Economist Kling Joins Chorus of Blockchain Naysayers | Crowdfund Insider

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Arnold Kling, an economist and adjunct scholar at the Libertarian think tank The Cato Institute, has blogged his reflections on a recent interview with blockchain proponents and tech VCs Andreessen-Horowitz (A-H).

Like A-H, Kling was around during the Internet’s nascent phase and made money from betting correctly on the Internet’s development.

Unlike A-H, Kling thinks blockchain is at best a niche technology and says he doesn’t believe blockchains can solve the problem of trust in society.

Blockchain has been variously defined and the term has been thrown around for years now, often inappropriately.

The blockchain that inspired most others is Bitcoin’s. Simply put, the Bitcoin network is made up of numerous computers running the same software.

The computers running the software communicate with each other using the same program to keep identical records of financial transactions.

Every time someone makes a Bitcoin transaction, the data recording the details of that transaction flows to a pool of other transaction data waiting to be settled on the network’s collectively-maintained ledger.

Each piece of data “falling” into the pool is scrambled with the last to form a layered “ball” of encrypted data that could be compared to an onion.

For the right to settle the pool or “block” of data, computers running the Bitcoin software compete to guess a long number set by the software. All the computers then persistently guess random numbers in an energy-intensive, competitive process called mining.

Eventually, one computer guesses the number, receives a “block reward” of Bitcoins for doing so (currently 12.5 Bitcoins), and that number is then used to scramble all the data in the block and cryptographically seal it.

The process is relatively slow compared to the SWIFT payments network because every computer on the network has to achieve “consensus” (agree on what data is valid) and maintain an accurate ledger of all the transactions being made across the world.

SWIFT only has to record the data once and not across hundreds of computers strewn across the globe.

The data on a Bitcoin block can still be read, but it cannot be easily rewritten or forged by a bad actor.

Blockchain proponents have sought to apply this tech in many fields. Despite almost a decade of research, very few projects have fulfilled their objectives of revolutionizing and resolving issues of trust in regular business data systems.

Bitcoiners like Jimmy Song have long warned the public that private businesses cannot use blockchain to automate trust and still compete. That method of settling data, says Song, is too costly for a centralized organization to bother with.

Because of consensus, Bitcoin cannot pivot quickly in response to market forces as businesses must. Bitcoin-style blockchains do not suit traditional business culture, says Song, and trying to sell one to a business is often fraudulent.

Kling concurs with Song’s cultural critique of enterprise blockchain:

“Andreessen and Horowitz are bullish on blockchain. Horowitz sees blockchain as a general-purpose technology for providing trust…I disagree.”

Ethereum proponents have often mused about how blockchain smart contracts can be used to “disintermediate” lawyers and automate the resolution of legal disputes.

At a conference in Toronto, Dmitry Buterin, Vitalik Buterin’s father, floated the idea of an artificial intelligence judge doing a better job of arbitrating legal cases than a judge hungry for lunch.

Wild promises of all the pain points blockchains can resolve by automation go on and on, but writers like Kling believe the painfully human process of holding others accountable cannot be avoided:

“In the context of business, trust means that you believe that the other party will do what it has promised. For that belief to be justified, you need credible evidence that the other party has kept similar promises in the past and has the incentive to continue to do so in the future…I think that trust is too subtle and nuance to be ‘solved’ by blockchain.”

Like Song, Kling believes that privately-controlled (enterprise or government) blockchain data systems can be gamed by corrupt actors:

“There are many, many ways to cheat in a transaction. I can sell you property where I do not actually have a title recognized by the authorities. I can sell you a property that has environmental hazards that I did not disclose. I can sell you a property that is not zoned for the type of improvement you want to put on it…Recording the transaction by blockchain does not by itself prevent me from doing any of these things.”

Like lawyers that have dismissed claims that what they do can be automated, Kling notes that a government must still recognize and enforce whatever conclusions are contained in a data set:

“Of course, if the government recognizes a blockchain as its official title record, then the blockchain technology would be involved in the transaction. But without government sanction, a blockchain title record would be of little or no use in a dispute.”

No matter what technology is circulating, humans still need the will and the systems to encourage and enforce pro-social conduct:

“…(W)e need an intricate interlocking arrangement of institutions to provide trust. We need a government in which officials who don’t take bribes are generally better off than those who do. We need businesses with valuable reputations that they do not want to lose. We need low-cost mechanisms by which people can reward cooperators and punish defectors, so that the trustworthy survive and the untrustworthy get weeded out.”

Kling sees only one enterprise/government application for blockchain:

“As far as I can tell, blockchain can only help to prevent one type of cheating: digital forgery. If blockchain is going to have a killer app, then it has to enable a transaction to take place where the only impediment to undertaking such a transaction currently is the threat of digital forgery. I cannot think of such transactions.”

Related: A company called Titan Seal is now doing marriage certificates on a blockchain for a county government in Nevada.

Jimmy Song has proposed that most businesses/organizations should rather use basic encryption on a standard database, a technology he says has been around since the 1970s, rather than a blockchain.

Kling, too, is circumspect about blockchain’s industrial importance:

“Andreessen – Horowitz would say that I have not tried hard enough to come up with applications for blockchain. That is because they think of it as an all-purpose technology, like the Internet. But I think of it as a narrow-purpose technology, along the lines of a digital signature. I think we already know what the applications are for a digital signature, and I don’t think it’s a very exciting market.”