What’s Wrong With Blockchain and Why Do I Not Understand It?

By: stephanie

“Blockchain” is a word used frequently but is arguably very misunderstood, or not understood at all. You will hear it at social gatherings as the usual meet and greet might be peppered with the “hey, have you figured out this blockchain thing yet?”

The word carries a bit of high brow, insider cache – as if everyone wished they understood it and when one finds an individual who can actually explain it (with pictures is helpful) the conversation will veer from accounting ledger talk to crypto language to cyber hacking and so on. In fact, one might converse for hours over whether it is “the” blockchain or “a” blockchain.

Such a simple distinction is not so simple. The New Yorker recently ran a very readable piece by Nick Paumgarten in the October 22, 2018 Issue “The Prophets of Cryptocurrency Survey the Boom and Bust, Inside the ongoing argument over whether Bitcoin, Ethereum, and the blockchain are transforming the world.” I know Nick very well and he is not an economist, mathematician nor engineer; but he is very adept at “peeling back the onion” to at least peer inside and remain just as puzzled.

Nick writes, “Blockchain talk makes a whiteboard of the brain. You’re always erasing, starting over, as analogies present themselves.”

There is nothing “wrong” with the/a (here we go again…) blockchain but there is something wrong with companies changing their corporate names to include the buzz word and then see their stock price surge the next day, with zero change in day to day operations. It reminds me of the early dot.com years when everyone added “e-“ to the title of their service offerings: e-commerce, e-sourcing, e-book. As for not understanding it – if you are not versed in basic accounting then an analogy to a general ledger is not helpful. Possibly it’s like a magic trick which twists the mind and pushes belief to the edge – until the trick is revealed and is now understood so simply.

So, let’s break it down into 3 buckets. I find this method best when stumped by a problem. First, it’s complicated. Second, it’s evolving. Third, how about a real world example of how this “magic” might be applied to solve real word problems.

Picture the process by which an investor buys stock: opens an account, buys shares, receives share purchase confirmation, shares are held in “custody” by a bank, and finally receives account summaries each quarter. Let’s separate the process further into 2 parts: the act of opening an account and buying shares is the front end, and everything else is the back end.

Arguably, most of the efficiencies and cutting edge technologies in recent years focused on the front end: faster trade execution at cheaper prices, varied investment vehicles (ETFs, options etc.) on line account management.

Relatively fewer advances focused on the back end: why does it take more than few minutes to receive a share confirmation? why must I pay for custody fees and why are these fees different across geographies? why can’t my broker consolidate all my investment accounts into one report to clearly show performance?

These back end functions are “back office” functions and the blockchain is very well suited to re-engineer all of it. It will do so because it is at its most basic, an accounting tool. It answers the question: who owns what?