help German farmers through this dry summer.

Instead of blockchains, we actually prefer to speak of Distributed Ledger Technologies (DLT) among nerds, because this expresses what makes the system so special: While a conventional database solution works centrally and can actually manage transactions very well, a DLT is distributed , that means there is no central administrator who has the power, for example, to forge the books. Instead, there is a consensus protocol with financial incentives that ensure that the whole thing holds together despite the distributed architecture. In addition to blockchains, there are also a number of other technologies such as hash graphs or DAGs that promise to do the same. Some are a little less decentralized and therefore a little more scalable. It is not uncommon to find completely centralized solutions that are actually de facto database applications and are more likely to be referred to as blockchain for marketing reasons.

Misunderstanding 2: "Blockchain is an ideology"

An opinion article by Michael Seemann in the taz describes blockchain technology as an ideology. And Michael Seeman is also a little right there. This impression can arise at the numerous blockchain conferences, because there you will find evangelists, liberalists, show masters and visionaries who have achieved veritable guru status in the community. But unlike in a sect, the spectrum of opinions is very diverse. If you want to recognize a common ground in the ideology, then this point from the hacker ethics comes to my mind: “Mistrusting authorities, promote decentralization”.

The dream of the inventors of the Internet that a truly decentralized network would emerge has largely failed, partly because advertising-financed business models, data collections and network effects have spawned large companies with billions. The crypto community would now like to revive this dream: With decentralized payment systems and decentralized online services, so-called dApps, the Web 3.0 is to be built, in which the user with self-confident cryptography solutions is to remain the master of his own data instead of data octopus. This ideology - if you want to call it that - naturally also needs suitable technology. And that's where it gets a bit more tangible, because many millions of the crypto wealth are invested in software development to make blockchains scalable, to reduce their energy consumption, to develop applications, to integrate identity solutions and also - this is long overdue - to increase the user experience improve.

Misunderstanding 3: "Data in a blockchain is always correct"

With Bitcoin, the principle of data integrity works quite well, because transactions can be validated using digital signatures before they are written to the blockchain. However, this gives rise to the widespread misconception that blockchains have a magic magic trick to guarantee the correctness of any data set. Unfortunately, as elsewhere, the GIGO principle applies to blockchains: garbage in, garbage out. And the more complex a blockchain application is and the less clear the data situation or quality, the more difficult it becomes to write 100% correct things in the transaction list. Machine learning can help to a certain extent. Even with imprecise initial data, the algorithm can make clear decisions and, for example, evaluate aerial photos of the rainforest to determine whether or not deforestation has taken place.

Misunderstanding 4: "Blockchains cannot be regulated"

You can't stop a blockchain if you don't turn off the entire internet, but regulators are not entirely powerless. China was the first country to prohibit crypto exchanges from exchanging yuan for Bitcoin in order to implement its currency policy, as this was previously used as a backdoor to indirectly exchange yuan for dollars. Even when it comes to money laundering and illegal business, authorities are not powerless. An estimated 90% of all Bitcoin wallet owners can be identified through links / correlations with other databases. There are some cases of fraud relating to the marketing and distribution of new crypto tokens, so-called Initial Coin Offerings, which are being prosecuted. Pyramid schemes, empty promises and the sale of nonexistent cryptocurrencies are part of it. Overall, however, Europe tends to follow an innovation-friendly line. The new crypto capitals Berlin, Amsterdam, Paris, Valetta and Zug are looking forward to an international influx of capital and talent. Perhaps other countries will follow the example from Singapore in the future: Regulatory "sandboxes" will be created here as exceptional regulations in order to be able to try out new decentralized solutions, even if they are actually not allowed under the current law.

Misunderstanding 5: "Blockchains need a lot of electricity"

Bitcoins currently use as much electricity as the whole of Austria, which corresponds to around 0.3% of global electricity consumption. Because blockchains are incentive machines. And the Bitcoin blockchain contains a strong incentive to use electricity. Because whoever solves a complicated formula the fastest with his computing power, wins Bitcoin. Solutions for significantly lower power consumption such as proof of stake, sharding, etc. already exist, and they are also used by various other blockchains. However, the power guzzler Bitcoin was there first and has therefore established itself as a kind of "reserve crypto currency". The question of the price is now: What has to happen so that the waste of electricity from Bitcoins is replaced by more energy-saving architectures? Governments around the world could help by stopping subsidized electricity for Bitcoin and also by giving energy-saving cryptocurrencies advantages by implementing government solutions on them and accepting them as a means of payment for taxes and fees.

Misunderstanding 6: "My company / authority also needs a blockchain"

The added value of blockchain technologies compared to conventional databases lies in their decentralization. So power is being shifted from a central point to several decentralized points. This only makes sense if there is actually a good reason why you do not want to trust central offices unreservedly.

About a quarter of the internet economy consists of transaction platforms. These and other marketplaces tend to monopoly and high transaction fees. Otherwise, they do not always act in the interests of market participants. Decentralized blockchin marketplaces act more in the interests of market participants, because there they can trade without intermediaries. Most business applications that take advantage of decentralization are still in the testing stage.

The public sector follows a different logic. You can ask yourself the initial question: Is there a reason why a government or administration should give up control of a database solution? In democracies, the power of governments is limited by constitution, institutions and the separation of powers. Blockchain applications are therefore interesting in terms of transparency and participation, for example in financial management and between authorities and administrative levels that pursue different goals. But different interests between states can also be addressed. A blockchain solution can be used to implement intergovernmental agreements, for example in trade or climate policy, because there is naturally no sovereign central body between states that enjoys unrestricted trust.

Misunderstanding 7: "Blockchains solve all problems in the world"

A lot is conceivable on blockchain, but there are also limits. In Sapiens - A Brief History of Mankind, Yuval Harari describes how humans were the only primate able to live in communities of more than 150 individuals - that is the Dunbar number. Homo Sapiens did this by creating myths, religions, and later institutions, states, companies and also stock corporations, with which rules of social and economic coexistence were enforced. Blockchains create a new decentralized infrastructure for trustworthy transactions between many thousands or millions of individuals. Trust in centralized institutions or companies is replaced by trust in the blockchain, which is based on game theory and the incentive systems of crypto tokens.

There are almost no limits to the imagination as to which new forms of collaboration between humans or machines can be developed with the help of incentives and game theory. This is how numerous new approaches to solutions are emerging among the thought leaders of token engineering. The limits: People do not always behave rationally, and so economic incentives can be unsuitable - these limits are explored in Behavioral Cryptoeconomics. In addition: in crypto-economics everything is voluntary, it has no compulsion. And maybe not all problems in the world can be solved without coercion. More on this in the next point:

Misunderstanding 8: "Blockchains make states superfluous"

The founder of Bitnation, Susanne Tempelhof, believes in being able to solve all aspects of coexistence with the help of blockchain and smart contracts in a decentralized manner, without institutions and on the basis of voluntariness, and thus make government action irrelevant by 2050. Such libertarian thoughts undoubtedly have their charm, but can social coexistence function completely without centralization, institutionalization and coercion? It is possible that many state functions can be decentralized, but when I think of some of the core functions of a state, for example the monopoly on the use of force, then this institutionalized, centralized coercion achieves an important added value, because in those parts of the world where the monopoly of force does not work, rival warlords or Mafia groups this mach vacuum. Other functions of the common good cannot be solved crypto-economically either. For example social redistribution: There are actually no good examples of purely voluntary, i.e. philanthropically financed, social services worldwide. Functioning social systems are based on a compulsion to pay into taxes or other solidarity systems. A voluntary blockchain cannot do that.

And how does it go on?

Blockchain innovations repeatedly give us reason to rethink central institutions and their functions. This can be the starting point for important political reforms. Especially in the world where institutions and laws fail, the decentralization technology blockchain can generate great added value. Could the Central Bank of Zimbabwe regain confidence in its monetary policy by using crypto-economics rather than politics to determine the money supply? Can corrupt health systems be reformed by making budgetary cash flows traceable on a public blockchain? Can more people in sub-Saharan Africa be supplied with electricity from a power grid that is being expanded by small businesses in a decentralized manner with blockchain incentives, smart meters, solar panels and batteries instead of a monopoly electricity company? Can state-funded journalism become independent if a decentralized curated crypto solution distributes the money instead of a state agency? Can we one day replace the internet monopolies and data octopuses with dApps?

Many of these ideas are just beginning. We must not be blinded by the blockchain hype and need sober analyzes of what is really possible. But at the same time we have to open up to innovation. For this, deep rifts between ideologies have to be overcome. An ideology hostile to the state of the crypto-libertarians is just as unhelpful as an ideology that always wants to adhere to the status quo of institutions and economic top dogs.

“Form follows function” was the principle of the Bauhaus architects. If we now have the blockchain as the new building material for our commercial and social building, then some structural features in this building may take on a new form.

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Guest Post

Guest contributions are contributions from people who do not belong to the netzpolitik.org editorial team. Sometimes we approach authors and publishers to ask them about guest contributions, sometimes the authors approach us. Guest contributions do not necessarily reflect the opinion of the editors.
Published 08/17/2018 at 8:04 am