There’s a shiny new toy on the block. It’s called block chain, i.e., the technology behind BitCoin. It’s going to solve lots of intransigent problems, the kind that have remained unsolved for years! Really! Everyone says so, from big banks to great investors to authoritative media with brainy journalists!
I love Bitcoin, and think that block chain is one of the cleverest technologies I’ve encountered in some time. But this level of enthusiasm is a bubble, and like all bubbles, it will burst. Meanwhile, loads of people are bubbling about all the problems worth billions, problems that have gone unsolved for years, that block chain will solve.
The stock transfer problem
Just for fun, I picked a clever 5 minute video produced by the Wall Street Journal that explains to us rubes in the back woods how BitCoin works, and how it will be used to solve the horrible problem of stock transfers. According to the authoritative folks at the WSJ, transferring stocks takes days, while Bitcoin makes it “nearly instantaneous.”
This is huge. Those authoritative WSJ folks, no doubt after consultation that was wide and deep in the world of Bitcoins, assure us that the result will be billions of dollars in savings.
Billions! And imagine, all you have to do is use BitCoin!
There are lots of things wrong with this picture. Let me just pick on a little thing. Bitcoin makes the transfer “nearly instantaneous.” Is that so? Because of all the computing the Bitcoin miners have to do to make the block chain secure, the actual waiting time varies, but a reasonable estimate ranges around 10 minutes. When you’ve gone to an ATM to withdraw cash, would you say getting the cash is “nearly instantaneous?” Well, no. You wait for the bills to count out. How long before the cash is in your hands? Ten seconds? Maybe twenty at the outside? What if it were a full minute? You would think the machine was broken. What if it were five minutes? You’d be sure the machine was broken, and you’d have left long before.
Why do people explaining things like this decide to change the facts on us? While I agree that, compared to “days,” ten minutes or so is a vast improvement, why exaggerate? What else have they got wrong, if they get non-crucial little things like this wrong?
There’s some magic that happens in the video. It’s not called out, but it’s clearly magic. And it has nothing to do with Bitcoin!
The magic is how the sender of the stock trade has all the data required for the transfer tied up in a neat little digital bundle, ready to send off to the block chain network – and equally magic, how the receiver of the stock trade is ready to receive said neat little digital bundle, unwrap it, store it, and be completely satisfied that it had received the stock.
Digitizing all the required information in a standard format all senders can send and all receivers can receive is the magic – and the genuinely hard-to-solve problem here. Why do things take days to settle? I don’t know, but the usual reason is that lots of departments are involved on both sides of the transaction, not everything is digital, and … it’s always been done that way!
Block chain is definitely a cool technology. But what it solves is not the problem here! The actual problem is completely unrelated to Bitcoin and block chain!
Once you’ve solved the genuinely hard problem – digitizing all required information in standard form on both ends and adapting all relevant systems to generate and accept it – there are loads of ways to transport the data from the sender to the receiver. There are even lots of peer-to-peer methods that could be used, thus avoiding all the hoo-haw of having your stock information stored many times in a distributed ledger all over the world. You could, for example, agree on a set of RESTful calls the sender could make on the receiver’s system that would work fine. The industry could set up a cooperative central place that used normal DBMS technology to make the transfer. There are loads of approaches, all of them viable, all of them faster than Bitcoin, and many of them no more expensive to implement.
Imagine you’re living in a house and you’ve bought a new one a couple of states away. You want to move all your stuff. As everyone knows, the hard part is packing and boxing up before you move, and unpacking after you’ve moved. That’s what takes the time and care, and that’s what Bitcoin-based solutions airily assume. In the real world, once you’ve packed everything, you load it into a truck, which drives to your new house, unload all the boxes, and then the “fun” of unpacking begins. In the Bitcoin world, you would still have to go through all the time and work of packing. Then you would call trucks (still!) and send your boxes to the various depots of the distributed moving service, which would move your boxes all over the place, let them be examined by loads of people, and put them on their shelves with exquisite care. Then you would … get ready … send your own trucks to the depot, pick up your boxes, move them to your house, and start the fun of unpacking. This added step in the middle would take at least 1,000 times longer than the moving van would have.
Isn’t Bitcoin great? See how it solves the moving problem so nicely?
There’s a pattern here
This misunderstanding of a technology and claiming it solves all sorts of long-standing problems is typical of the new technology hype cycle. It’s happened loads of times before, and will keep happening for the foreseeable future. A good current example is the Big Data mania, which is supposed to solve all sorts of long-standing problems and unlock the keys to the kingdom – except that it doesn’t. When people have trouble understanding the basics of relatively simple things like email, is it surprising that they get Bitcoin wrong?
I’m eagerly awaiting problems for which the super-cool block chain technology is actually relevant. I suspect they're out there. I've even started looking at a couple candidates. I’m ready.