Blockchain Won’t Cut Out Intermediaries After All

Before cryptocurrencies, digital transactions between two parties required a trusted third party to act as an intermediary. Given that most blockchains are public, anonymous, immutable digital ledgers, many supporters argue that it will help usher in a new mode of conducting transactions that are not dependent on intermediaries at all.

However, blockchain will likely never entirely eliminate intermediaries: here’s why.

Service Providers are Needed

Blockchain and cryptocurrency complexity has created a need for service providers. In most jurisdictions, those offering blockchain and cryptocurrency services must validate their clients to ensure they are who they say they are and that they are legally able to conduct transactions. If service providers do not, they run the risk of facilitating illegal or illicit activities or running afoul of the law themselves.

Human Nature Requires Intermediaries

Many areas (e.g., national registries, voting systems, trading platforms) require the services of third parties. Blockchain can help reduce the role of these intermediaries and alter the trust relationships previously required, but it is unlikely ever to eliminate them entirely because they are necessary for societies and economies to function properly.

In the past, catchphrases such as “the code is law” or “trust the code ” have been used to explain that programming is infallible in enforcing laws and honest activity. The issue with these views is that humans create these programs. They unknowingly introduce bias into their programming, make mistakes, don’t interpret the laws correctly, and much more. This is not to say blockchain programmers are not intelligent but to say that no one can know everything and program code to address it all. Additionally, programmers and businesses do not create, enact, or enforce laws—even in cyberspace. Elected government representatives and government employees do this.

Because blockchains are most often used in financial and business contexts, there must be intermediaries. Not everyone will understand this technology or how to use it, and there will always be those who try to take advantage of others—we’ve already seen many instances of this, with thousands of people falling victim to financial scams using blockchain and cryptocurrency.

Cryptocurrencies Must Be Converted

Permissionless blockchain ecosystems like Bitcoin want to exclude intermediaries, but they are still required because cryptocurrency cannot realistically be used without them. For example, cryptocurrencies have exchange rates with fiat currencies. If they didn’t, they would not be accepted by anyone as payment.

This means that exchanges must exist that can convert cryptocurrency to fiat currency for users—and most jurisdictions do not allow currencies to be exchanged, converted, transmitted, or even handled by anyone if they are not licensed and follow reporting requirements.

Cryptocurrencies are Too Volatile and Complex

Cryptocurrencies are currently very volatile, although some people still use them to make payments. Even stablecoins with fiat currency held in reserve fluctuate in value and are not 100% pegged to their currencies. Additionally, these stablecoins are issued by businesses, not governments, and are thus reliant on the company’s ability to remain profitable and maintain the required amount of capital as a peg.

Volatility introduces a lag in cryptocurrency prices because their market values sometimes change by the second. Worse, they can change thousands of dollars within minutes. When combined with slow blockchain processing times, this volatility creates price slippage, where buyers may not have enough cryptocurrency to purchase something if the exchange rate slides. Sellers may not receive enough payment due to this slippage or be paid too much. So, business owners must pay for a processing service that will collect and convert them at guaranteed exchange rates.

To deal with slippage, payment processors have created methods to guarantee exchange rates and handle transactions for retailers and merchants. Because of their complexity and volatility, cryptocurrencies would likely not be accepted by the merchants and retailers they currently are without these intermediaries.

What Blockchains Do Achieve

It’s worth noting what blockchains can achieve in their efforts to eliminate third parties. Bitcoin is a financial network with no privilege levels, meaning that all changes to the ledger are managed mutually by all users. Ethereum is also a financial network like Bitcoin, but it is natively capable of much more than payments.

Other blockchains and cryptocurrencies vary in their capabilities, but the end result is generally the same—blockchains create systems that allow anyone with an internet connection to connect to a financial system. They also offer a method for securing widely distributed data that was not possible before they were introduced to the public in 2009.

Automation

Something else blockchains assist with is automating financial or other data manipulation processes. This technology allows for data reconciliation between independent parties who, in many cases, need to trust that someone they do not know is honest. Blockchains can eliminate the need for trust because they automate and verify data transfers.

In this way, and because blockchain can synchronize data across an unlimited number of servers in real time, many processes, such as auditing or database management, can potentially be made vastly more efficient.

Take the process of auditing as an example. Blockchains can synchronize data, verify database updates, and so on. Humans are prone to make mistakes and can be easily influenced to ignore altered data. Blockchains, however, are programs that will not change data, accept bribes, or ignore errors because they are programmed to automatically validate changes.

The Bottom Line

Blockchain can help to make the process of intermediation more efficient. It can even help to minimize the trust required of ecosystem participants in any number of ways. However, it’s unlikely that intermediaries will ever disappear completely.