Many people have heard of blockchain technology, but few know what to make of it. Some people will tell you that it’s the next big thing, poised to disrupt almost every industry under the sun and reshape the world, affecting everything from real estate to education to the very structure of modern democracy. Others will assert that blockchain is technically advanced and theoretically interesting, but overhyped and impractical.
NYU professor, former senior economist for international affairs in the Clinton White House’s council of economic advisers and Nobel Prize winning economist Nouriel Roubini once compared blockchain to “an Excel spreadsheet” and proposed that the technology has “absolutely no basis for success.” The truth lies somewhere between these two poles.
Many proposed uses for blockchain will remain forever implausible: Blockchain will not bring peace to the Middle East, and today’s blockchain solutions are inefficient. But the technology is improving and the ecosystem is maturing; tomorrow’s blockchain may have a profound effect on the ways we lead our lives and conduct our businesses.
“As of today we do not believe that there is a proven solution that can deliver the scale, stability, and security needed to support billions of people and transactions across the globe through a permissionless network.”
What needs to change before blockchain thrives in corporate America?
Some analysts prefer to call blockchain “distributed ledger technology,” and the name, even if it doesn’t roll off the tongue, is an accurate one. Blockchain enables businesses to create ledgers that are immutable and secure; the ramifications for payment processing, remittance transfers, supply chain tracking and digital distribution are profound. Blockchain possesses capabilities even the most sophisticated traditional ledgers (paper or digital) do not.
Smart contracts allow the trustless automation of value or data transaction when certain predefined conditions are met. In the coming years, these pieces of code may streamline and accelerate vital, but slow, economic processes like real estate transfer and insurance payments. And they may open markets for new products that couldn’t exist today.
Unfortunately, blockchain systems, despite using thousands — or even millions — of computers, have not yet solved the problem of scale. To take a familiar example, consider payments: Visa and PayPal process thousands of transactions every second, providing one-click and zero-wait payments.
Bitcoin (BTC), the world’s leading cryptocurrency, clears roughly five transactions a second, and it often takes an hour for transactions to finalize. Facebook has designed Libra to clear around 1,000 transactions a second.
That’s impressive, but it’s not enough for a firm with billions of users. Once problems of speed are solved, blockchain pioneers still need to address privacy concerns, since anyone with access to a given chain can view all of its associated data. After that, there are the legal and regulatory challenges that always accompany innovation.
Fixes to throughput, speed, privacy and regulatory compliance are all on the way. Thousands of the best developers are at work on protocols that will accelerate finality and move transactions per second into the five- or six-figure range, while permissioned blockchains will address major privacy concerns.
Companies are increasingly engaging with regulators. The United Kingdom Financial Conduct Authority earlier this year granted a license to a cryptocurrency investing firm, while regulators from groups like the Financial Action Task Force (FATF) routinely engage with blockchain firms and blockchain media.
That’s not to say that the road for regulator and business cooperation is an easy one: New technologies like blockchain force both parties to ask difficult questions. What convinces a regulator in one country or state might prove less compelling to a regulator elsewhere; we’ve already seen that some regions are more welcoming of blockchain innovation than others. Today, the world’s blockchain laws are a patchwork. Let’s hope they grow more consistent in the years to come.
Different layers of blockchain
Blockchain insiders often speak of Layer 1, Layer 2, and Layer 3 technologies; each new layer builds off a previous level of technology to provide greater utility and efficiency. Much of the activity so far has been in Layer 1. What are the differences between the various layers? Transit and commerce provide a good model. Vehicles and a road network might constitute a Layer 1; Layer 2 would be a state-of-the-art logistics structure for moving goods and people on demand. Layer 3 might be an e-commerce system that relies on the Layer 2 logistics to move goods. Blockchain needs strong solutions in all three layers, and there’s every indication that Layers 2 and 3 will blossom in the next few years.
In fact, depending on how you define the term, some Layer 2 solutions have already debuted, though they are limited. The Lightning protocol, for example, speeds up Bitcoin transactions but does not allow crucial blockchain features like smart contracts and will not work with other blockchain protocols. If Layer 2 protocols are to transform blockchain, it’s clear that protocol-agnostic tools, equally well-suited to different chains, must appear.
Microsoft has stated that it anticipates Layer 2 blockchain will move the technology from the niche to the mainstream, but such success seems unlikely if systems aren’t interoperable.
Once the technology is better understood and the legal situation codified, we can expect early-adopter companies to make extensive use of blockchain. Already, major companies like Bank of America, Microsoft and JP Morgan have begun investigating blockchain, but most enterprises have remained cautious and have contributed a relatively small portion of their resources to distributed ledger technology.
The exception to this rule might be Facebook, which claims huge plans for its announced Libra cryptocurrency, but blockchain is not yet central to the social network’s value proposition and the launching itself might be postponed. Enterprise understands the value of patience, and we’re unlikely to see mass implementation until early adopters demonstrate that blockchain saves money and opens new markets. If rapid settlement of complex transactions via smart contract becomes standard, for example, we can expect a new technological gold rush.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Ed Felten is a Robert E. Kahn professor of computer science and public affairs at Princeton University, the founding director of Princeton’s Center for Information Technology Policy, and he serves as a member of the United States Privacy and Civil Liberties Oversight Board. In 2015–2017, he worked in President Barack Obama’s White House as Deputy United States Chief Technology Officer. He has published more than 150 papers in research literature and three books.