Crypto Report — Blockchain Overhyped?
Nevertheless, Exponential Growth Ahead From Financial Democratization to STOs/ABTs
by Dr. Chris Kacher
Riding the Revolutionary Rocket with Cryptotechnologies… Entirely Evolutionary™
Utopian Delusions
When I hear nonsensical proclamations about blockchain/crypto technology making corrupt governments and corporations a thing of the past, it is a Utopian fallacy which miserably fails when examined more closely, much as so many leftist, progressive ideals which sound great on paper, not only fail to achieve the intended effect, but often create the exact opposite effect as numerous corrupt regimes have come to pass over the centuries, predicated on the false claim of bringing power to the people.
The Revolution Of Financial Democratization
Nevertheless, just as the internet revolutionized access to content and creation of content, blockchain will revolutionize finance, money, and the transaction of value. As one of many examples, billions of unbanked and partially banked are/will be able to send/receive money and purchase goods without a bank account. Bitcoin and other crypto technologies democratize finance via crypto wallets. Where it gets even more interesting is the Supreme Court ruled that bits of information on a computer are a speech, so since money can be represented as bits, it too is a form of speech. And the first amendment suggests as the renowned Naval Ravikant pointed out, that a certain level of financial freedom, expression, and the transaction is on the way:
“Speech is free because we’re a free society, and we’re not going to do away with free speech because it’s the fundamental basis for a free society, but now money is just code, and code is just speech, so money and speech are actually the same things. So, you’re trying to keep speech free, and you’re trying to restrict the flow of money, and the two of those just can’t go together.
Bitcoin is pure code. There’s no paper. There are no guns. There’s no federal government. It’s just pure code, so to stop Bitcoin, you got to stop code, and code is actually just speech. It’s just a bunch of numbers and letters that I write down that a computer interprets. So, you have to stop me from writing those numbers or letters down in a certain sequence and conveying them to other people to stop them from loading it on a computer somewhere in the world to stop that somebody else from then turning that into money. So, you can’t control the way money flows unless you can stop the developers from writing the code and from talking to each other and from thinking, and the regime that could do that would probably be one of the vilest regimes on the planet, not a society that I think any of us would want to live in.
So, essentially, by turning speech into code or just writing into code that computers can interpret and then turning code into money that computers can exchange, you can’t stop money from moving around anymore. This is what China’s figuring out. This is why they had to shut down all the exchanges, because they had huge capital flight issues, because they’re trying to control the ingress and egress of money in China, but you can’t do that unless your firewall policy can filter out all the traffic that looks like money, and it’s really hard to recognize what it is because it’s all encrypted, to begin with. So, there’s all these 0s and 1s flowing by on the wire, and you’re trying to figure out which one is someone talking on WeChat and which one is money, really hard problem.”
While this all may sound extreme especially to those deeply ensconced in the banking system and high finance, keep in mind that technological revolutions from the printing press to the telegram to radio to television to the internet itself were often denounced. Governments have tried to exert control, sometimes in vain. Back in the day, a common belief was that publishers should control what is published as they are a check on sensibility, let alone the controlling of information via book burning ceremonies. “What if people could read and publish whatever they wished? It would be chaos and pandemonium!”
So while it may be difficult to see banks and other institutions enabling such actions, they have no choice. The CEO of Boerse Stuttgart said at the recent blockchain conference in Frankfurt, Germany that if they do not onboard blockchain technologies, they will be left behind. Peer-to-peer (P2P) decentralized platforms that enable the transaction of value such as Bitcoin, Dash, Zcash, Grin, and Beam are a great onramp for financial freedom for the many, enabling those in second and third worlds to leapfrog normal banking and go straight into p2p platforms to transact value. This is similar to how many Asians leapfrogged landlines and went straight to wireless mobile.
So just as Amazon became the long tail of Internet retail, crypto will become the long tail of finance.
Government Intervention Futile?
Back in the 1990s, internet companies were either new to the world or offline juggernauts. Amazon and eBay were new to the world. Time-Warner which bought America Online was not. The large offline companies were slow to embrace the internet but eventually had no choice or fade away. As a consequence, the internet became a new information infrastructure that ran in parallel to the offline world. The decentralized financial system runs in parallel to existing financial systems as well. Killer apps use cases are already live but are slow and expensive. They just need to scale and have lower on-ramp costs.
Eventually, decentralized financial infrastructure will be borderless at a lower cost and higher efficiencies. People will be able to create markets for themselves and trade on things they’ve never been able to exchange before via the tokenization of value, ie, security token offerings/asset-backed tokens on the blockchain. This may be hard to imagine as new financial markets prior to blockchain required a massively expensive platform designed by financial institutions and investment banks. But then, prior to the late 1990s, the idea of having a non-physical online store in lieu of a traditional store was hard to conceive. Remember when most believed the internet was all about pornography and credit card fraud? Many said they would never trust their credit card with Amazon. But then Verisign came along.
So while blockchain is presently slow and expensive with no user-friendliness in sight, so was the internet in the early to mid-1990s. But just as with the internet, blockchain will scale, fiat-to-crypto onramps are coming, and user-friendly decentralized apps are being built. This will massively increase liquidity in the cryptospace which will engage the steep part of the S-curve, causing it to soar. Just as AOL made the internet accessible to the masses through its user-friendly interface, so will some of these blockchain-based platforms which are being built as I type. Remember back in the early 1990s when creating even a simple website was hugely expensive and onerous?
Crypto combines computer science with economics. For an app/dApp/protocol/platform to succeed over the long run, its code must get the economic incentives right while maintaining security against attacks. That said, one big reason why the blockchain buildout will be faster than the development of the internet is that blockchain is open source so anyone can stand on anyone’s shoulders and continue to build. Nevertheless, blockchain is where the internet was in 1995. It is just starting to take its first steps. Remember that back then, people used to complain that the internet’s TCP/IP was inferior because you couldn’t stream video.
And firms such as ICE’s Bakkt, Fidelity, and ErisX are launching institutional-grade platforms over the next few months which will help motivate institutions into entering the cryptospace, encouraging further investment.
Lost Your Key?
There are issues. What if you lost your key that is tied to a hard asset? This could be real estate, cars, collectibles, and even tokenized shares. At present, you would lose your bitcoin. Would the same be true of your home? Naturally, regulators would step in and require there to be a way for someone who lost their key to recovering their item. This would require a central authority of some form, ie, a third party intermediary, or what is called an ‘oracle’ that could override the “immutable” blockchain distributed ledger. While some oracles are less corruptible than others such as ESPN being the oracle that sports betting platforms can use to automatically decide who gets paid via smart contracts, such intermediaries will still have to exist, thus while the odds are low of corruptibility in such instances, all intermediaries are potentially corruptible. What’s stopping a corrupt intermediary from overriding the blockchain distributed ledger and handing your property over to someone else? What of squatters taking possession of your land? Once again, you would have to appeal to a higher authority to enforce your rights. Alternatively, there are now decentralized oracles as a possible solution.
An Obvious Solution
Still, one could ensure their key against loss with an insurance company since the probability of loss would be very low, thus premiums would be relatively low. Of course, one would have to take responsibility not to lose their key, much as one would have to be careful with valuable jewelry which could be lost or stolen when worn. People insure jewelry so why not ensure private keys?
With crypto exchanges that are centralized, one has recourse. Not so with decentralized exchanges (DEXs). Thus again, one could ensure their private DEX key with an insurance company. Just as with a valuable diamond ring, one should perhaps keep their private key in a home safe or safety deposit box.
Thus, while blockchain will reduce or eliminate costs across the transaction chain for many businesses such as banks, retailers, and the like, it will never eliminate trust from the equation. But then, with the solutions proposed above, oracles and intermediaries will not always be required.
Tech Development At Breakneck Speeds
Still, the tech that bridges the physical world with the virtual world needs to be built out. The pace of development continues to accelerate with a continuous flow of some of the smartest minds migrating into space. Though bitcoin remains overvalued (see my recent piece here), bitcoin’s hash rate continues to climb. The number of transactions is also near all-time highs despite the crypto winter which continues to rage on, now in its 15th month. Further, the cost savings with blockchain is immense, thus still deserves the title of being a truly revolutionary technology.
The Future: Security Token Offerings (STOs) / Asset-Backed Tokens (ABTs)
In one of the most dramatic examples, companies that are tokenizing hard assets (STOs/ABTs) such as HanseCoin and Harbor reduce front and back end fees substantially without requiring capital lock up. For example, in the shipbuilding industry which typically requires a capital lock-up of several years, fees can be reduced from 25.5% down to 4% by removing many front and back end costs with no capital lock-up. Total fees on capital raise from construction equity to finished homes and apartments are also significantly reduced. The savings is passed onto all parties involved from the buyers to the investors. Indeed, developers in newly thriving cities such as in Finland, Estonia, and parts of Asia are interested in onboarding their real estate development projects onto capital raise platforms using blockchain technology. The tokenization of hard assets is the way forward. Higher growth nations with families information exert high demand for such projects, especially since the price points of the apartment or home are more favorable due to the lower development costs from the utilization of blockchain technology.
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