One of the things that’s fun about being an entrepreneur in a new space is that everyone loves offering their opinion. Invited or not:
Bet Chris a beer he’s wrong, so we’ll see where the cards fall in due course. The tweet refers, of course, to this article by Chain’s Adam Ludwin on the subject of – what else? – why “Bitcoin is the oil in the machine,” and why “you definitely shouldn’t build a private block chain” (a version of the argument that “Blockchains are awesome, unless it isn’t the blockchain I use, in which case blockchains suck”).
Blockchains are awesome. Bitcoin is pretty awesome – at being Bitcoin. In terms of mainstream stuff, they’re most awesome when they’re designed to work within commercial frameworks. Which requires commercial thinking.
I’m sure Wall Street should be looking at blockchains. But I remain highly skeptical of the proposition that they should be spending any more of their time looking at Bitcoin or anything even remotely like it, even though my friends Richard Brown and Simon Taylor have both published posts leaning that way this week.
But let’s move on, shall we? Some of Mr. Ludwin’s points in favour of using Bitcoin:
Assets move directly between entities — transfer and settlement are one-and-the-same — eliminating counterparty risk.
On the subject of counterparty risk:
For Bitcoin itself? Sometimes.
For off-chain assets recorded on-chain? Never.
What these guys actually mean here is “settlement risk.” Counterparty risk is a much wider risk-bucket.
Blockchains do not magically create and transfer assets; they record data, and what that data means in a particular context determines whether it has anything to do with an asset or not. There are many ways to use the internet to move assets around; people did it all the time before the blockchain and continue to do it all the time without a blockchain. Sending a signed document over e-mail is one way this is commonly done. SWIFT messaging is another.
That said, this idea that “if it isn’t a cryptotoken, it isn’t a digital representation of an asset” is a very common misconception in the Bitcoin community and for early-adopters in the corporate space. But tokens are actually terrible ways of representing financial assets (I wrote a blog post on this over at the EI company blog two weeks ago).
Most of the time – in fact, nearly all of the time in finance – assets aren’t constituted as sui generis, tough-to-replicate tokens on decentralised global ledgers. What they are, instead, are bundles of rights to and obligations of performance of delivery of some other thing, like currency. A bond is one such bundle of rights. Ownership entitlements are recorded on databases and evidence of title is easily demonstrated with things like signatures and chains of evidence like correspondence.
Blockchains can be useful here. But not Bitcoin.
On the subject of the merits of “trustless” systems (a concept which is, commercially, nonsense – and thoroughly debunkable):
Commercially, no matter what your subject matter asset is, you won’t want to use a “decentralised” network. You will actually want the trusted third party and identifiable counterparties. Why? Well, because most of the time when we loan someone 100, we collateralise it to the tune of 100 – but that doesn’t mean we collateralise it in cash. We have identifiable actors and a legal nexus, so we can take charges or liens over the underlying assets – which our debtor then uses for some other purpose (like living in, e.g. a mortgage) – and procure enforcement if we need to by bringing an action.
As I put it on the Eris Industries Distributed Business Blog about two weeks ago:
…the fully-decentralised networks such as Bitcoin – being completely open – don’t actually provide you with a facility to verify that the thing someone is trading is actually that thing. A token could represent a car or a house, sure, but unless you can link that token to a certified copy of a title deed – and then ascertain that no other prior interests took priority to yours – when you purchase that token with (e.g.) Bitcoin in a crypto-escrow-thingy you might be taking an encumbered asset. Or the asset may not actually exist.
So, e.g., if you buy a “bond token” that records entitlements to real-world dollar payments but is recorded on the Bitcoin blockchain, all of your counterparty risk is still there – if your borrower defaults, you’re shit out of luck (and back in the legal system dealing with a debt actions and, possibly, insolvency) no matter what the blockchain says. This isn’t to say blockchains aren’t excellent global data management systems. They are. But they’re a hell of a lot better at mainstream commerce when you build them to work in a mainstream commercial context.
Assets move instantly, and settlement time is ~10 minutes (settlement can also be instant if the parties trust the other won’t “double spend”)
So this is actually the “settlement risk” question.
Does Bitcoin fix it? Sort of – but only to the extent that the transaction
(a) lives entirely within bitcoin-land (see above) and
(b) that the transaction can be adequately described and secured by Bitcoin’s limited scripting capabilities.
Confirmation and settlement that is instantaneous is something Bitcoin does extremely well (as does any blockchain). With a gap of, say, three months between confirmation and settlement (i.e. one of your buyers or sellers wants to have the freedom to move the assets around before they clear and settle), Bitcoin doesn’t cut the mustard.
And Bitcoin doesn’t even try to serve the function of a CCP to cover your ass in the event a major counterparty does go down. I’d share some thoughts on how we fix that problem with Eris Industries’ developer tools. But that’s my milkshake. I could teach you but I’d have to charge.
The transfer mechanism is public infrastructure and is always improving — everyone has a shared incentive to make it better, similar to Internet protocols like email and http
On the infrastructure: that’s a discussion that’s already raging somewhere else on the internet. I’m happy to stay out of that.
On blockchains: We hear this “Bitcoin is the TCP-IP of Money” nonsense all the time. It’s a groundless claim, and self-interested garbage. For the five millionth time, stop saying Bitcoin is a foundational protocol. It isn’t. Bitcoin uses foundational protocols like TCP-IP; it is a software application that allows thousands of computers to co-ordinate their activities and agree on a shared, global state of data without (necessarily) requiring fixed hardware.
A blockchain basically has two components:
1) Its protocol (the rules).
2) Its database (the transaction history of that given rulebook).
HTTP is a communications protocol; MySQL is a relational database technology. The world may all use HTTP, but that doesn’t mean the world stores all of its data on one database.
Saying one world == one blockchain is like saying one World Wide Web == one SQL server. For those of us who are less technically inclined, saying that the world should use one blockchain for all its transactional data is rather like saying that we should store the entire English literary canon (including all newspapers, notes, powerpoint slides… everything) into one book.
In other words: the idea of one master “world wide ledger” is completely absurd.
Upshot: the internet doesn’t use one database in all its LAMP stacks. It won’t use one blockchain for all its transactional data, either.
Assets and end-user data are privately controlled, and strong security for assets can be achieved by using multiple signing keys across several parties
Fully public open ledger which everyone can see, which nobody controls. Gonna leave it that.
Policy rules about the movement of assets can be enforced programmatically — whether those are “terms and conditions” or regulatory requirements
I think this is a somewhat disingenuous assertion. It’s not possible to do XML/FpML or anything even remotely that complex on Bitcoin. The same thing goes for regulatory requirements, absent a major hard-fork of the protocol or conducting transactions off-chain (which defeats the purpose of using a blockchain in the first place).
Above all, the current transaction limit of about 4 transactions per second (at absolute maximum) on Bitcoin means the Bitcoin network can’t scale.
Commercially, it’s a dog. Private turing machines (smart contract blockchains) with something like Eris Legal Markdown are more appropriate for this.
Assets are fungible and play nice together — e.g., you can use reward points to buy mobile minutes
Not sure what they’re getting at here. Assets play nice together already through this medium called “money.”
A single transaction can include multiple entities and assets, on both sides of the transaction — e.g., you could execute a merger of two companies in a single transaction, with the inputs to the transaction being all stockholders across all share classes for both companies, and the outputs being all the newco shares going to all the new stockholders (again, no escrow service needed)
See “real world financial assets don’t play nice with the Bitcoin blockchain” above.
Anyone who has papered a M&A deal (I’ve done a few) will know that this process is far from simple. Although blockchains certainly could be of some use in making this process easier (see, e.g., Eris Industries’ proposal for Open Document Monkey), including things like bondholder consultations, simply effecting the share transfers isn’t that much of a problem today – and not the main pain point that a blockchain could or should address.
Every transaction is added to an immutable record which, while anonymous, can be used to construct a perfect audit trail of an asset’s movement when combined with the private data held by the entities using the system — this defends against fraud, and also gives issuers transparency into asset movements.
- Pseudonymous, not anonymous;
- Immutable – for now;
- Unlikely to fail given present conditions, not incapable of (irretrievable) failure.
Commercial data management needs to do better than this. On a private blockchain, it can.
It’s easy to integrate new parties
Agreed, 100%. The public-key infrastructure utilised by any blockchain makes user onboarding super easy. It becomes even easier when you can get granular with access permissions, as a certain FOSS technology developed by a marmoty company based in London allows you to do.
Like the Internet itself, it’s a global system
Agreed, again. But not just for Bitcoin. So is any blockchain, private or open.
See here for the (currently very small) Ethereum testnet to see how easily these critters can establish a working global network. The brilliance of the blockchain is that you can hand someone a copy of it and know – with a very high degree of certainty – that they’re not going to do anything they aren’t supposed to do. That’s why they can scale globally, quickly, safely.