Is Blockchain Technology Overhyped

Blockchain, the ingenious database technology best known for underpinning the faddish digital currency Bitcoin, is reviving the utopian fantasies of the early internet era. In an influential manifestofrom that time, “A Declaration of the Independence of Cyberspace,” published in 1996, the essayist and activist John Perry Barlow opposed the idea of government regulation of the internet, offering instead an anarchical vision of an online world in which a decentralized network of people existed free from all authorities and intermediaries save for their own “social contract.” Whatever else Barlow’s statement might have been, it was not prophetic. The online world today is full of authorities and intermediaries — search engines, social media platforms, cloud computing services, internet service providers — all of which exert considerable control over cyberspace and are themselves shaped by laws and regulations. It is hard to imagine a cyberlibertarian paradise emerging from that.

Or it was hard to imagine, until blockchain came along. The first blockchain was the database introduced in 2009 as the infrastructure of Bitcoin; it is where every transaction involving Bitcoin is stored. Because this database is “distributed” (it is supported only by the network of its many thousands of users, with no central or controlling nodes) and because, thanks to a cunning design, it can essentially guarantee the integrity and authenticity of the information it stores, it demonstrates that a functioning currency does not require a bank or equivalent centralized institution. Whether Bitcoin itself ends up being successful is not what matters. What matters is the discovery that the underlying blockchain technology can obviate the need for centralized authorities in contexts where they were once thought to be indispensable. This includes social, political, economic and legal transactions involving not just currency but also stock certificates, deeds to plots of land, titles to copyrighted works, remittance payments, food supply chains, votes in an electoral system and so on.

For the John Perry Barlows of today, blockchain represents a new opportunity to free people from governments, corporations and other sources of centralized control. (Indeed, a few true believers, made rich during the recent digital currency boom, are spending millions of dollars on potential experimental communities where rights and contracts would be implemented using blockchain technology.) But for the legal scholars Primavera De Filippi and Aaron Wright, the innovative promise of blockchain, though real, has been exaggerated. As they argue in BLOCKCHAIN AND THE LAW: The Rule of Code (Harvard University, $35), the growth and evolution of this technology “will follow a similar path” to that of the internet itself: from anarchic potential to a more regulated and controlled reality. They also argue that this is desirable — that blockchain visionaries looking to free people from the hegemony of governments and corporations “could wind up surrendering themselves (and others) to the whims of a much more powerful enemy”: namely, the self-governing code of blockchain itself.

To understand why many proponents of blockchain assume, contrary to De Filippi and Wright, that the technology can and should remain impervious to external control, it helps to understand some details about how such a technology works. Imagine you want to send someone a certain amount of Bitcoin as payment for a service provided. Rather than having the payment go through a bank to be authorized, as it would if you paid with a check or credit card, the proposed transaction is shared with and authorized by the entire Bitcoin network. To determine whether you have enough Bitcoin to make your payment, the computers on the network search through the history of all previous Bitcoin transactions. If your transaction is valid, it is added to a list, or “block,” of recent pending transactions. Every 10 minutes or so, the latest block is collectively verified by the network and added to the “chain” of all the previous blocks. Everyone’s Bitcoin account balance is updated accordingly. This communally maintained history of total transactions — a copy of which is shared with every node of the network — is the blockchain.


What makes the design of blockchain so clever, De Filippi and Wright note, is its solution to an obvious concern with the description above: Why trust the network? After all, the network is open to anyone and can be joined pseudonymously. What is stopping someone from creating hundreds of Bitcoin accounts and voting to impose a bogus “consensus” on the state of the database? The technology solves this problem by making the task of adding a block to the chain into a competition: Any Bitcoin user who is interested can try to solve, by brute trial and error (and with the help of a high-powered computer), a mathematical puzzle generated by the Bitcoin software. If you find the solution, you broadcast it to the rest of the network; if a majority of the network agrees you’ve solved the puzzle (it’s simple to confirm), you receive a payment (in the form of newly minted or “mined” Bitcoin) and the block is added to the chain. The difficulty of the competition, which is automatically calibrated by the software so that the puzzle becomes harder the more users join in, virtually ensures that no single user can monopolize the network.

De Filippi and Wright agree with blockchain’s most passionate proponents that the technology’s design gives it many features that are desirable. Because it is decentralized, it cannot be dominated by a single power. Because it is tamper resistant, it cannot be used fraudulently. Because the information it stores is distributed to every node in the network, it is resilient in the face of damage or destruction. In many contexts, such as unstable political environments, these qualities make the technology especially valuable. (There have been efforts in Honduras and the former Soviet republic of Georgia to register property or land titles using blockchain.)

But De Filippi and Wright stress that because blockchain is essentially autonomous, it is inflexible, which leaves it vulnerable, once it has been set in motion, to the sort of unforeseen consequences that laws and regulations are best able to address. Fortunately, they argue, though the absence of a central authority can make it seem as if blockchain offers no “object of regulation,” there are in fact many entities the government can target to influence how blockchains are run, including internet service providers, hardware manufacturers, software developers and the many supplementary services (like “wallets” and currency exchanges) now being run on these networks.

In THE BLOCKCHAIN AND THE NEW ARCHITECTURE OF TRUST (MIT, $27.95), the legal scholar Kevin Werbach stakes out a position similar to that of De Filippi and Wright, arguing that “like the internet the blockchain is mistakenly viewed as the final answer to the problem of intermediation” — the problem of inefficient, unwanted or unreliable go-betweens. The trouble with this view, he notes, is that intermediaries, when trustworthy, play many beneficial roles: pairing buyers with sellers, bundling demand to create economies of scale, correcting imbalances in bargaining power. Because there is no widespread desire to eliminate intermediaries, he predicts that blockchain technology will most often “supplement or complement conventional legal regimes, not replace them,” proving most useful when rigidity and automation are valuable. Blockchain might be used, for example, to mechanize the enforcement of reporting rules for banks, so that government agencies need not actively monitor every relevant bank transaction.

Werbach is fond of invoking a “governance paradox” that he attributes to the economic sociologist Vili Lehdonvirta: The very mechanisms needed to make a decentralized system like blockchain desirable — namely, apparatuses of oversight and regulation — appear to make the system no longer decentralized. However, Werbach argues, the most significant innovation of blockchain is not governmental or even technological but emotional: the creation of “a new form of trust,” in which you put your confidence in a store of information without relying on any single person to authenticate it — trust the system, not its parts. The outstanding question is whether this method of cultivating trust is viable, and if it is, in what ways we can best deploy it. The answers we come up with are likely to determine blockchain’s future.

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