Each week, I will be posting my notes from MIT’s Blockchain and Money course to keep myself accountable for my learning.
In the famous letter to Jamie Dimon (CEO of JPMorgan Chase), the author Adam Ludwin (founder of chain.com) points out that comparing cryptocurrencies to fiat or other traditional securities isn’t quite accurate. Rather, it is a new asset class that enables decentralised applications, just like how the internet enabled online applications like Facebook and YouTube.
In fact, the author finds the term “cryptocurrency” to be misleading for this reason. Rather, they should be called crypto assets.
In which case, when evaluating the value of these crypto assets, the focus should be on the individual use cases and how likely they may take off, not whether crypto can replace fiat.
To recap, there are key trade-offs between centralised and decentralised systems:
- More decentralisation means less economic rents and single points of failures.
- But it also means increased challenges with coordination, governance, security and scalability.
The author of the letter believes centralised applications beat the decentralised ones in almost every dimension, censorship resistance.
In this context, censorship resistance means no one can stop individuals from accessing and using decentralised applications. This doesn’t just apply on an individual freedom level, but also for barriers to entry.
A McKinsey report in 2018 viewed that the short-term value of blockchain will be mainly reducing cost, especially for record keeping and verifying functions. They believed technical issues such as scalability will be resolved around the year 2021–2023.
Given this, some current and potential use cases of the blockchain technology include:
- Venture capital — Crowdfunding through ICOs
- Payment Systems — Cross border, inter bank, retail
- Loan Issuance & Trade Finance — Digitizing paper-based processes
- Clearing, Settlement and Processing — Securities & Derivatives
- Digital IDs and Data Reporting
- Central Bank Digital Currency & Private Stable Value Tokens
- Supply Chain Management
- Property & Asset Registries
- Device-to-device transactions in the IoT
- Medical records
- Voting
When assessing each of these potential use cases, there are a few core pillars that should be considered:
The benefits to the application:
- Which pain point are you solving?
- What value is being captured?
- What are some competing solutions?
Specifics of the application:
- Which costs of verification or networking are you reducing?
- Which transactions need recording?
- Which stakeholders need write and read access?
- What does the user interface look like?
Costs to the application:
- What are the costs of transition from legacy systems?
- What trade-offs of scalability, performance and privacy are necessary?
- How can broad adoption be realised?
- And finally, given all of this, are the net benefits sufficient for the use case?
MIT Sloan Management Review offers another frame work for assessing blockchain use cases:
What are you trying to do?
- Record
- Track
- Verify
- Aggregate
What value do you want to capture?
- Information and knowledge
- Attribution and responsibility
- Access or permission
- Decision rights or votes
- Ownership or incentives
- Reputation and trust
- Contracts
- Transactions
For whom?
- Customers
- Employees
- Suppliers
- Creators
- Investors or creditors
- Governments
- Citizens
Finally, it is important to consider why blockchain is the right technology for the use case compared to a traditional database which have been discussed here. In short, the main difference between a database and blockchain is:
- Database can be edited by the administrator while blockchain is append-only.
- Blockchain ledger is distributed yet updated real-time for everyone accessing it.
- Blockchain introduces the idea of cryptographically securing the data.
In blockchain (technology arguably receiving the highest levels of hype and capital in the recent memory), it is difficult but important to form your own views on what the unique value propositions of the technology are.
Personally, I think the mixture of the Adam Ludwin’s point on censorship resistance and cost reductions (economic rents and costs of reconciling different databases) are the current valid arguments for adopting blockchain technology.
