Digital transactions originally necessitated an intermediary, a trusted third party, before the advent of cryptocurrencies. The argument made by many blockchain proponents is that, being anonymous, immutable, public ledgers, blockchains herald a new era of intermediary-free transactions.
Yet, blockchain’s potential to completely eliminate intermediaries is quite limited: here’s why.
The necessity of service providers has been highlighted by the intricate nature of blockchain and cryptocurrency. In order to ensure legality and genuine identity, service providers must verify their clients’ claims in most jurisdictions. Without doing so, they risk facilitating illicit or illegal activities or becoming entangled with legal violations.
Despite blockchain’s capacity to redefine the role of intermediaries and alter previous trust-based relationships, the complete eradication of third parties remains unlikely, as they are essential for societal and economic function. Real-world scenarios such as national registries, voting systems, and trading platforms still rely on third-party services.
Human nature remains one of the most compelling justifications for the perpetuation of intermediaries. Jurisdictional legal mandates necessitate the involvement of intermediaries in certain blockchain and cryptocurrency interactions and usages. Due to privacy and safety regulations on financial systems and data, legal intermediary requirements cannot be circumvented by blockchains.
Expressions such as “trust the code” or “the code is law” have been historically used to illustrate the infallibility of programming in enforcing regulations and honest conduct. The flaw in this perspective is rooted in the fact that these programs are created by humans. They inadvertently introduce biases, make errors, or misinterpret laws. While programmers are intelligent, no one can anticipate every eventuality and encode a solution for all. Furthermore, laws are not crafted, enacted, or enforced by programmers or businesses—even in cyberspace. This role is fulfilled by elected officials and government operatives.
Given that blockchains are prevalently utilized in business and financial contexts, intermediaries are essential. Not everyone comprehends this technology or its application, and there will always be opportunists ready to exploit others. Numerous instances have demonstrated this, with many falling victim to financial frauds involving blockchain and cryptocurrency.
Automation
Blockchains also play a role in automating the manipulation of financial or other data processes. By facilitating data reconciliation between independent entities who must trust the honesty of unknown parties in many cases, blockchains can reduce the need for trust by automating and verifying data transfers.
By enabling data synchronization across an unlimited number of servers in real time, blockchain technology can potentially greatly enhance the efficiency of many procedures, such as database management.
Take auditing as an illustration. Blockchains can synchronize data, validate database alterations, and so forth. Humans, with their propensity for errors, might overlook altered data. Blockchains, on the other hand, as programmed entities, cannot alter data, accept bribes, or dismiss mistakes due to their automatic validation capabilities.
When it comes to financial matters, intermediaries are inevitable because legal systems, financial services, and sometimes even the financial instruments themselves present complexities requiring expertise that most people lack the leisure to develop.
Although permissionless blockchain environments like Bitcoin aim to eliminate intermediaries, their necessity remains because realistic cryptocurrency usage mandates their involvement. Cryptocurrencies, interacting with fiat currencies, require exchanges to convert them, or they would be rejected as payment.
Thus, exchange entities must exist to facilitate the conversion of cryptocurrency to fiat currency for users, adhering to licensing and reporting requirements as mandated by most jurisdictions.
The volatility of cryptocurrencies is evident, albeit some people still utilize them for payments. Even stablecoins, with their fiat currency reserves, experience value fluctuations and are not entirely pegged to their currencies. Moreover, stablecoins are issued by companies and rely on the company’s ability to remain profitable and maintain the necessary capital for pegging.
Due to the frequent changes in cryptocurrency market values, usually occurring within minutes, and compounded by slow blockchain processing, volatility introduces price slippage. This can hinder buyers from purchasing if exchange rates shift unfavorably. Consequently, sellers might receive insufficient payment or excessive payment. Therefore, businesses must employ processing services that collect and convert cryptocurrencies at predetermined rates.
To mitigate slippage, payment processors have devised methods to ensure exchange rates and facilitate transactions for merchants. Without these intermediaries, given the complexity and volatility of cryptocurrencies, merchants and retailers who currently accept them would likely not do so.
What are Crypto Intermediaries?
Cryptocurrency intermediaries are the third-party entities that are instrumental in payment processing, key storage, transaction facilitation, crypto-to-fiat conversion, and more. Given the complexities and legal stipulations surrounding these tasks, intermediaries such as banks and payment processors are better suited to manage them than individuals.
How Does Blockchain Remove Intermediaries?
Through cryptographic techniques like encrypting and linking previous data, blockchains strive to remove intermediaries like banks and auditors. Additionally, they can automate numerous tasks commonly carried out by these intermediaries. Nevertheless, not all intermediaries can be eliminated due to regulatory frameworks in most jurisdictions mandating intermediary involvement in various transaction types.
With respect to blockchain achievements in reducing third-party involvement, it’s noteworthy. Bitcoin exemplifies a financial network devoid of hierarchical privilege, where all ledger changes are collectively managed by users. Ethereum represents another financial network akin to Bitcoin, but with a broader spectrum of native functionalities beyond payments.
While the capabilities of other blockchains and cryptocurrencies differ, they generally share a common outcome—establishing systems accessible to anyone with internet access, integrating them into financial systems. Furthermore, they present a secure data distribution method, unachievable before their public introduction in 2009.
What are the 4 Types of Blockchain Networks?
Blockchains are generally categorized into two types: public and private. These can be further subdivided into permissioned and permissionless blockchains, resulting in four distinct sub-types: permissioned public, permissioned private, permissionless public, and permissionless private blockchains.
Although blockchain technology has the potential to optimize intermediation processes, it is improbable that intermediaries will be rendered obsolete. They remain integral, ensuring the smooth operation of various systems by minimizing the necessary trust among ecosystem participants.