A new Technology Quarterly report from The Economist published in the September edition examines blockchain and cryptocurrencies. Tim Cross, The Economist’s science correspondent, takes a skeptical view and says despite a decade of development, bitcoin, and the various cryptocurrencies it has spawned, remain little more than a vehicle for risky speculation. They have failed in their original objective: to become a usable currency.
Bitcoin is a decade old this year. It was created by an anonymous cryptographer called Satoshi Nakamoto in the hope that it might serve as an electronic version of cash, free from the control of governments, banks, regulators, and with no need for trusted intermediaries. It has seen three boom-and-bust cycles, each bigger than the last. In the most recent, which peaked in late 2017, its price soared to $19,000. It is now below $7,000. Rather than a usable currency, bitcoin has become an almost completely unregulated penny stock. But that has not stopped the creation of over 1,000 other cryptocurrencies.
All this has been accompanied by a hurricane of hype. Cryptocurrencies have been touted as the future of money and a way to get rich quick. Blockchains – the technology that powers them – have been presented as a way of revolutionizing everything from accounting and logistics to tracking conflict diamonds and endangered species. They are currently the subject of widespread experimentation. “Smart contracts” (agreements written as self-executing code) are touted as the basis for a reboot of the internet itself. Investment money has piled in, not least through “Initial Coin Offerings” (ICOs), in which startups sell crypto-currencies expected to gain in value later.
To critics, cryptocurrencies are an unregulated swamp. Cryptocurrency exchanges, they say, rip off their customers and expose them to having their deposits raided by hackers, with no way to recover losses. ICOs raise millions based on nothing more than slick websites and jargon-filled prospectuses, and then fail to deliver any sort of product. Smart contracts are used to automate Ponzi schemes, or are looted when attackers find flaws in their coding. Bitcoin uses more electricity than entire nations to run a system that struggles to process more than seven transactions per second. And blockchains are a solution in search of a problem, hobbled by fundamental design trade-offs and almost always less efficient than ordinary databases.
This Technology Quarterly cuts through the hype. And traces the history of Bitcoin and explains why it has failed as a currency even as its price has zoomed and dived. It critically examines the promises of the cryptocurrency enthusiasts and explains to prospective investors what they are letting themselves in for. And concludes that although some of the technologies involved in blockchains might be useful, they fall short of the wild promises made in their name. Bitcoin and blockchain fans like to compare their industry to the dotcom mania at the turn of this century, which eventually produced many useful advances. But while blockchains, or something that loosely resembles them, may eventually find some uses, that comparison wildly overstates their likely impact.
You can read the entire Technology Quarterly here and online at The Economist.
