Meaning | Blockchains, what are they good for?

A year ago, Bitcoin and other cryptocurrencies were sold at record prices, with a combined market value of around $3 trillion; glossy ads featuring celebrities — most notoriously Matt Damon’s “Fortune Favors the Brave” — filled the airwaves. Politicians, including, sadly, New York’s mayor, raced to adjust to what appeared to be what was to come. Skeptics like you were told we just didn’t get it.

Since then, crypto asset prices have plummeted, while a growing number of crypto institutions have collapsed amid accusations of scandal. The implosion of FTX, which appears to have used depositors’ money in an attempt to prop up a related trading firm, has made the most headlines, but is just one entry in a growing list.

Many say we are going through a “crypto winter.” But that may be understating the case. This is looking more and more like Fimbulwinter, the endless winter that in Norse mythology precedes the end of the world – in this case the world of crypto, not just cryptocurrencies, but the whole idea of ​​organizing economic life around the famous “blockchain”.

And the real question, it seems to me, is why so many people – not just naive small investors, but also big financial and business players – bought into the belief that this bad idea was the wave of the future.

A blockchain is a digital ledger associated with an asset, which records the history of transactions in that asset – who bought it from whom and so on. The asset can be a digital token like a Bitcoin, but it can also be a stock or even a physical thing like a shipping container. Ledger is of course nothing new. What is distinctive about blockchains is that the ledgers must be decentralized: They do not sit on the computers of a single bank or another company; they are in the public domain, maintained by protocols that cause many people to maintain records on many servers.

These protocols are, everyone says, extremely smart. I’ll take your word for it. The question I’ve never heard or seen satisfactorily answered, however, is, “What’s the point?” Why go to the trouble and expense of maintaining a ledger in many places, and basically carry that ledger around every time a transaction takes place?

The original rationale for Bitcoin was that it would eliminate the need for trust – you wouldn’t have to worry about banks getting away with your money, or governments inflating the value. In reality, however, banks rarely steal customers’ assets, while crypto institutions fall more easily to temptation, and extreme inflation that destroys the value of money usually only happens in the midst of political chaos.

Still, there was an alternative, more modest rationale for using blockchain technology, if not necessarily for cryptocurrencies: It was meant to offer a cheaper and more secure way to keep track of transactions and things in general.

But that dream seems to be dying too.

Amid all the sound and fury over FTX, I’m not sure how many people have noticed that the few institutions that were seriously trying to use blockchains seem to be giving up.

Five years ago, it was supposed to be a big deal – a sign of mainstream acceptance – when Australia’s stock exchange announced it planned to use a blockchain platform to clear and settle trades. Two weeks ago, it quietly canceled the plan, writing off $168 million in losses.

Maersk, the shipping giant, has also announced that it is discontinuing work on using a blockchain to manage supply chains.

A recent blog post by Tim Bray, who used to work for Amazon Web Services, tells us why Amazon chose not to implement its own blockchain: It couldn’t get a straight answer to the question “What good does it do? ?”

So how did this enterprise, which never stood up to scrutiny, become such a big deal?

It was probably a combination of factors. Political ideology played a role: Not all crypto-enthusiasts were right-wing, but mistrust of banks – we all know who’s in charge them — and government money provided a hard core of support.

The romance of high technology also played a role, with the very incomprehensibility of cryptodiscourse acting, for a while, as a selling point. And as prices rose, the fear of missing out—plus heavy spending on marketing and political influence buying—led many others into the bubble.

It is a wonderful story, and also a tragedy. It is not only the small investors who have lost much, if not all, of their savings. The crypto bubble has had great costs for society as a whole. Bitcoin mining alone uses as much energy as many countries; I’ve tried to estimate the value of the resources used to produce fundamentally worthless tokens, and it’s probably in the tens of billions of dollars, not including the environmental damage.

Add the costs associated with other tokens and the resources burned up in failed attempts to use a blockchain approach to everything, and we’re probably talking about waste on an epic scale.

No doubt I will hear from many who still insist that I don’t get it. But it really looks like there was never anything to be had.