The Blockchain Revolution Has Reached a Crossroads. What’s Next?
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Strategy Oct 2, 2018

The Blockchain Revolution Has Reached a Crossroads. What’s Next?

Bitcoin and its ilk need to become more efficient without losing their trademark decentralization.

A cryptocurrency tanker is flanked by small boats.

Riley Mann

Based on insights from

Sarit Markovich

With more than a thousand cryptocurrencies now loosed upon the world—for a total market capitalization of roughly $200 billion—it’s clear that the likes of Bitcoin and Ethereum are here to stay. But it is also clear that the “blockchain revolution” has reached a crossroads.

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Last year, Bit­coin divid­ed itself after fail­ing to solve an inter­nal dis­pute over how to scale its net­work, and Ethereum has faced its own rough weath­er, from soft­ware bugs to gov­er­nance issues. While both are still mak­ing head­lines, they are a long way from estab­lish­ing a viable alter­na­tive to glob­al finan­cial net­works. The ques­tion for these and oth­er cryp­tocur­ren­cies is: Can they scale?

This is the big chal­lenge, and it’s one that involves an uncom­fort­able trade-off,” says Sar­it Markovich, a clin­i­cal asso­ciate pro­fes­sor of strat­e­gy at the Kel­logg School. On the one hand, there’s a strong push to increase the blockchain’s effi­cien­cy. On the oth­er hand, this needs to be done while pre­serv­ing its decen­tral­ized struc­ture. The prob­lem is, you can’t do both.”

For Markovich, there is lit­tle ques­tion that scal­ing would involve some degree of cen­tral­iza­tion. That means each cryp­tocur­ren­cy will have to strike a bal­ance between grow­ing its net­work and stay­ing true to the prin­ci­ples of trans­paren­cy and auton­o­my inher­ent to a decen­tral­ized ledger.

With­out that bal­ance, cur­ren­cies will either stag­nate — due to slow traf­fic — or fail to attract and retain users, since cen­tral­iz­ing con­trol in effect means emu­lat­ing the banks and finan­cial insti­tu­tions to which they were meant to be an alter­na­tive.

There isn’t just one solu­tion for this,” she says. Each com­mu­ni­ty will choose an approach that works best for them. But the key is that these net­works can’t just scale up with­out a plan. They have to find a neu­tral way to cen­tral­ize for effi­cien­cy, and they’ll need to do so with­out dis­rupt­ing estab­lished pro­to­cols with com­mu­ni­ty consensus.” 

A Net­work Prob­lem with a Twist”

In the ear­ly days of cryp­tocur­ren­cies, the blockchain — the dig­i­tal ledger that makes these net­works pos­si­ble — was advanced enough to suit the needs of a small, eclec­tic group of alter­na­tive investors. The goal was to allow finan­cial trans­ac­tions that did not require mid­dle­men such as banks or cred­it card com­pa­nies.

Dig­i­tal coins were mined” and shared through a quirky, mys­te­ri­ous process involv­ing math­e­mat­i­cal puz­zles. The net­work processed trans­ac­tions slow­ly, but the dig­i­tal ledger was ful­ly trans­par­ent and updat­ed in real time. And users liked the fact that they were not behold­en to any sin­gle pow­er­ful insti­tu­tion.

As the net­work grew, how­ev­er, the slow-and-steady approach became a prob­lem: the move­ment of dig­i­tal coins around the globe was sim­ply too inef­fi­cient. For every trans­ac­tion Bit­coin processed, Visa han­dled sev­er­al thou­sand. A frac­tion of Bit­coin users felt that in order to go main­stream, they would need to boost effi­cien­cy by chang­ing the blockchain’s pro­to­col,” or the rules that gov­ern the size, speed, and process of ver­i­fy­ing trans­ac­tions. Oth­ers believed that doing so would mean com­pro­mis­ing the trans­par­ent, secure, decen­tral­ized net­work they had signed up for.

This dis­pute led Bit­coin to divide into two cur­ren­cies last year: Bit­coin Cash and Bit­coin Core. Bit­coin Cash, the group that argued in favor of effi­cien­cy, chose to increase the size of the blocks,” which allowed them to process trans­ac­tions more quick­ly. But this divi­sion — known as a hard fork” — does not solve the long-term prob­lem of how to scale effec­tive­ly. There is plen­ty more to argue about, such as how to increase the size of the blocks with­out com­pro­mis­ing secu­ri­ty (with larg­er blocks, it takes more time for infor­ma­tion to spread through the net­work, which some see as a major risk). What hap­pens when there is a dis­agree­ment with­in the Bit­coin Cash com­mu­ni­ty? Will there be anoth­er fork? Cryp­tocur­ren­cies can’t grow if they are con­stant­ly under­go­ing schisms.

In many ways it’s a clas­sic net­work prob­lem,” Markovich says. But there’s a twist.”

When a com­pa­ny like Com­cast or AT&T needs to solve a net­work prob­lem (such as how to trans­fer mas­sive amounts of data with­out caus­ing con­ges­tion), they don’t need con­sen­sus from their mil­lions of cus­tomers. The exec­u­tive team sim­ply makes a deci­sion, and soft­ware engi­neers exe­cute it. And while there are cer­tain­ly those who pay close atten­tion to how these net­works are man­aged — for exam­ple, net neu­tral­i­ty advo­cates — most are will­ing to accept a mea­sure of cen­tral­ized con­trol if it means their YouTube videos load.

But the blockchain com­mu­ni­ty is different.

Bit­coin fanat­ics will have to accept some degree of cen­tral­iza­tion. At the same time, any com­pa­ny hop­ing to ben­e­fit from these net­works has to rec­og­nize that the solu­tion can’t be total centralization.”

When it comes to blockchain, this men­tal­i­ty becomes more prob­lem­at­ic,” Markovich says. The whole pur­pose was to move away from cen­tral­ized author­i­ty.”

So what wins, effi­cien­cy or auton­o­my? As Markovich sees it, the only way for­ward is to find an accept­able com­pro­mise. The future of blockchain — at least in terms of under­gird­ing dig­i­tal cur­ren­cy — seems des­tined to land some­where between the two extremes.

Bit­coin fanat­ics will have to accept some degree of cen­tral­iza­tion,” she says. At the same time, any com­pa­ny hop­ing to ben­e­fit from these net­works has to rec­og­nize that the solu­tion can’t be total cen­tral­iza­tion. Both sides have to compromise.” 

Keep­ing It Neutral 

That com­pro­mise could take many forms, as a quick scan of cryp­tocur­ren­cy web­sites will attest. Every blog­ger, investor, and min­er” seems to have an opin­ion on how to solve this net­work prob­lem that is pre­vent­ing plat­forms like Bit­coin and Ethereum from achiev­ing sta­ble growth.

One solu­tion involves bundling cer­tain trans­ac­tions off chain” and reg­is­ter­ing them on the dig­i­tal ledger after a giv­en peri­od of time. (This would be the equiv­a­lent of see­ing one’s month­ly Star­bucks bill instead of a break­down of each pur­chase). One prob­lem with this solu­tion is that it requires cus­tomers to open pre-paid cred­it lines with mul­ti­ple ven­dors. Fur­ther­more, it does not allow the entire net­work to ver­i­fy every trans­ac­tion, which poten­tial­ly opens the door to fraud and oth­er secu­ri­ty issues, since there would be less infor­ma­tion on the log.

The oth­er solu­tion is com­ing up with a cen­tral­ized algo­rithm that would opti­mize the flow of trans­ac­tions among the network’s var­i­ous nodes. This would increase pro­cess­ing speeds while still main­tain­ing full trans­paren­cy. The chal­lenge is find­ing a way to keep the algo­rithm neu­tral.

This is where a lot of peo­ple are focus­ing their efforts,” Markovich says. It’s tough, because if you start to pri­or­i­tize one trans­ac­tion over anoth­er in the inter­est of effi­cien­cy — for exam­ple, depri­or­i­tiz­ing nodes in devel­op­ing coun­tries — that’s going to be a prob­lem. Any per­cep­tion of bias would make the com­mu­ni­ty feel they’re los­ing too much. It’s a com­pro­mise they won’t accept.”

The best solu­tion would also be one that doesn’t require changes to the blockchain’s pro­to­col, because that would mean hav­ing to seek buy-in from all stake­hold­ers, thus increas­ing the chances of dis­agree­ment and, poten­tial­ly, a fork.

Changes to pro­to­col make peo­ple ner­vous about secu­ri­ty,” Markovich says. So ide­al­ly you want an algo­rithm that doesn’t threat­en secu­ri­ty or cre­ate pri­or­i­ty or bias in the net­work. Because oth­er­wise you’ll need to find a way to get every­one on board.” 

Find­ing the Right Bal­ance for Gov­er­nance Issues

Beyond the tech­ni­cal prob­lem of increas­ing net­work effi­cien­cy, there is the social prob­lem of address­ing the needs of a dig­i­tal com­mu­ni­ty. The Bit­coin com­mu­ni­ty spent two years debat­ing whether and how to scale before agree­ing to dis­agree, and such pro­longed delib­er­a­tions are not atyp­i­cal.

You can’t get much done with­out a cen­tral author­i­ty,” Markovich says, and that rais­es seri­ous gov­er­nance issues. This is espe­cial­ly hard giv­en how eas­i­ly peo­ple can express their ideas on Twit­ter polls and oth­er forums. And it gets even more com­plex when those who gov­ern these forums have their own opin­ion.”

Con­sid­er what hap­pened after the 2016 hack of the DAO, a pro­gram that was designed to democ­ra­tize project fund­ing on the Ethereum net­work. The hack result­ed in more than $50 mil­lion of stolen cryp­tocur­ren­cy. Ethereum’s founder exe­cut­ed a hard fork” to iso­late the hack­er from the orig­i­nal blockchain net­work in an effort to essen­tial­ly freeze his assets.

That was a gov­er­nance deci­sion, and it was a huge deal at the time, because a num­ber of peo­ple were say­ing, Well, [the hack­er] didn’t do any­thing wrong — he just exploit­ed the pro­to­col,’” Markovich says. But at the end of the day you need­ed some author­i­ty to undo a trans­ac­tion that should have been immutable and decide how the net­work would move for­ward.”

The episode revealed what sub­se­quent volatil­i­ty has rein­forced: with­out some form of cen­tral­iza­tion, cryp­tocur­ren­cies are vul­ner­a­ble to com­mu­ni­ty strife and inef­fi­cien­cies. If they are going to be secure and effi­cient, they might have to sac­ri­fice some of the hack­er-lib­er­tar­i­an ethos that went into design­ing these sys­tems and poten­tial­ly some of the demo­c­ra­t­ic aspects of the com­mu­ni­ty.

It’s all about find­ing that mid­dle ground where peo­ple can be com­fort­able,” Markovich says. Almost every­one sees the prob­lem, but will they accept a giv­en solu­tion? That will be inter­est­ing to watch.”

About the Writer

Drew Calvert is a writer based in Houston.

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