2016: The Year of Blockchain Hubris

Chris DeRose is a software developer, bitcoin evangelist and the controversial co-host of the podcast Bitcoin Uncensored.

In this CoinDesk 2016 in Review special feature, DeRose provides his recap of the year that was, looking at ideas he believes proved fruitless for innovators.

Inconvenient as it may be for some, blockchain is booming.

Despite challenges in other areas, blockchain's use as a value routing protocol is developing at blistering speeds, and I would argue, with amazing results. If you know where to look, you can see labor specializing, banking services being extended and information services being globalized.

So, why does everyone seem to be talking about the technology's potential tomorrow? It turns out the real 'disruption' is not as uncontroversial or straightforward as some have promised.

For speculators that arrived in 2016 looking to strike it rich, it would seem that the chance of finding success in areas outside of the technology's original purpose (value routing) seem increasingly unlikely. That means the biggest success stories are companies focusing on that – not trying to win investors outsized returns.

Profitable businesses such as Nitrogensports and Alphabay (not to mention good-old ransomware) are in no short supply – but like any business that relies on regulatory arbitrage, these companies and individuals don't gloat on progress.

Big banks and private blockchain supporters won't likely acknowledge the success of these businesses anytime soon. But that's not to say that these businesses aren't drivers of real change – even perhaps more so than the industry startups that seem so fond of press releases.

While some may cast judgement on these businesses, preliminary studies are showing that their successes could reduce health and crime costs compared to incumbent technologies – and that may even improve computer security by incentivizing users to chose better written software.

Whether they'll succeed in this endeavor is a topic for 2017 to address.

For now, as 2016 comes to a close and bitcoin ascends up the hype cycle's slope of enlightenment, let's look back what went wrong, and what was outright stupid, during the 2016 blockchain fever.

The idea that a 'blockchain' could exist without the use of a publicy traded token made its first appearance as early as 2014. Pitched as a best-of-both-worlds, the idea was simple – banks liked the idea of 'bitcoin' the payment rail and settlement system, but didn’t exactly care for 'bitcoin' the currency.

Now, there are signs that this idea may have finally culminated with the struggles of startups like banking consortium R3 and post-trade distributed ledger startup Digital Asset Holdings.

Though digital bearer asset technology (the technology behind bitcoin) required a financial reward to compensate the entities that provide its immutability (miners), these firms were quick to offer solutions that promised to remove this supposed burden.

However, by the close of the year it quickly became evident that at least some of their initial supporters weren't buying the pitch.

It would seem private blockchain firms have decided that 'blocks' of data aren't actually an efficiency, and that 'sharing facts' is 'the technology behind bitcoin' that will add value for their supporters.

Digital Asset Holdings has go so far as to remove most of the references to blockchain in its newest site redesign, touting the newest fintech buzzword du jour 'distributed ledger technology' instead.

As to what these value propositions might have to do with the scientific deifinition of blockchain… well, it would seem that the hope is no one will ask.

Though I've written extensively on the topic of ICOs in prior articles, no article on the fumbles of blockchain would be complete without at least a passing mention to the 2016 altcoin rebrand.

In recognizing that the allure of the 'bitcoin get rich quick' dream is fading, exchanges such as Coinbase have pivoted toward the newest marketing gimmick as a means to supplanting bitcoin's dying speculative fever.

Of course, whether a US exchange could successfully sustain growth by arbitraging SEC regulations (and labeling digital securities 'blockchain'), remains to be seen.

However, as the year comes to a close, it would appear that the SEC is not going to accept the pitch in whole. And while the ICO proponents are eager to suggest that this model of speculative trading is going to bring greater attention and funding to software developers, to date, I would argue there has yet to be even a single example of success.

Outside the anecdotal stories of insider traders whose exit positions left themselves rich at the expense of late-coming greater fools, utility for these coins remains thoroughly unclear.

To date, the vast majority of 'appcoins' or 'blockchain tokens' remain on exchange's books, ready to be sold by unscrupulous speculators to the newcomers without even a single consumer to be found.

It would seem that the advantages of concealing logic and iteratively publishing code are becoming far more obvious.

Thus far, all attempts to find an efficiency by publishing code in a blockchain have fallen flat.

Though many have attempted 'Uber clones', 'prediction markets', 'cloud storage' (basically all successful Web businesses, but with the blockchain) – the only successes that I can see have been found in automated ponzis, provably fair ponzis and outright explicit gambling ponzis.

As people search for use cases where the inordinate overhead of a Turing-complete smart contract finds a net efficiency, the few cases of censorship-prone algorithms such as gambling, darknets and ransomware are meeting almost no enforcement action that would prevent HTTP and Tor from solving their problems.

Meanwhile, the overhead and complexity involved in maintaining a smart contract-enabled blockchain like ethereum has resulted largely only in continuous comedy memes.

For others in 2016, blockchain seemed poised to displace one the oldest of institutions in our modern world – the corporation.

Thus, 'distributed autonomous organizations' were presented as a solution to the perceived 'evils' of profit-seeking middlemen.

The pitch of DAO proponents would appear to be that smart contract code itself could facilitate market efficiencies through its own cognizance – and without the leadership and direction provided by a traditional group of employees, founders and decision makers.

Many in this pro-DAO camp were seemingly unaware that much like code itself, corporations require constant iterative development and direction in response to pressure from competitors and changes in regulatory and technological environments.

However, after the DAO exploded (and made the opportunity costs of immutable code obvious) – fans of this pursuit are in shorter supply.

When Digital Asset CEO Blythe Masters took the stage of the American Banker conference in 2015, she declared that she believed banks trust each other enough to share financial details.

The purpose of blockchain, according to Masters, is that it would dispense  'proprietary information' and enable regulators and banks alike to benefit together, reducing asymmetric data in the marketplace.

Unfortunately, in the time since that announcement, banks have not only distanced themselves from consortium initiatives, they have begun filing patents with the intent of guaranteeing control over the technology.

Further, these institutions have started to ask what can be done to obscure their information from being disclosed in their 'transparency' initiatives.

While most successful business owners have long ago discovered that asymmetric control of market information is the efficiency that their business provides, blockchain leaders are just now coming around to this realization.

Such realizations pose, yet again, the question of just what it is we're even trying to achieve with transparency initiatives.

No, not smart contract oracles – people as oracles!

Newcomers to the bitcoin and blockchain space this year arrived bright-eyed and hopeful that certain individuals possessed the innate knowledge necessary to navigate this brave new world.

In 2016, 'oracles' appeared and delivered this information to the crowds.

Initial promises and prognostications were offered by the likes of Balaji Srinivasan, Vitalik Buterin and Andreas Antonopolous – but these individuals were displaced by new oracles such as Don Tapscott, William Mougayar and Bettina Warburg.

As the new round of oracles drifted even further into the realm of hyperbole and exaggeration, the blockchain space began to sound like a feel-good echo chamber.

For many of the 2016 newcomers, 'blockchain' was the savior of the day, and to ask what a blockchain even was became taboo.

Yet, by the year’s end, the lack of clothes for each of these attempted emperors would become painfully obvious. It would appear that in an exotic new specialty such as blockchain, there are few qualifications that would enable anyone to evaluate claims.

It seems clear now that the efficiency of blockchain is regulatory arbitrage.

But in 2016, some came to this space with the goal of applying this technology to the realm of regulated commerce. And their success has been limited.

I have long argued that the regulations that are likely to improve blockchain adoption are those that increase and expand the censorship of credit cards and digital payments that would otherwise service its potential markets.

These restrictions act as subsidies, which in turn fuel the adoption rate of blockchain.

In this light, one could go so far as to say that the people who are most hard at work advancing these regulations are the members of America's law enforcement, and more specifically, the people who employ them.

Whatever function blockchain regulatory groups can offer for these people would appear to be, at their very best, misguided.

Whether this lesson has been learned in 2016 is yet to be determined, but signs are pointing toward "maybe".

It is certain that there will be further blockchain innovations down the line – however, scandals and scams continued to define the industry.

In this light, I'd argue that the successes that await us are unlikely to come via the funding of bold new blockchain ideas, but by the mechanism which brought the innovatoin of bitcoin in the first place.

Humble, simple propositions, brought by specialists working in solitude, who came to scratch their own itch.

Perhaps this will be the lesson of 2016. Time will tell.

Dead fish image via Shutterstock