In an article in The Guardian this week, economists Nouriel Roubini and Preston Byrne call blockchain “one of the most overhyped technologies ever.” In an earlier piece, Roubini predicts that Bitcoin and other cryptocurrencies collectively are “the mother of all bubbles.” When Roubini talks about bubbles, we should definitely listen: in the mid-2000s, he was either luckier, gutsier, or just more prescient than most people in warning of impending doom in our financial system. But that bubble and the one he’s predicting now are two very different animals. The former involved a catastrophic combination of inflationary monetary policy, government interference in housing markets, and tacit collusion between big banks and rating agencies. We can all hope it will never be repeated. The latter involves thousands of small entrepreneurs and an increasingly loud media echo chamber, and in the long run this “overhype” may be a good thing.
Roubini and Byrne seek to refute several claims about blockchain technology, and each of their criticisms merits some discussion. I’ll take each in order, and then discuss what I believe is the false premise on which the whole idea of “overhype” is based when looking at new technologies.
The first two related claims the authors take on are that blockchain will transform entire industries like cloud computing, and that it will represent a new universal protocol like HTML. They point out many of the known downsides to blockchain technology, such as its slow speed, storage requirements, and energy intensity. When it comes to applications requiring large numbers of fast transactions, I’m likely much closer to Roubini and Byrne’s view than I am to many blockchain entrepreneurs’.
But blockchain represents a trade-off, sacrificing some types of efficiency for disintermediation and data security. The authors say as much: “Blockchains can make sense in cases where the speed/verifiability trade-off is actually worth it,” though they go on to say, “but this is rarely how the technology is marketed.” But there are also two possibilities the authors don’t discuss. First, computing technology can advance to the point where some applications make more financial sense than they do now. Second, entrepreneurs can build around blockchains (e.g., the Bitcoin Lightning Network) that involve more intermediaries but mitigate some of the speed and energy issues.
The third claim taken on by the authors is that blockchain technology represents a “utopia” where nobody will require intermediaries to transact with non-trusted parties: “Automating away these possibilities with rigid trustless terms is commercially non-viable, not least because it would require all financial agreements to be cash collateralised at 100%, which is insane from a cost-of-capital perspective.” Again, they seem to be attacking the idea that blockchain technology will change the way we do every transaction, an idea I certainly wouldn’t defend. But they miss a good deal of transactions where automation along with 100 percent collateralization makes perfect sense —for example, small retail transactions where fraud is possible but it is not financially viable to litigate.
Roubini and Byrne’s final issue with blockchain evangelists is one with which I entirely agree: “Moreover, it turns out that many likely appropriate applications of blockchain in finance – such as in securitisation or supply-chain monitoring – will require intermediaries after all, because there will inevitably be circumstances where unforeseen contingencies arise, demanding the exercise of discretion. The most important thing blockchain will do in such a situation is ensure that all parties to a transaction are in agreement with one another about its status and their obligations.” Beautifully said.
I agree with most of Roubini and Byrne’s specific points, so what rubbed me the wrong way enough to write this piece? First, the points they attack are mostly those made by the most absolutist advocates of blockchain technology. I went to a blockchain conference in Miami where the main auditorium was like a planetarium light show and the exhibition hall was like a Turkish bazaar. Overhyped? Yes. But only those who’ve gone back to the Kool-Aid jug for seconds would dispute that. Even Roubini and Byrne concede the technology’s potential importance: “On its own, blockchain is hardly revolutionary. In conjunction with the secure, remote automation of financial and machine processes, however, it can have potentially far-reaching implications.”
Second, treating overhype in a purely pejorative sense ignores the evolutionary process of markets. I think Roubini and Byrne would agree that there is a lot of unresolved uncertainty surrounding blockchain technology. At its core, overhype is often the manifestation of entrepreneurs competing for investors. On a micro level, one can predict that a specific coin will fail, and probably be right. On a more macro level, this competitive process allows the market to find applications for a new technology that not even someone as prescient as Dr. Roubini could predict in advance. Blockchain startups may be individually extremely risky investments, but competition is necessary to converge on the uses that most benefit society. So bring on the hype!