Professors in Economics as well as journalists and technologists have a hard time getting to grips with Bitcoin. That’s because you need to be very well-versed in so many disciplines (a polymath more or less) to really get it (or devote countless, really countless, hours to reading those polymaths and questioning yourself to understand).
Now R3 has replied to some of the critique against its offer towards the banking industry to provide them the promise of “the blockchain technology”, without the bitcoins, ignoring the fact that the bitcoins are the Blockchain – and missing the point on how Bitcoin turns energy into security (truth).
Line by line (highlighting the erroneous/stupid statements);
“Explore the Blockchain, Ignore the Bitcoin Maximalists”
The headline reveals the attitude. Terming Bitcoin aficionados “maximalists” gets the author nowhere (few have even heard the term), and it’s not smart to ignore your adversaries. I, for example, have had enough respect (and admiration for the idea) for Ethereum to devote a lot of time to research it, before refuting it. Ignoring these issues just leads to ignorance. But of course one should explore, research “the Blockchain”, however; it is the bitcoin transactions that make up the Blockchain, it’s not “a technology”, it’s a concept, and idea, a method (or just a way to visualize the “log”, the history of information exchange).
“While all the individual elements that comprise the Bitcoin blockchain have been around since 2001, it took until Satoshi’s 2008 white paper to demonstrate how these individual pieces could be cobbled together to work as one to fulfill certain tasks. Specifically, the paper described a new type of data structure that was tamper-evident and economically costly for any one entity to unilaterally revise.”
R3’s choice of words (intentional or not) make it seem like the blockchain is a type of file that is, in itself, tamper-proof and costly to “attack”, but that is not true at all. It is not the blockchain of Bitcoin as a format that is resistant to tampering, it’s the economic majority powering (by choice) this network. Bitcoin is not protected using pass phrases, firewalls etc, but by using energy. If you “copy the blockchain” (the code) and set-up your own instance it is not secure at all. You need many megawatts of power (and your own algorithm). This sort of subtle sliding arguments from “blockchain consultants” will net them many large invoices from the banks, and those banks will loose out against burgeoning fintech startups using the “real blockchain”.
“Due to how it was configured, the specific applications of Bitcoin’s blockchain itself resulted in a niche set of use cases, namely pseudonymous interactions that needed censorship resistance on a public network.”
R3 is trying to downplay the importance of this new invention, these decentralized permissionless programmable bits of money (information, really), like it’s a niche only for shady groups. There are actually billions of individuals on this planet that have a hard time getting permission to use any transaction network. Bitcoin serves them, as well as the rich, it serves all. And its uses are almost endless; any type of information can benefit from having a connection to the Blockchain, especially info on assets, holdings, ownership, patents, rights, proofs – any document more or less. “Niche”?
“What happens if you reconfigure those same elements or substitute those elements with other cogs and software libraries?”
You can get a lot of money from the banks, that’s what happens. Not much else. The other things you want to do (lower costs) you can do without using “a blockchain”.
“For instance, most traditional financial institutions must comply with a variety of regulations that effectively rule out use cases that involve censorship resistance. In almost all cases, regulated entities must “know your validator.” Therefore, since all transaction validators participants are known and legally accountable to off-chain third parties such as courts, the intensive proof-of-work mining process used by many public blockchains becomes unnecessary and wasteful.“
This is just mumbo-jumbo. Banks don’t know where today’s cash comes from. Banks are the biggest launderers of drug money today (the current fiat system makes that possible). Each bitcoin is traceable, fiat money is not. You can easily build a “validator” system on-top of the Bitcoin Blockchain, but the question has nothing to do with Bitcoin. These “blockchain consultants” want it to look like the units of the old paradigm (USD, Yen, Euro etc) are validated, known, traceable etc. They are not.
And; authorities do not control the actual units in any currency (KYC/AML), they can only extract info from the “on-ramps”, the “gateways” (i.e. banks, brokerages, exchanges, financial institutions etc). If R3’s reasoning here would be true then a bank today should “know” every “validator” that has been handling its money before themselves. They don’t. They just don’t want this new thing to compete with their own money-printing powers. Also, producing bitcoins is not wasteful, only the offices of one (1) US bank consumes more energy than the global Bitcoin network. And offering anyone in the world the possibility to transfer funds and time-stamp information 24/7 is immensely valuable. It’s the work of R3 that can be considered wasteful.
“But wasn’t the sole value proposition of Bitcoin censorship resistance? If you remove that, shouldn’t you just use an existing database for any and all interactions?”
No, who told you that? Here’s the very first line from Satoshi’s white paper on Bitcoin: “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
Do you understand how much money we (the world) can save by getting rid of many of today’s “financial institutions”. Who do they serve? Humanity or its owners? And it turns out “censorship resistance” is a very big deal; not only does it protect against governments/central banks eroding their citizens buying power through inflation (like QE and FRB), it also creates a new cyberspace where everyone is allowed to use money as a store of value, a currency, a payment method, a transaction network and a secure public ledger with the accounting built-in (and I haven’t even mentioned the fact that the Blockchain enables the Internet of things, AI, Dapps, Dacs, prediction markets and much more – in the longer term).
“There is no such thing as an off-the-shelf, production-ready, cryptographically signed shared ledger specifically designed for large-scale enterprise usage. At least, not yet.”
Yes, there is, it’s called Bitcoin. It’s specifically designed for anyone (including large-scale enterprise usage). You can build on top if. Check this list of add-ons being built on top of Bitcoin right now (offering almost-free, really fast transactions and large-scale capabilities).
“Many Bitcoin enthusiasts proclaim that since the Bitcoin network already exists today, there is little reason to go through the effort of reinventing the wheel. The reality is that the Bitcoin blockchain – which is just one of a few hundred blockchains – cannot currently provide a secure on-chain solution for the settlement of off-chain registered assets. Nor does it have the ability to quickly upgrade to provide such utility or capacity.”
Again with your wording. There is one (1) big powerful Blockchain, the “hundreds of blockchains” are copies, they don’t matter. Bitcoin’s value (the exchange value of all of its units against the dollar) represents more than 95% of all the value in all blockchains’ currency units put together. In effect there is only one, already today, the rest is confused noise. And, the blockchain wasn’t intended to “quickly upgrade” to provide your customers with whatever they think they are looking for, it’s intended to be an immutable globally shared ledger of valuable information.
“The Bitcoin blockchain – which is just one of a few hundred blockchains – cannot as it stands provide a secure on-chain solution for the settlement of off-chain registered assets.”
Actually it can. Look at this list for instance.
No, it’s been invested into the production of unique bitcoins that can be used forever, and invested into creating a network for all, not just selected participants. The bitcoins don’t need replacing (including cutting down trees, storage and transportation) every 5 years like costly, environmentally-unfriendly papers bills need to be.
“It is a collective action problem that arises due to the very nature of how its cogs were purposefully arranged seven years ago.”
No, it’s not a problem, it’s a solution.
“There is a time, a place and a customer base for pseudonymous cryptocurrency systems. But for now, the global financial services markets demand far more than the Bitcoin blockchain can handle.”
They demand profits, nothing else. Bitcoin demands no profit (there is no CEO looking for a bonus). That’s hard to compete with.
“For the average reader of American Banker, those working for and representing globally regulated financial institutions, certain types of shared ledgers, with legally accountable validators and clear terms of service, could likely provide unique utility to your organizations.”
Yes, I do agree that blockchain technology can save costs for banks, but only marginally. You still need the costly gatekeepers at each “validator”, just like today, to satisfy the legal system.
“Whether the end product is called “a blockchain” or not is a No True Scotsman fallacy and one that distracts your firm from making economic, cost-saving decisions.”
Nah, R3 is distracting your firm from making economic, cost-saving decisions.
In conclusion; Yes, there can be (there are) many blockchains, but there can be only one strong (valuable) blockchain per algorithm and mechanism (in Bitcoin’s case that’s value-transferring). This is due to the fact that the participators in a more powerful network easily could divert a small fraction of its mining power and overturn a weaker blockchain using the same algorithm.
And it doesn’t really matter, as a truly decentralized cryptocurrency is protected by power (energy divided by time), not pass phrases, courts, judges, validators, banks or R3. Read ‘The Bitcoin Formula“.