What Goldman Sachs' CEO misunderstands about private blockchains

Published at: Dec. 13, 2022

Only one of the following news items is real, but someday, all will sound equally comical.

Headline, 1896:

The owner of Wagoneer & Sons, a leading horse-drawn carriage maker, has announced the adoption of a new machine called the “internal combustion engine” to improve its manufacturing process. “Gas engines are powerful but dangerous,” the owner said. “We will use them to make better wagons.

Headline, 1918:

The American Association of Candle Makers has announced a new initiative to electrify its wax-making process. It believes that electricity is too dangerous to use for lighting but can be utilized to make cheaper candles.

Headline, 1989:

The United States postal service will adopt a new technology called “the internet” to speed up the sorting and delivery of letters and postcards.

Headline, 2022:

The CEO of a major investment bank argues that blockchain, a technology invented to eliminate legacy intermediaries such as banks, is best used by those intermediaries to incrementally improve their outdated methods.

That final headline is a summary of an op-ed authored by Goldman Sachs CEO David Solomon, who argues that private blockchains deployed by regulated intermediaries are more useful than cryptocurrencies. This is the latest iteration of the “blockchain, not Bitcoin” argument we’ve heard for years. It usually starts with a list of why things like public blockchains or decentralized finance (DeFi) are dangerous and ends with the conclusion that only incumbents should be allowed to use the technology. But that’s not how history works.

Every transformative technology starts out as “inefficient and dangerous.” The earliest automobiles often broke down, and one of the first major uses of electricity was executing prisoners. The people and companies who initially embrace new tech also tend to be suspect. Most car companies that popped up 100 years ago failed, and Thomas Edison used to electrocute animals to make his competitors look bad. But good tech that solves important problems wins anyway.

To be fair, there was a time when I considered private blockchains to be a useful, though insignificant, solution — not as a substitute to crypto but as a temporary solution that could evolve in parallel. A bank, I would have told you three years ago, could use a private network to reduce internal inefficiencies today while learning how to interact with public ones tomorrow.

But I was wrong. Despite a massive effort, the only thing private chains have achieved so far is impressive headlines followed by even more impressive failures. I can’t find a single instance of a corporate project doing something useful despite hundreds of millions of dollars invested in many. The list of epic failures grows by the week.

The first problem with any private network is the bastardization of the point of crypto, which is to eliminate intermediaries like banks and the fees they collect. Take cross-border payments, where multiple correspondent banks have been (supposedly) building private blockchains to improve their internal transfers. The best correspondent bank isn’t a more efficient one — it’s the one you don’t need thanks to stablecoins.

That’s not to say that banking will go away. Even stablecoins will need someone to hold their reserves, and tokens often need custodians. But the more time big banks waste on their private-chain fantasies, the less likely they are to build useful crypto products.

In his op-ed, Solomon argues that “under the guidance of a regulated financial institution like ours, blockchain innovations can flourish,” followed by “the invention of email didn’t make FedEx or UPS obsolete.” This is a false analogy. A better one is the U.S. Postal Service, where mail volume collapsed by 50%. Is Wall Street listening?

The second problem with any private network is the slow pace of development. In DeFi, new protocols are frequently launched by random developers. Most fail (sometimes catastrophically), but thanks to the permissionless nature of public networks, the iteration is instant. That’s how we get generational breakthroughs like Uniswap, built on a $100,000 grant — less money than the salary of the countless bank executives working on the latest private network fantasy.

“But wait a minute,” bankers like to argue, “what about regulations? We can’t just dive head first into DeFi even if we wanted to.” That’s true. But it’s also their problem.

What these executives are really saying is that they expect their regulatory moats to protect them indefinitely. If every DeFi project had to first get a banking license, then the pace of innovation in crypto would slow drastically.

But that’s not how disruption works. By using smart contracts and cryptographically guaranteed outcomes, DeFi will be a lot safer than any bank. By riding a transparent, global public network like Ethereum, it will also be more accessible and fair than any financial system that we have today. Regulators will eventually come around.

It’s hard to know exactly what a public permissionless future would look like, but the one thing we can be sure of is that it won’t look like how Wall Street operates today. That’s not how history works.

Omid Malekan is a nine-year veteran of the crypto industry and an adjunct professor at Columbia Business School, where he lectures on blockchain and crypto. He is the author of Re-Architecting Trust: The Curse of History and the Crypto Cure for Money, Markets, and Platforms.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.