27 Feb The Distortion of Decentralization
In the show, “What About Bob?” Bill Murray plays Bob, a quirky phobic in need of psychiatric treatment. At one point in the show, Bob states emphatically, “there are two types of people in this world: those that like Neil Diamond and those that don’t.”
The same could be said of blockchain and decentralization. You either see broad implications for disruption or you don’t. You’re either like Bill Gates who described bitcoin as a technology tour de force or, like Berkshire’s Charlie Munger who uses phrases like noxious poison or totally asinine.
The promoters will tell you blockchain will impact business and the world in and least some of the following ways:
- Playing field leveler
While it is true that the implications behind blockchain may very well lift a larger number of people out of poverty and provide large and broad-sweeping opportunities much like the internet did. However, there are a few paradoxical considerations of the aforementioned benefits.
First, while blockchain does help to level the playing field and create opportunity by decentralizing both the storage and the management of the network in an immutable way, it is not likely to concurrently solve all the problems
I’m a believer in the net-net gain of blockchain and crytocurrency (it’s the main reason behind our deep commitment to ICOs, TGEs & cryptocurrency investment banking). The rising tide will float all boats, but unfortunately it will not happen equally.
Second, when it comes to the most complex of transactions, including mergers and acquisitions and dealing in general debt and equity securities, fully disintermediating and decentralizing is going to be very difficult for the following reasons:
- M&A contracts are more nuanced, tailored and negotiated than tokenized smart contracts–at least for the foreseeable future.
- Complex transactions involve people. People are not decentralized and autonomous. They are centralized and emotional. It’s about 90% psychological.
The wave of disintermediation has already begun. It is likely to sweep lesser transactions like goods, services and we are even seeing it with real estate. Services like Redfin have added a brokerage angle to scalable technology and reach while at the same time decreasing the overall cost of transacting. And, they’re not yet even using blockchain. I suspect at some point blockchain may be implemented into their business model, but that is likely far down the road. In fact, Redfin itself has had some growing pains in convincing customers to use a more brokerage-lite approach, citing that the complexities of selling a home made having the personal touch a bit more appealing. If you think real estate transactions are complex, try due diligence on a multi-entity organization with operations across numerous jurisdictions and reps and warrantees that go on for pages. It’s difficult to pull the attorneys as the investment bankers out of that type of transaction.
Ultimately, decentralization and disintermediation sound great in practice, but in principal they are difficult to achieve. When I hear things like “blockchain will disrupt governments” or “blockchain is going to disrupt [fill in the blank industry],” I’m always a bit skeptical. Only the weakest governments will be undone by a distributed ledger and the smarter governments are likely to embrace it as a means to achieve their ultimate ends and many industries will powerful players are likely to adapt into blockchain either through organic development or by acquisition, rather than get swept up in the wave.