What Goldman Sachs’ CEO misunderstands about private blockchains

Only one of the following news stories is real, but one day they will all sound equally funny.

Holder, 1896:

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

Headline, 1918:

The American Candle Manufacturers Association has announced a new initiative to electrify its wax-making process. He thinks electricity is too dangerous to use for lighting, but it can be used 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invented to eliminate legacy intermediaries like banks, is best used by those intermediaries to gradually improve their outdated methods.

That final headline is a summary of an opinion piece. written by Goldman Sachs CEO David Solomon, who argues that private blockchains implemented by regulated intermediaries are more useful than cryptocurrencies. This is the latest version 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 the story works.

All transformative technology begins as "inefficient and dangerous." Early automobiles often broke down, and one of the first major uses of electricity was the execution of prisoners. People and companies that initially adopt new technologies also tend to be suspicious. Most of the car companies that started 100 years ago failed, and Thomas Edison used to electrocute animals to make his competitors look bad. But good technology that solves important problems wins anyway.

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

But I was wrong. Despite a massive effort, all the private networks have managed so far are impressive headlines followed by even more impressive flops. I can't find a single instance of a corporate project that does anything useful despite the hundreds of millions of dollars invested in many. The list of epic fails grows week by week.

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The first problem of any private network is the bastardization of the cryptography point, which consists of eliminating intermediaries such as banks and the commissions they charge. Take cross-border payments as an example, where various correspondent banks have (supposedly) been building private blockchains to to improve your internal transfers. The best correspondent bank is not the most efficient: it's the one you don't need thanks to stablecoins.

That does not mean that banking will disappear. 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 opinion piece, Solomon argues that "under the guidance of a regulated financial institution like ours, blockchain innovations can flourish," followed by "the invention of email did not make FedEx or UPS obsolete." This is a false analogy. A better one is the US Postal Service, where the volume of mail collapsed by 50%. Is Wall Street listening?

The second problem with any private network is slow development. In DeFi, random developers frequently release new protocols. Most fail (sometimes catastrophically), but thanks to the permissionless nature of public networks, iteration is instantaneous. This is how we achieve generational breakthroughs like Uniswap, built on a $100,000 grant, less money than the salaries of the countless bank executives working in the last private network fantasy.

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“But wait a minute,” bankers like to argue, “what about the regulations? We can't just dive headfirst into DeFi, even if we wanted to." That's true. But it's also your problem.

What these executives are really saying is that they expect their regulatory moats to protect them indefinitely. If all DeFi projects were required to obtain a banking license first, the pace of crypto innovation would slow dramatically.

But that's not how disruption works. By using smart contracts and cryptographically guaranteed results, DeFi will be much more secure than any bank. By using a global and transparent public network like Ethereum, it will also be more accessible and fair than any financial system we have today. Regulators will eventually take notice.

It's hard to know exactly what a future without public permission would look like, but the one thing we can be sure of is that it won't look like how Wall Street works today. That's not how the story works.

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 herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.