Last week I identified four questions about blockchain: 1) What are the benefits of blockchain tech that are creating so much excitement; 2) Why are some industries – such as financial services, music and advertising technology – so particularly interested in blockchain; 3) Is blockchain the best solution to solve these industry problems; and then 4) the most relevant question of our time – could blockchain have saved Blockbuster Video?
As I covered the first two last week (click here if you need to get caught up), let’s look at blockchain as a solution and the cause of Blockbuster’s demise.
3) SIMPLE SOLUTIONS? – So, is blockchain the best way to solve the inefficiencies in the financial services, music and digital advertising industries?
What I have not yet described are the relative challenges and costs of running a blockchain system. In reality, blockchain systems aren’t cheap and have some serious drawbacks, which are eloquently described by Jimmy Song here.
In short, a successful blockchain system works if you have a significant network of disparate servers all keeping track of the same digital ledger. But this redundancy causes a host of issues:
1) it’s expensive and somewhat inefficient to build and maintain a sea of servers all keeping track of exactly the same thing and continuously update themselves (depending on the volume of transactions on the network);
2) it’s hard to upgrade anything across the blockchain since there is no single owner of a decentralized system – so achieving the necessary majority or consensus for any updates, fixes, etc. can be incredibly laborious and slow;
3) decentralization only works with a significant number or participants, and the incentives to partake in the blockchain (which I don’t even touch on here, but is the basic driver for “Bitcoin mining” if you’ve encountered that phrase) need to be compelling enough to create broad participation, otherwise you end up with a system with only a few nodes that would have been much cheaper just to centralize; and
4) these systems aren’t impervious to fraud or hacking – the main challenge with a personal digital key is that if you lose it, you literally lose everything – there’s no backup or recourse. Similarly, if someone else gets your key, you are completely exposed. Further, in an open blockchain network, the “majority rules” whenever there is a discrepancy, so if a single actor gets control of >50% of the network (which is a known flow of an open system and referred to as a 51% attack) it puts the entire system at risk of manipulation (and basically eliminates the point of a decentralized ledger in the first place).
I assume market forces (Moore’s Law or otherwise) will do their thing and the efficiency of all of the blockchain elements will increase as time passes, but this is the State of the Union today: blockchain systems are relatively expensive, slow to change, complex to maintain and not truly fraud-proof. Isn’t there a better way to do this?
Absolutely. A strong, transparent centralized database is less expensive, easier to upgrade and easier to maintain. I have yet to find a reason why the same levels of transparency, security and simplicity blockchain offers could not be achieved with a centralized shared ledger system that was intentionally designed that way. This does not seem to be the issue. So again, what’s really driving the frenzied blockchain conversation?
Money. And trust.
The exuberance about blockchain doesn’t seem to be coming from the IT world – at least in the majority of articles in my feed. It’s from people wanting to challenge an inefficient establishment. The real appeal of blockchain is how its basic architecture destroys the opaque, lopsided business models that dominate certain industries like financial services, music distribution and display advertising.
So, will blockchain revolutionize these three industries?
Financial services is probably the ripest industry for widespread adoption, as it is in the best interests of financial service companies to make transactions more efficient, reducing costs and increasing volumes. But can’t this be done without a full-blown blockchain system for less ongoing operating expense? A number of financial institutions have been running blockchain pilots in walled gardens, and there is a good analysis of the benefits and challenges of both Bitcoin and Ethereum solutions here. In terms of using cryptocurrencies to counter bad monetary policy, I am completely sympathetic to people experiencing hyperinflation, but speculatively investing in a cryptocurrency has its own set of challenges, as both Bitcoin’s and Ethereum’s wild price volatility over the last few years demonstrates.
“The real appeal of blockchain is how its basic architecture destroys the opaque, lopsided business models that dominate certain industries.” – Alex Hultgren
In music, I would be shocked if any of these well-intentioned blockchain start-ups gained enough market traction to truly usurp the dominant players, although they could force Apple, Amazon, Spotify, etc. to rethink their margin/royalty structure and transparency on music sales and streaming services – which is the underlying mission of several of the startups anyway. Note: there is another line of thought around using blockchain to combat piracy by creating digital scarcity in the music and entertainment industries, but I’ll address that in a future post.
For digital display media, we are already seeing large advertisers pull significant spend from partners that cannot guarantee brand safety and viewability, as well as continued efforts to bring trading desks in-house. With $16.4 billion in estimated fraud in 2017, there is a lot of clean up work that needs to be done in this space – and blockchain technology could be a clean slate to restart things – but the advertising industry will have to decide if the costs and challenges of blockchain (as stated above and specifically analyzed by Justin Musterman in detail here) are the best way to go.
4) BLOCKCHAIN FOR BLOCKBUSTER?
And now to answer the fourth question (and proof the title wasn’t just click bait): Could blockchain technology have saved Blockbuster Video?
Well, not exactly.
There have been many postmortems explaining Blockbuster’s demise, but I’m firmly in the camp that it stemmed from the consequences of their primary income source: late fees. A business model fueled by gouging unsuspecting customers cannot survive in the long run, and it didn’t. Their fall delighted many, probably best articulated by Gary Gulman. His celebration of Blockbuster’s passing from the perspective of a customer – although NSFW – is hilarious.
“A business model fueled by gouging unsuspecting customers cannot survive in the long run.” – Alex Hultgren
So no, a network of cryptographically secured decentralized ledgers would not have saved Blockbuster. But an earlier course correction for the lack of transparency around fees and charges – the exact factors that are fueling blockchain fever – could have potentially changed Blockbuster’s fate.
Money. And trust. When businesses create wealth in appropriate proportions and everyone trusts each of their partners to play their respective role, amazing things can happen. This doesn’t require a technology solution; it’s just good business. On the other hand, when things get out of proportion for a long enough period of time, someone eventually shows up at your office offering to sell you a disruptive, transparent technology that challenges the status quo.