Blockchains are just inefficient databases
A common critique of blockchains is that they are merely inefficient, append-only databases.
That’s kind of true. But the world is run on databases:
Banks maintain databases of their customers and the balances in their respective accounts
Exchanges are databases where market participants post bids and offers for financial assets
Emails are databases of messages and attachments
Ride-sharing companies match databases of riders to databases of drivers
Food delivery companies match databases of consumers, databases of restaurants, and databases of delivery riders to try to deliver food to consumers in a timely manner
Social media platforms are databases of users who upload their content to databases, with algorithms matching which bits of the databases are shown to which users
Media streaming services match databases of users against databases of content that the service licenses from professionals
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A core innovation of distributed ledger technology is to offer a way to disintermediate the centralized entities that manage private databases with a distributed network of self-interested parties who coordinate the maintenance of a public database through software, without needing to trust other nodes in the network.
The public and open nature of distributed ledgers means we have a universal data system that can seamlessly maintain state (a “single” source of truth). Layering computation (like the Ethereum Virtual Machine) on top of this open data system allows for the development of interoperable and composable apps (smart contracts). The combination of universal data and compute is the ultimate coordination tool.
(Note: Not all data needs to be stored on-chain. Today, on-chain storage of data is expensive given limited block space, and while research is underway, we have not yet found satisfactory solutions to the problem of privacy for on-chain data. In the meantime, there are interesting business models where some non-sensitive data (e.g., pseudonymous accounts) are stored on-chain and enriched by private data stored off-chain.)
This technology helps solve a coordination problem. A public blockchain that serves as an open and immutable database that anyone can read and write to permissionlessly is powerful in itself as people coalesce around this new standard of storing and transmitting data.
Standards are required to coordinate all types of technology and human activity in an interconnected world. We would not have consumer electronics without technical standards for electric wall sockets. We would not be able to email each other across different email service providers without a common standard for transmitting messages. International payments would be far slower if the banking system did not move on from telex (a free messaging system) to the SWIFT messaging system (with standardized formats for different types of data required to process transactions).
Standards generally form in three ways (and they sometimes meld together):
Where there are no clear open standards that help coordinate all types of technology and human activity, the high friction that exists between trying to connect siloed private databases becomes a substantial business opportunity.
Visa and Mastercard are examples of businesses that have built intermediating databases to connect disparate databases (banks, merchants, consumers) to facilitate economic activity, and charging for that service. Network effects result in these players accumulating substantial market power.
Regulators have coaxed banks towards “open banking” — i.e., pushing financial institutions to allow third parties to access their users’ financial data via APIs - creating business opportunities for companies like Plaid to become the intermediary database that connects traditional financial institutions with the emerging fintech ecosystem.
The same can be found beyond the financial sector: electronic health records companies (e.g., Epic) are intermediary databases that attempt to sync patient data within and across hospitals and other healthcare service providers; carbon credit registries (e.g., Verra) are databases that attempt to log carbon credits across a range of unique projects with differing quality of credits; supply chain companies (e.g., Flexport) maintain intermediary databases to track the movement of physical goods between an wide array of suppliers, ships, ports and warehouses to support efficient logistics.
Generally, the more fragmented the number of stakeholder types, the more complex and challenging it is to be an intermediary database provider given the large number of integrations needed before the service becomes useful to customers. This is where having an open database that can be trusted because it is credibly neutral, permissionlessly accessible, censorship-resistant, and immutable - i.e., a decentralized public blockchain - becomes really useful. The long tail of economic actors can utilize this open database as a “universal” coordination layer with substantially reduced need for complex integrations across a wide range of disparate stakeholders.
Coordination is the unique superpower of homo sapiens. As a species we have consistently advanced our ability to coordinate human activity across the ages, from written language to global communications networks, forming ever larger organizations and breaking through Dunbar’s number. Distributed ledger technology and public blockchains are the next iteration in the long trend of tech innovation that can be used to help solve some of the messy coordination problems that exist in the long tail of human actors.
We believe that the next generation of highly scalable enabling technologies will be created around this infrastructure to make it easily usable by consumers and enterprises. If you’re building something in this space, please reach out to us at hello[at]artichoke.capital - we would love to discuss.
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