Blockchain legacy might not be its technology

Blockchain has crypto-anarchism roots dating back the 1980’s with Bitcoin as its flagship. While this technology continues to have strong limitations, alternatives exist that can offer similar solutions without the inconveniences. Blockchain has nevertheless pushed an unforeseen technological development in Central bank digital currencies (CBDCs) and this might be its true legacy. As CBDCs gain traction it is yet to known if adopters will start to blindly trust central banks in opposition to Blockchain.

With thousands of public projects listed and private ventures from IBM, Maersk or Visa ledger technology (Blockchain) has brought to light the subject of trust. Viewed as a “trust-free technology” this innovation promises to disintermediate necessary third parties across many industries. Blockchain technology is a latest technological development on account transactions which promises to record full verifiable copies of a ledger to all nodes (network branching) within a set network. Added the benefit of removing any authority to supervise transactions (consensus mechanisms) full transparency of information participants would place their trust on networks instead of a third force. Early electronic currencies (Digicash, E-gold) from the 1990’s failed due to scalability issues and anti-money laundering regulation so it is surprising that digital currency led to the phenomenon we now witness. Natamoto (Bitcoin: A Peer-to-Peer Electronic Cash System) solved the issue of double-spending and increased users trust in digital systems which led to foundations of today’s cryptocurrency movement.

Less known to the public is Bitcoin’s roots in cypherpunk and crypto-anarchism, a political ideology which aims radical political and economical freedom principles through cryptography. This movement dates back from the late 1980’s (Crypto Anarchist Manifesto) as a reaction to perceived government mass surveillance programs. Today members include founder of BitTorrent (Bram Cohen), Netscape (Marc Andreessen), Tor (Jacob Appelbaum) or Wikileaks (Julian Assange) and have the goal of rending Big Brother obsolete. Bitcoin is a proposal for fiat currency without government reliance and Blockchain (the technology behind Bitcoin) would enable this proposal by offering a distributed “append-only timestamped logs” database. This would remove centralization, therefore an authority to control.

It is this removal of centralization that is the primary appeal for “trust-free technology” as most of our data is quantified and centralized within CRUD (Create, Read, Update, Delete) databases. Parallel to the cypherpunk movement in the 1980’s SQL (Structured Query Language) became the standard language for accessing data in relational database management system. SQL is a CRUD database with remarkable adaptability. Oracle, Microsoft sell their enterprise version while open-source MySQL or PostgreSQL remain widely accessible. Relational databases remain the standard for managing data even if storage and retrieval of data can be done alternatively with non-relational software (NoSQL) as in database management systems Cassandra or Hbase. These database programming languages are constantly in evolution and can offer fault-tolerance systems (data replication across nodes) similar to Blockchain’s proposal of decentralization (Sharding) and also offer same cryptographic hash functions (ex: SHA-256) if required.

Contrary to a CRUD database Blockchain only options are only Create & Read. Management systems that use ledger technology cannot delete nor update data. It is this appeal that solved the issue of double spending as the creation of a universal ledger made all transaction immutable and visible to all nodes within a network.

While offering resiliency for unwanted data manipulation Blockchains’ limitations also makes impossible for ad-doc adjustments offered by CRUD databases. Blockchain also requires all nodes to be validated which needs high levels of energy consumption. Bitcoin as the largest (estimate of over 80’000 nodes) has the electricity consumption of whole of Belgium (+/- 85 TWh) for a network of 30GB (as of 2021). While the combined power usage of Microsoft, Google, Facebook, Apple and Amazon is close to Hungary (+/-45 TWh).

Blockchain can define its design architecture that will limit transaction speed, consensus mechanism, security protocol and other characteristics with the risk that updates will lead to forking (creation of a new software). In 2017 Bitcoin forked because a dispute between core developers. This originated Bitcoin Cash since all nodes didn’t accept the update (now both exist in parallel). This isn’t an issue with CRUD databases as it

follows an unidirectional control model that doesn’t require a consensus. When implemented within a software ecosystem as in Hadoop (used in Big data) blocks are by default 128Mb (Bitcoin has 1Mb block size limit) and are not limited to transactional speed. If Blockchain blocks would increase in size this would impede higher storage, bandwidth and energy consumption. Natamoto understood Blockchain limitations and proposed light nodes to solve scalability issues. Side-chains found in projects as in Hyperledger try to remediate transactional speed. Even if smaller versions of Blockchain (Private Blockchain) are proposed to alleviate limitations of Public Blockchains (ex: Bitcoin) they are paradoxical proposals. The value of blockchain network is based on size and private networks by design invite centralization without offering full anonymity.

Unforeseen from the public’s interest in ledger technology Central bank digital currencies or CBDCs could be the true legacy of Blockchain. CBDCs as a digital innovation could accelerate a real economical transition with meaningful consequences. Perceived threats can push significant changes and CBDCs could transform how we would deal with currency in public or private affairs. Central banks proposal to emit their own digital currencies is a radical proposition started in Finland with Avant (smart card with a chip) in 1993. Initially popular it failed due to charging fees, lack of merchant adoption and better services by debit and credit card.

Central banks yield enormous influence on world economies due to their monetary and economic policy. Any change to this structure would transform the whole financial ecosystem due to central banks relationship with intermediaries as in commercial banks, insurance companies and pension funds.

CBDCs don’t have technological imperatives (doesn’t require Blockchain) nor regulator hurdles. As a proposal from central banks it has full support of state governments and can be made legal tender. With 70 projects CBDCs are nascent in our conversion of digital currencies. The United Kingdom has RSCoin, Uruguay e-Peso, Eastern Caribbean Dcash or China e-CNY in public testing since April 2021 and already considered as legal tender. CBDCs allure is that they improve transactions efficiencies, financial inclusion or traceability. While it is the perceived threat of cryptocurrency that definitely accelerated digital currency experimentation is was Facebooks’ announcement of Libra (cryptocurrency) and the release of e-CNY (China) in 2019 that led to its strong acceleration. 24 out of 70 CBDC propositions started a year later in 2020.

Of the latest proposals the Digital Dollar Project is the one to pay attention. The US Dollar is world’s foremost reserve currency since the Bretton Woods agreements following the end of World War 2. Countries needed a efficient foreign exchange system and therefore it was agreed that currencies were pegged to the US Dollar (USD) as itself was pegged to gold. This lasted until the 1970’s when US would no longer exchange gold for USD. Today the USD remains the world’s strongest currency supported by the US economy. 60% of all central bank all foreign exchange reserve is in USD. Over $2 Trillion daily average are in circulation followed the the Euro ($800M). 40% of the world debt is traded in USD and over 80% of foreign exchange trading involves the USD. The USD is not the first world currency and there is no guarantee it will remain so in an era of digital transformation. The Digital Dollar Project kicked-off in May 2021 with five pilot programs as to test the implications of the e-dollar would have if introduced.

There is an irony that cryptocurrencies created by individuals who wished to remove authoritarianism have ultimately accelerated CBDCs initiatives that would grant central banks omnipotent control over financial transactions. Economic Impact Payments offered by the IRS as a result from COVID-19 has demonstrated that governments can implement federal financial logistics at a large scale and therefore CBDCs could be implemented based on that precedence. There still remains questions that pilot programs will help answer, will populations would accept such a radical change in trust? Will commercial banks lead opposition? Will there be enough adoption rate? Part of the appeal of Blockchain is its’ “trust-free technology” CBDCs on the contrary would on push us blindly trustful to a 3rd party institution, the central bank. As we are on the cusp of a new era long-term consequences of Blockchain and cryptocurrencies are still difficult to predict as the technological unknowns remain unanswered.

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