When you work in the blockchain and cryptoasset space for a while, you hear four particular questions asked over and over by people new to the space and particularly by skeptical people. These are good and important questions and they deserve simple, straightforward answers, so let’s get to it.
What problem does it solve?
This question is sometimes asked as a challenge and sometimes an attempt to understand why it is useful. In either case, blockchain is useful because it solves the problem of digital integrity. It may not be the only solution to that problem but it is becoming the most widely adopted one.
In short, digital integrity is the idea that we should be able to have things on a computer that are equivalent to physical items. When you hold an orange in your hand, you are holding a physically unique item. You can inspect it and determine whether it is intact, has flaws, or has been partially eaten. You can run tests on it and make choices about whether you want to eat it, sell it or trade it for an apple.
The digital world is different. Computer technology allows for infinite copies that are exactly the same as the original and those copies can proliferate. Worse yet, copies on a computer can be altered very easily and in ways that completely change their meaning or import. Think about the kid who tries to access the school computer in order to change her grades. Even if she only changes her grades and leaves the rest of the data intact, it makes a big difference. It ruins the integrity of the data in the same way that smashing the orange with a hammer ruins the orange, except on the computer there is no way to see the smashing.
Blockchain directly solves this problem of data integrity. It stops someone from smashing the data (changing it) through a combination of cryptography, transparency, and other features.
The idea that data in computers does not have integrity and can be changed at any time strikes people as either impossible or outrageous (or both). How can it be true? Well, we know about hacking and the damage it can cause. It means not just the stealing of information from computers but also the changing of information on computers. Cybersecurity attempts to stop hackers and secure computers and the information they contain. But cybersecurity does not result in the kind of digital integrity outlined above. Moreover, someone with permission to access the system and make changes to the data might be guilty of falsifying it. So digital integrity is a big deal.
Why is Bitcoin valuable?
One easy retort is: why is anything valuable?
Most people would answer that question by saying some version of: if humans want it, it is valuable. Even more complicated answers that explain why something is useful really boil down to “it is useful to humans so it’s valuable.”
This answer, while true, is frustrating to the person asking the question because the question really is “why is Bitcoin useful to humans such that it is valuable?” The straightforward answer to this question: Bitcoin is valuable because it created blockchain. As discussed above, blockchain is important and valuable because it establishes data integrity across any digital system, even a dispersed system without central control (indeed, especially across such systems). So Bitcoin showed the way to digital integrity through better database infrastructure.
The answer to the follow-up question of whether Bitcoin is worth its current price in fiat currency is less clear. If you believe that the technology is valuable, then the progenitor of the technology should be especially valuable, particularly because it has a record of functioning properly for almost a dozen years. But while the value proposition is clear to me, the price is much less so.
What about the environmental impact?
Everything humans do has an environmental impact. While popular blockchains like Bitcoin and Ethereum rely in part on the cost of energy to secure their networks and provide digital integrity, newer blockchains use other methods that require no more energy than any other household computing task. Explaining the differences between the two types of networks is a bit more complicated and therefore outside the scope of providing simple answers. If you’re interested, please do some internet searches on “proof of work” and “proof of stake” to find articles on those topics (and use the same amount of energy as you would participating on the newer blockchains).
Two other points deserve mention here. First, the use of energy does not necessarily equate to negative environmental impact. There are many environmentally neutral energy sources and more regularly coming online. For example, if solar power or wind power is used to generate the electricity that is used to secure the networks, the carbon footprint is much different than coal-burning plants.
Second, the energy consumption statistics most often cited are comparisons to the energy usage of particular countries. Bitcoin uses more energy than Argentina or Slovenia or the Netherlands, is the overwhelmingly common comparison. There must be more apt comparisons to be calculated. I encourage people to find a better analogue for the energy usage of a world computing system that anyone, anywhere can use reliably and securely. Should the energy usage of a world-completing system be compared to the energy usage of all daily financial instrument transactions? The mining of gold or diamonds? The shipping of goods around the world? Let’s find the right basis for comparison before we cast aspersions on the environmental impact.
Isn’t this all about avoiding the government to facilitate criminals, terrorists, money launderers, and tax cheats?
No! Emphatically NO!
I should just leave it there because I like to believe that my friends and colleagues aren’t any of those things.
All technologies have a multitude of uses. Database technologies are no different and because blockchains allow for the transmission of value over the internet with the ease and certainty of cash and without any intermediaries, Bitcoin and other cryptoassets can be used in many different ways. We don’t ban cars because bank robbers use them to escape, we don’t ban phones because kidnappers use them for ransom calls and we don’t ban cash because drug dealers and terrorists use it. No one is talking about banning the internet simply because the “dark web” exists alongside all the amazingly positive uses.
There are lots of good actor companies and people in the blockchain space building the better future they envision. Society and regulators should not disparage them or their efforts. There is no place for that small-mindedness.
People make choices about how to use things, and policies that ban or strictly control technologies should only come when the negatives heavily outweigh the positives.
With blockchain, the positives heavily outweigh the negatives: we have global computing that is secure and auditable, and accessible to anyone with a computer (mobile phone) and an internet connection. It creates economic opportunity, financial inclusion, and new wealth. It allows individuals more control over both the creation process and the fruits of their labors. To my mind, those who believe that all of blockchain is negative or criminal should bear the burden of proof, especially now that Coinbase is a public company and cryptoassets are worth more than $2 trillion.
Policymakers should enact policies that encourage innovation, creativity, and empowerment to foster the use and development of blockchains by good actors. This will marginalize the bad actors, especially when combined with “cops on the beat” chasing the criminals. This ethos has prevailed throughout the industrial revolution and into the computer revolution. It should guide policy through this phase of the internet revolution.
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Now that you’re ready for the naysayers, keep building, keep inventing, keeping making the world a better place. Do we have things to figure out? Of course. But that’s what humans do: figure out how to slowly but surely make the world a better place for other humans through ingenuity and new technologies.
Lee A. Schneider is a financial services and technology lawyer with extensive experience in blockchain. Lee co-hosts the Appetite for Disruption podcast with Troy Paredes and is the contributing editor for the Chambers and Partners FinTech Practice Guide. He co-founded Global Blockchain Convergence and is active with a number of other organizations. Lee serves as General Counsel for the block.one and is the father of two wonderful college students. He learns about Japanese art history from his wife.