Why Most Blockchain Projects Are Bullsh*t

And How to Spot the Ones That Aren’t

My first week working at Hologram, back in February, our CTO told me about a secret blockchain project the team had been working on. When I found out, I nearly quit.

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Bitcoin is Worthless and Bad

My skepticism came from watching hype around the first and biggest blockchain project: Bitcoin, billed as a decentralized virtual currency that took off as the payment channel of choice for dark web drug dealers and malware extortionists. There’s a finite total supply of Bitcoins defined in the code, and coins are distributed as rewards to computers that power the network, but they’re not for anything—they only have value because people think they do, like beanie babies or tulip bulbs.

That means the proper value for Bitcoin is $0, and while the market can remain irrational longer than you can remain liquid, it will eventually go there. It’s an objectively terrible mode of payment, and the store of value use case is a transparently post-hoc justification for a solution in search of a problem. There are real use cases for a pseudonymous digital currency with irreversible transactions (gambling, money laundering, black markets, and evading capital controls), but they’re all bad. And having no real legitimate interests puts the market at risk of being taken down entirely by the first powerful actor that decides to do so, which appears to be easier than previously thought.

Bitcoin is a genuinely novel and interesting piece of technology — a little bundle of economic incentives that add up to a kind of perpetual motion machine. But real currencies are made of sterner stuff.

Ethereum Is Also Bad, But Maybe Useful

The second-largest blockchain project is Ethereum, which marries a currency database like Bitcoin’s to the ability to run small computer programs called smart contracts. Introductions to Bitcoin or Blockchains always jump with two feet into cryptography and distributed consensus protocols without answering basic questions like “what is it good for?” You get a much better understanding from Loom’s CryptoZombies tutorial, which guides you through building a toy distributed application (“DApp”) on the Ethereum platform. Hands-on experience makes it easier to see both the possibility of the technology and its current limits.

The Ethereum blockchain is a very dumb kind of database, controlled by a very expensive version of AWS Lambda. Ethereum DApps store the database as a javascript Map and make changes by loading the entire object into memory. You can spend cryptocurrency to run functions on the machines maintaining the network, but it has to run on every one of those machines, not just the cheapest or the fastest. You need to have a very good reason to run an app that way. But at least there’s something there.

Dubious investment opportunities in The Conjurer, by Hieronymus Bosch

The Irresistible Attraction of Dumb Money

Much of the tech sector looked on enviously at the incredible run-up in prices of this obviously worthless asset and asked themselves, how can we get in on that action? There was already a strong tradition in tech of businesses optimized to raise ever-larger amounts of investment without any reasonable plan to ever turn a profit. So the most natural way to have a blockchain startup was to take an existing business and staple on selling your own cryptocurrency to the general public as a kind of unlicensed security. Right away, widespread selling of unregulated securities led to the predictable results and the predictable regulatory scrutiny, and the predictable disappointment and crash. But tokens-as-unlicensed-security is about as far as most blockchain startups are today, in accordance with Sturgeon’s Law. So what might blockchains actually be good for? What’s the real use case that enthusiasts always tell you all the flimflam is obscuring?

Some Things Might Not Be Bullshit

Non-bullshit blockchain projects will be ones that could not be built without distinctive features smart contracts provide. Otherwise, it would be orders of magnitude cheaper and easier to build the same business on more conventional platforms. I refer to this as the MySQL Test—if your project can be implemented in MySQL it’s probably a bullshit blockchain project. Fortunately, using the very expensive database and very expensive execution environment that Ethereum provides does get you two distinctive properties: database records are immutable and can be checked publicly, and you can guarantee that the environment runs specific open-source code.

Collective Action and Credible Pre-Commitment

The best¹ use case for blockchains is laid out in this presentation by the venture capitalists at Andreesen Horowitz. You can use a blockchain (like the Ethereum network) to bootstrap a network effect by giving early participants an incentive to seed the network before it’s big enough to be useful on its own terms.

Decrypting Crypto, From Bitcoin and Blockchain to ICOs

by Alex Rampell

To provocatively reverse the usual ideological valence of these projects, blockchains make it easier to set up co-ops by letting them issue scrip to early members for helping get the co-op off the ground. Say you wanted to start a business like the Park Slope Food Coop. Once it’s up and running it’s valuable to be a member, but some people have to be first to sign up and to put up signs and sweep the floors before it’s open or has any inventory. Your nascent co-op might issue scrip — coupons redeemable for produce from the store at some future date when it’s open. You can give it away freely because it’s not real money, but it’s valuable if the project succeeds. Blockchain projects can use tokens to align incentives in the same way, awarding them to early participants in a network with the promise that they’ll be redeemable on the network once it gets off the ground.

Passing the MySQL Test

Why not just store the records of who owns what tokens in a regular database? In principle you could, but the danger with such a setup is the token-issuing authority could embezzle or over-inflate the supply of scrip to deny early adopters of their just reward. In a friendly neighborhood co-op, social relations and local laws can help tamp down on shenanigans, but for a new startup on the internet, there are no such protections. That makes it hard to get people to accept scrip in the first place. And even the most stridently principled project runners can struggle to hold out against the enormous pressure to sell out the modern economy can apply.

Selling Out is Hard (Not) to Do

What you get from running your database of token holders on the blockchain is the ability to credibly pre-commit to running the token economy and managing the project a certain way. Those commitments aren’t bulletproof. But since the whole game is getting people to lend their efforts on the hope that the project pans out, it’s helpful even if they just make it somewhat harder to embezzle token value and make participants somewhat more likely to contribute. And you do get the ability of network participants to wrest control away with a hard fork as a last-ditch backstop against mismanagement. Balancing the strength of those pre-commitments against the ability to upgrade and iterate on blockchain software opens up a whole new (but exciting!) set of problems, but it’s a genuinely new tool that enabled the building of genuinely new kinds of products.

The Groupstarter Model

The promise of blockchain technology is as a spiritual successor to Groupon and Kickstarter: as a novel technology to solve collective action problems. That’s potentially a very big deal — earlier advances in this area like governments or the joint stock corporation have had pretty big impacts. It could also be Groupon. Either way, the key to separating uses with promise from bullshit projects is asking what can only be done with the specific features blockchains provide, and whether those things are worth doing or having. In almost all useful cases, blockchains don’t solve technological problems, they solve people problems.

Shameless Self-Promotion

Our team at Magic is trying to put this technology to good use, creating a new decentralized marketplace for internet access, with security, privacy, and net neutrality baked in. Check us out and sign up for early access at https://magic.co/.