Blockchains Are The Transactional Internet – Not The Internet of Money
This article has been written by Ralph Windsor, Editor of Digital Asset News.
In discussions about blockchains, one description which is encountered a lot refers to it as The Internet Of Money. In this article, I want to both refute that claim and describe why I believe an alternative conceptualisation, The Transactional Internet is a superior one.
Clarifying What A Blockchain Is
There seems to be quite a lot of confusion about what blockchains are and their relationship with cryptographic digital assets, in particular. Not everyone reading this article may concur with my view of blockchains, so I will define what I mean by the term.
Blockchains are distributed ledgers with records of transactions and data about them (in the blocks themselves). Each block header includes a pointer to the previous one. Something like blockchains (even if not using that name) have existed for decades. What is relatively new is the ability for anyone to record transactions on them via a public network (i.e. de-centralised public ledgers accessible over the internet).
Cryptographic Digital Assets Are Not Currencies
As I discussed in our digital assets definition, there is undoubtedly a value element to digital assets, because in order for the data to be identified (or grouped into a collection of related data) it will have taken time and therefore cost someone, somewhere money (however small). This does not mean, however, that they are currencies. I covered this last year in another article, this is the summary:
- By definition, currencies issued by nation states are issued by governments. If I steal your currency, you can call upon the state (or agents thereof) to try to force me to return your funds and I face the threat of a penalty being imposed on me for my transgression.
- All currencies have base interest rates for borrowing that are determined either by central banks or a government-appointed representative.
- The supply of a currency is arbitrary, governments and/or central banks can increase or decrease it, at will.
- The arguments about cryptographic tokens and blockchains being decentralised are fundamentally incompatible with the characteristics of a currency. Currencies are nationalised tokens of value exchange. For the issuer, they offer a potential mechanism to enforce policy, for the user they potentially provide security.
The Intrinsic Value Of Digital Assets (Or Lack Of It)
One of the points made about Bitcoin is that there is a theoretical maximum supply of 21 million coins as a result of a hard-wired limitation into the blockchain code. This ignores the two forks of Bitcoin that have taken place (Bitcoin Cash and Bitcoin Gold) and is in addition to the billions (or probably more like trillions) of tokens that exist in alternatives based on the original idea. It is not the artificial scarcity which gives Bitcoin its current value, but the extrinsic value based on the fact it was one of the earliest attempts at a fungible digital asset, has the best known brand and the largest volume of transactions (as measured in USD).
All the time there is available digital storage and processing capacity somewhere in the world, there is an opportunity to fill it with virtually anything. This means that for every innovation in digital technology, numerous forks, clones and hybrids will emerge (and could continue to do so). Digital assets (of any kind) are almost entirely made of up of extrinsic value. There is very little intrinsic value at all because anyone can copy them if they can pay for some developers and engineers to help them do it. True scarcity in digital environments is impossible to achieve until both storage and processing capacity become finite. That might happen one day, but there is no evidence to suggest it will for the foreseeable future.
The only scenario where digital assets can be said to have scarcity is their uniqueness, i.e. where there is just one instance of a given digital asset. With other digital asset types (e.g. content digital assets) there is more intrinsic value in the form of the binary data which represents an image, audio, document or video file etc. The majority, however, are not yet recorded on a blockchain of any description and even if they were, that is not their source of intrinsic value (and is no more than a placeholder to represent them). It should be noted that the intrinsic value of content digital assets is usually fairly trivial to copy. Most of the extrinsic value in content digital assets also takes the form of metadata designed to help prospective users find them again as quickly as possible.
This only intrinsic value in cryptographic tokens is their unique identifiers (i.e. the fact you can prove they exist on a blockchain). Digital assets which lack anything other than a blockchain entry have no more intrinsic value than cells on a spreadsheet or index numbers in a list. This isn’t to say that the extrinsic value cannot make you become very rich, but extrinsic factors usually imply higher volatility because it can evaporate as swiftly as it was generated.
Money is An Arbitrary Characterisation Of Blockchains
The association blockchains (and the tokens used to represent transactions on them) have with money, or even assets is an arbitrary one. If you say words like ‘transaction’, ‘coin’ or ‘ledger’ to most people, they think of money, but this is because they have meaning to the majority of people in that context. If you chose to swap the word ‘coin’ for something like ‘corn’ instead, then metaphors related to farming would probably become more prevalent instead. Similarly, some of the descriptions like ‘mining’ used to confirm transactions are also arbitrary. ‘Mining’ on blockchains is essentially a form of very electricity-intensive bookkeeping. Blockchains are accounting ledgers that have been de-coupled from the value they might represent, which is more of a benefit than it sounds (as I will explain later).
Money-oriented characterisations of blockchains are invented constructs. They might help people to understand their mechanics, but that does not mean they are money, on the internet nor anywhere else. Readers may be aware of the dangers of believing in mythology that you have invented about yourself (or words to that effect). That is what has happened with blockchain and why people who call it ‘Internet of Money’ are delusional (even though many might also be exceptionally intelligent).
Compared with money (fictional or real) and the prospect of making or losing it via trading, ambitious enterprises, heists, subterfuge etc, transactional ledgers might appear quite dull and not very exciting or worthy of anyone’s attention. That would be to underestimate the potential of blockchains, but the romance of the metaphors employed should not cloud anyone’s judgement about the fundamentals of what they are dealing with.
It’s interesting to note the historical similarity between blockchains, crypto-digital assets and railways. The latter are not considered particularly high-tech these days, however, when they were first adopted in the early-mid nineteenth century, they certainly were. The same speculative bubbles, duplicitous chicanery on the part of those seeking funds for them and volatile boom/bust cycles occurred. Bitcoin (and other digital assets which use a blockchain concept) use a funding model which is not dissimilar to securitising a railway by auctioning off the sleepers on the track and charging rent to the owners of the trains that passed over them.
Why Transactions Are More Useful Than Made-Up Money
The two key points about blockchains which are the crux of the reason why they are not the ‘Internet of Money’ are:
- They are not currencies in the conventional meaning of the term.
- The use of a blockchain (alone) does not grant cryptographic asset any intrinsic value, it is simply an identifier that is very difficult to fake.
If blockchains are not ‘Internet of Money’, then what are they? In straightforward terms, blockchains are records of transactions. They are a conceptually very simple and quite flexible data model for recording activity in a way that is immutable. That makes them useful for scenarios involving money or assets of value, but it does not make them money as a result.
Up until the adoption of blockchains, there was a lack of any kind of interoperable protocol for recording transactions. As many readers will be aware, the internet is a stateless protocol, packets have no knowledge of each other and all kinds of complex extensions are needed to work around this issue where state needs to be maintained. Blockchain is the opposite, packets can’t exist without having the required context that unequivocally describes both when they occurred and with mathematically proven validation of the data that they contain.
This is where blockchains have some potential; rather than having to roll your own protocol to record transactions, it is possible to use an existing one instead. If the participants involve parties you do not know (or cannot trust) then an existing public or shared blockchain can be used, however, it is possible to use a private one instead if you think you can trust who you are dealing with but don’t want the complexity of devising your own technology. In the same way that websites run over public networks and intranets use private ones (but using an identical underlying protocol) so blockchain offers the same, but for transactions. This is why describing blockchains are ‘The Transactional Internet’ is appropriate.
One further observation I will make in reference to the statefulness of blockchains is that this also implies that they are not universally useful for every single application. Committing data which you cannot ever erase might be a poor idea in a whole array of scenarios. Anyone with a background in risk management (especially as it applies to IT projects) will pick this up very quickly and recent legislation suggests that not only is it not always desirable, it could be illegal too. The implication of this is that a hybrid form of existing technologies combined with of blockchains will be required to allow flexibility about which tool to use for different jobs is going to be needed.
Blockhain Is Not Revolutionary – It Is Just Another Stage In The Industrial Revolution
Blockchains are digital utilities (or digital infrastructures). In reality, there isn’t much that is exciting about them, however, their existence may facilitate some more intriguing innovations (in the same way that a reliable electricity supply was needed before computers could exist). Employing blockchains to record transactions involving intrinsically worthless tokens is the most obvious use-case, therefore, it is likely to become the least valuable as everyone else will be doing it, in a frenzy to copy the idea which has been delivering great fortunes for those who got into them at an early stage. They are not Ponzi schemes (as some claim) but they can encourage this kind of behaviour on the part of those establishing or investing in blockchain-related projects.
Earlier I described how blockchains are accounting ledgers that have been de-coupled from either assets, money or anything else of value. This might superficially appear to be a negative point, but if you view blockchains as tools or utilities then it is actually a benefit since it means the same model can be re-used for a multitude of other use-cases. This is slowly being grasped by a number of blockchain-oriented projects where the concepts are being applied to scenarios that are not money-oriented, such as:
- Supply chains
- Provenance (the origin of a given item)
- De-centralised record storage
- Verifying identity and ownership
- Recording asset ownership transfers
- Interoperability protocols and exchanging data
All of these are dry but essential aspects of billions of people’s lives that have transactions between different parties at their core. While the subjects might involve money or assets, the records are not, they are merely representations (or entries on ledgers, digital assets as tokens for other assets).
The capital generated by cryptographic digital assets to fund research is useful to accelerate the innovation process, but the more useful (and valuable) applications will get created when this dries up and those who remain are forced to deliver tangible results and value for money. As with other developments in the industrial era, this is an on-going process for which there is a familiar pattern which occurs consistently in almost anything you care to look at, from railways to the internet (and all points in between). For these reasons, I believe blockchain when described as ‘The Internet of Money’ (a fallacy you can speculate on) will gradually transition into ‘The Transactional Internet’ (a fact you can invest in).