We Don’t Need to Put Everything on a Blockchain
If you’re working on a start-up, now is a good time to work the word “blockchain” into your elevator pitch. Fueled by interest from media, corporations, academia, and governments, people are seemingly proposing new applications for the technology every day. But where is the line between buzzword and legitimate game-changing technology? I don’t pretend to know which specific applications will succeed or fail, but a look at the dizzying array of current start-ups certainly reminds one of past technology bubbles.
Sometimes, in our excitement, we forget the time-tested economic maxim that there is no free lunch. Blockchain technology, like everything else, involves tradeoffs. Processing data in a decentralized manner using numerous independently operating computers is generally more complex and expensive than managing a “master” set of data from one source. To make economic sense, using a blockchain for a given task must involve benefits that outweigh the costs.
Blockchain technology has many potential benefits, but perhaps the one most frequently discussed is the ability to conduct transactions without a central intermediary. While that is far from the only benefit, blockchains are likely useful in situations where trusting or relying on such an intermediary is problematic. With cryptocurrencies, there is no government to cause inflation, and no credit card company holding our personal information. Blockchains also address significant problems with central intermediaries in examples including, but not limited to, the following:
- Remittance payments to the developing world, where intermediaries extract high fees
- Supply-chain management, where producers, wholesalers, and shippers around the globe can interact without central monitoring
- Settlement of financial derivatives between banks, where parties still rely on long and costly back-office processes
- Records of ownership, in cases where risk of governments appropriating assets is high
When considering the outlook for a blockchain-based startup, do the following thought experiment: Imagine the exact same purpose being fulfilled by a central intermediary. If relying on this intermediary would cause significant problems for the parties to a transaction, it might be an industry ripe for disruption by blockchain technology. But intermediaries carry significant economic value and aren’t inherently bad. Some of the current crop of start-ups are no doubt trying to fix what isn’t broken.
Max Gulker
Max Gulker is a former Senior Research Fellow at the American Institute for Economic Research. He is currently a Senior Fellow with the Reason Foundation. At AIER his research focused on two main areas: policy and technology. On the policy side, Gulker looked at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker was interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy.
Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxg_econ.
