When Blockchain Is Useful

Two of the main currencies that rely on blockchains. Photo by Pierre Borthiry on Unsplash

This is a snippet.

This piece is mostly meant to record my thoughts on blockchain and NFTs, especially as they become more widespread.

At the time of writing I believe the using blockchain technology for currency, NFTs, or smart contracts is useful in exactly two scenarios:

1. There’s an entity that people don’t trust.
2. The entity is trusted while it exists, but it may not exist in the future

That’s it. Those are the only two cases in which I think blockchain actually adds value.

Now, I do believe that blockchain will be used in many different scenarios where it doesn’t particularly add any value beyond being a buzzword. Thus, I’m invested. (Literally — I currently am monetarily invested Bitcoin and Ethereum.)

However, I do want to make sure I write this down so I can point to it later and also so that I don’t get myself caught up too much in the hype.

Why

Blockchain technology, by design, solves a single problem: trust. It allows a community of people to track and validate transactions with one another, with out any of them trusting each other. All they have to do is trust the system: blockchain.

And that’s it. That’s all blockchain does.

NFTs

You can use a blockchain to create an NFT. However, if you’re a business selling NFTs, you could have just tracked who bought them yourself. If you’re an artist, you might as well create a website and just post the name of the person who bought your digital art. (If you want to charge a fee for trading the NFT, you could just charge a fee for changing the name that’s displayed.)

The only reason why creating an NFT would be better (beyond the hype) is in the two cases I mentioned.

1. Nobody trusts your business. They don’t trust you to accurately store who bought what and to verify that who did indeed buy it. In this case, by making the goods into NFTs, buyers can have the peace of mind that there will be a permanent record of their purchase in a publicly viewable blockchain.
2. You or your customers are worried that you’ll go out of business. If you go out of business, then the fact that the NFTs were recorded on the blockchain means that their purchases will be recorded regardless of whether or not your business exists. For example, if you’re a videogame company, and you go out of business, players of your old game could create their own sequel game, and have purchases from the old game work in the new game as well.

If you’re not in these two cases, there’s no reason to create an NFT other than for the hype of the term. You’re better off (trust me, it’s cheaper!) just hosting your own database and keeping track of purchases on your own.

What I find especially hilarious is companies that create their own “blockchain” run by their own company, just in order to say that what they’re selling is an NFT. This completely defeats the purpose of blockchain. If the blockchain is run by their company, and if their company were to die, then the blockchain would die with it…it might as well just be a publicly viewable database where the company manages who can edit the database.

Some Extra Thoughts

Having written this, I do see one more way in which blockchain could help, but given the way blockchain technology is currently going, I don’t think it’s likely to materialize.

Imagine a world in which companies did just host things themselves. We all know that each of them will likely create their own API, or method of interacting with their database. However, if the data were to be stored on a well-known blockchain, it would be significantly easier to run code to determine what’s in the database, because there would be a lot of people who are familiar with how that blockchain operates and how to interact with it.

In short, it might make it easier to interact with the databases because everyone will know how to interact with that type of database. (Think of how computers are easier to interact with because most keyboards in the U.S. have the same letters in the same place.)

Now, there are two issues with this.

1. It requires blockchain users to generally use a very small amount of blockchains. If people start using many different blockchains, then coders will have to learn how to interface with each of those different blockchains, which generally defeats the purpose. (One of those links claims that the blockchains will merge or develop similar interfaces. I don’t see that happening.)
2. The way that users store data in the blockchains would have to be relatively similar. Even if all of the companies used the same blockchain, each company could store data in the blockchain in such a different way that it was still a hassle for coders to be able to determine what information was in the database. Very few people want to look at spec sheets (or smart contract code) to understand the layout of memory inside of a block on a blockchain.

So, it is possible that blockchain may also make it easier to gain insights into purchases from many different companies. However, the way blockchain is going right now, I doubt that this will be a real value-add.

As a final thought, blockchain may also help with transparency. Since all transactions are public (if the blockchain is useful at all), if more businesses start using it due to the hype and trust, this will likely make more transactions public. This also helps stop thieves, since if money is stolen, it can be traced and become unusable.

But, this transparency is a by-product of blockchain and more of a useful property of blockchain rather than a value-add. That is, if businesses wanted to make transactions public, they could. It’s just that if they want to use a blockchain (for non-transparency reasons), they’ll then be forced to make transactions public.

(Also, to be clear [pun not intended], blockchains generally link transactions to online IDs (think usernames), which are anonymous until they’re linked back to a real person. Thus, even the transparency provided by blockchain isn’t full transparency.)