Over the course of the past decade, the world has witnessed the rise and many falls of Bitcoin. The promise of cryptocurrency and the initial wave of Initial Coin Offerings (ICOs) led many to tout the underlying blockchain technology as “revolutionary”—the next major disruptor of the global financial system. Following declining values in most cryptocurrencies, however, many have begun to question their assumptions. Some have gone so far as to say that blockchain is no longer revolutionary, but in fact boring. So how important is blockchain to the future of the digital economy?
The fact that even conservative institutions like banks, exchanges, and other financial intermediaries have been exploring the power of blockchain is significant—an indication that the technology indeed has potential to disrupt the financial services industry. “If it turns out that we don’t need to rely on banks as a trusted intermediary anymore—if we could do transactions in a peer-to-peer network where we all have our personal ledgers that we reconcile—in theory, we could imagine that the cost of trusted intermediaries could go down,” says HBS Professor Ramana Nanda. But in practice, Nanda warns, “you don’t get something for nothing.” Any platform able to securely perform such a task—able to prevent double-spending and other fraudulent activity—must be computationally intensive. That’s one of the reasons that bitcoin mining requires massive energy expenditures, says Nanda, and why, in his view, “it is not very practical to use as a mode of payment for small transactions.”
Yet, Bitcoin is still an interesting use-case. Says Nanda, “For ten years, people have been trying to hack Bitcoin, but the network appears to be pretty robust. Centralized exchanges that sit on top of the Bitcoin network have been hacked, but the network itself has been resistant to attack.” Thus in some sense, he says, it can be thought of as a proof of concept—as a technology stepping stone that will inspire others to engage and build new applications based on what has been learned.
We are beginning to see some of these new use-cases in recent years. In 2017, IBM introduced the Hyperledger fabric to share information between and within companies using the same principles as blockchain. It is now being used by Walmart, Maersk, and others as a private, internal blockchain. However, Hyperledger overcomes the challenges of cost and scalability by using what they call a permissioned blockchain that only allows trusted counterparties to join the network, leading some to question if it is truly an example of blockchain, or just a distributed database. To an extent, Nanda agrees, explaining that “the more centralized the process of the consensus protocol, the less revolutionary the technology.” Yet in some ways, he says, this debate is missing the point.
Nanda draws an apt comparison to the early days of the Internet. “The Internet was meant to be a decentralized network, but now you have large tech companies that act as gateways, providing value but also centralizing information and content that they monetize.” Does this undermine its value or utility? Not necessarily. As Nanda says, “people are always willing to pay intermediaries—for convenience, for service, for value-add.” This time isn’t any different. Whether you pay to use the IBM Hyperledger or open an account with Coinbase, “you’re relying on a centralized organization sitting on top of blockchain technology.”
Nanda recommends adopting a longer-term perspective when evaluating the potential of this technology. Think of it as a “version 1.0,” he says. “Blockchain is a fundamental technology. It is a revolutionary technology. I think we are in the very-very early stages of it.” Just as with the development of computers and the Internet, “there has been an incredible amount of talent flowing into this sector from across the world, and decentralized protocols continue to capture substantial developer and entrepreneurial attention. Usually, when really smart people are working hard on something that they believe has a lot of promise, it evolves into something useful.” Nanda notes that product market fit with the mass consumer and enterprise clients will take time. “Today the use-cases are sort of there, but not really. But if some of these costs fall, and if scalability and usability goes up,” he says, “then one can see these inflection points where all of the sudden there are so many new possibilities, and that’s when I see this really taking off in a mainstream fashion.”