I just thought this article needed a quick response. Apparently Goldman Sachs and JPMorgan have “envisaged a new blockchain that would be jointly run by the computers of the largest banks and serve as the backbone for a new, instant payment system without a single point of failure.”

First off, let’s get this clear, blockchains do not work without an incentive system.



So the Blockchain without the Bitcoin is absurd right off the bat.

But let’s briefly discuss what we’re doing here. Blockchains disintermediate third parties from transactions. They reduce risk. They do that by having participants engage in a war of attrition that requires them to burn energy.

Banks respond to incentives. Blockchains decentralize by incentivizing external participation. So what? This secret, non-public blockchain is going to benefit the world because banks are benevolent? Is that what the last 10 years have taught us?

Come on! Absurd!

Is government going to make compromising the secret blockchain illegal? Does government force these “miners” to not discriminate against transactions? How does a new bank get involved in this private blockchain?

If you have to regulate your blockchain, you did it wrong.

The benefits of decentralized interbank settlement can only be realized when the blockchain is a public ledger. Making it non-public is going to mean that there is less energy going into the system which makes the transactions mutable to a degree and the blockchain compromisable (immutability comes from non-compromisability… so two sides of the same coin).

The reason that ACH and Swift exist in the first place is to manage the risk of interbank settlement. That risk exists because… BANKS DO NOT TRUST EACH OTHER. The third party sits outside of the system and manages the honesty of the system’s users. If banks implement their own blockchain, they are being asked to manage their own honesty. And not only is that a bad idea for all of us, it’s almost certainly a bad idea for any bank that isn’t humongous. How will this blockchain manage to prevent Goldman or JPMorgan Chase from controlling 51% or colluding to control 51%? How will you prevent them from blocking the settlement of small banks they want to push out?

You will very quickly see a situation much like what Comcast did to Netflix subscribers during negotiations. Just like Comcast used their monopoly on the last mile to force Netflix to give them favorable terms, Blockchains will allow big banks (who are now synonymous with miners) the ability to attack smaller banks at their most important pain point. Big banks will control the settlement and honesty of the chain.

If you haven’t figured this out yet, blockchains are mechanisms of war. They are nothing more and nothing less. Having a blockchain between two, three, ten, four million entities, means that those entities are, in a very real sense, fighting for honesty. If they trust each other, they do not need a blockchain. But they don’t trust each other. And they don’t trust each other because many of them are dishonest. Many of them are dishonest because they respond to incentives and it is more profitable to be dishonest. So to the banks: go ahead and start your Bitcoin-free blockchain. All you are doing is admitting that the incentive to be honest needs to be removed because you don’t like the way the incentives are aligned. You want a dishonest chain.

NASDAQ gets it. They are going to build whatever it is they’re building on The Blockchain. Goldman, JP Morgan, all the other banks, they will eventually follow. But for now they’re stuck in the valley known as the Purgatory of Stupid where companies like Eris have carved out a niche for themselves and declared their expertise.