Blockchain Is Not Quite Ready for Facebook's Dreams: Here's Why

Ed Felten, Offchain Labs Founder, Princeton Professor & former Deputy CTO to Barack Obama’s White House

Many people have heard of blockchain technology, but few know what to make of it. Some people will tell you that it’s the next big thing, poised to disrupt almost every industry under the sun and reshape the global economy. Others will assert that it’s technically advanced and theoretically interesting, but overhyped and impractical.

The truth lies somewhere between these two poles.

It’s clear that many proposed uses will remain forever implausible; and today’s blockchain is inefficient. But the technology is improving and the ecosystem is maturing; it’s equally certain that tomorrow’s blockchain will have a profound effect on the ways we lead our lives and conduct our businesses.

It just might take a little while: Even Facebook, which just announced a cryptocurrency, acknowledges in its white paper that problems remain: “As of today we do not believe that there is a proven solution that can deliver the scale, stability, and security needed to support billions of people and transactions across the globe through a permissionless network.”

What needs to change before blockchain thrives in corporate America?

Some analysts prefer to call blockchain “distributed ledger technology,” and the name, even if it doesn’t roll off the tongue, is an accurate one. Blockchain enables businesses to create ledgers that are immutable and secure; the ramifications for payment processing, remittance transfers, supply chain tracking, and digital distribution are profound.

Blockchain possesses capabilities even the most sophisticated traditional ledgers (paper or digital) do not. “Smart contracts” allow the trustless automation of value or data transaction when certain predefined conditions are met. In the coming years, these pieces of code may streamline and accelerate vital, but slow, economic processes like real estate transfer and insurance payments. And they will open markets for new products that couldn’t exist today.

Unfortunately, blockchain systems, despite using thousands, or even millions, of computers, have not yet solved the problem of scale. To take a familiar example, consider payments. Visa and PayPal process thousands of transactions every second; they provide one-click and zero-wait payments.

Bitcoin, the most famous blockchain, clears roughly five transactions a second, and it often takes an hour for transactions to finalize. Facebook claims that Libra tests have achieved speeds around 1,000 transactions a second. That’s impressive, but it’s not enough for a firm with billions of users.

Once problems of speed are solved, blockchain pioneers still need to address privacy concerns, since anyone with access to a given chain can view all of its associated data. After that, there are the legal and regulatory challenges that always accompany innovation.

Fixes to throughput, speed, privacy, and regulatory compliance are all on the way. Thousands of the best developers are at work on protocols that will accelerate finality and move transactions per second into the five-or six-figure range, and permissioned blockchains that will address major privacy concerns. Companies are increasingly engaging with regulators.

Blockchain insiders often speak of Layer 1, Layer 2, and Layer 3 technologies; each new layer builds off a previous level of technology to provide greater utility and efficiency. Much of the activity so far has been in Layer 1.

What are the differences between the various layers?

Transit and commerce provide a good model. Vehicles and a road network might constitute a Layer 1; Layer 2 would be a state-of-the-art logistics structure for moving goods and people on demand. Layer 3 might be an e-commerce system that relied on the Layer 2 logistics to move goods. Blockchain needs strong solutions in all three layers, and there’s every indication that Layers 2 and 3 will blossom in the next few years.

In fact, depending on how you define the term, some Layer 2 solutions have already debuted, though they’re limited. The Lightning protocol, for example, speeds up bitcoin transactions but does not allow crucial blockchain features like smart contracts and will not work with other blockchain protocols.

If Layer 2 protocols are to transform blockchain, it’s clear that protocol-agnostic tools, equally well-suited to different chains, must appear. Microsoft has stated that it anticipates that Layer 2 blockchain will move the technology from the niche to the mainstream, but such success seems unlikely if systems aren’t interoperable.

Once the technology is better understood and the legal situation codified, we can expect early adopter companies to make extensive use of blockchain. Already, major companies like Microsoft and J.P. Morgan have begun investigating blockchain, but most enterprises have remained cautious and have contributed a relatively small portion of their resources to distributed ledger technology.

The exception to this rule might be Facebook, which claims huge plans for its just-announced Libra cryptocurrency, but blockchain is not yet central to the social network’s value proposition. Enterprise understands the value of patience, and we’re unlikely to see mass implementation until early adopters demonstrate that blockchain saves money and opens new markets. If rapid settlement of complex transactions via smart contract becomes standard, for example, we can expect a new technological gold rush.

I’ve spent my career at the busy intersection of technology and policy. Again and again, I’ve seen nascent technologies prove their worth. I’ve seen the internet and mobile grow from interesting curiosities to inescapable facts of life. I’ve seen new industries through their first experiences of regulation and oversight; I’ve seen them thrive and expand under rules they once militated against.

History may not repeat itself exactly, but as I look at all the signs, I believe that blockchain is on the verge of a similar transformation. I cannot wait to see what happens.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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