Philip Rosedale's online social VR world High Fidelity famously uses a blockchain-based cryptocurrency for user-to-company and user-to-user payments, so understandably, Philip strongly disagreed with this recent VentureBeat post by Adam Frisby, lead creator of Sinespace (full disclosure: a sponsor to this blog), who pointed out some concerns with blockchain, especially as a payment system for online worlds, but also for many other payment services. Philip just sent me a thorough reply to Adam's guest post, which for the sake of clarity, I'm running alongside the passages in italics he's responding to -- beginning with the more general challenges that Adam raised on VentureBeat:
For most consumers, losing a password to an online service is a mild inconvenience they’ve grown accustomed to, since typically, it’s quickly fixed by requesting an email reset, say, or talking with customer service. Blockchain wallets and their passwords, by contrast, are tied to a file on a user’s hard disk and are absolutely critical to users trying to access the blockchain. By their very nature they have no recovery mechanism. “You lose your password, you lose everything” is an awful user experience for mainstream consumers and a nightmare for companies attempting to build their service on a blockchain.
PHILIP ROSEDALE: Yeah, it's inconvenient to lose your password, but you know what's really inconvenient? When Equifax gives away all your information to hackers, as they just did! At least with the blockchain, YOU have a choice. If you want, you can use a separate service that stores your password for you and will give it back if you need to reset it. For example this is what people using Coinbase do - you can recover your passwords. And because you can use a separate service that hackers probably don't know is associated with you, you are much less likely to get information stolen. But the security choice is up to you, not Facebook or Google or Equifax.
Blockchain adds frictions to an already seamless process... Most public chains have settlements measured in minutes — unless you’re willing to pay high transaction fees. Compare that to the 2-10 seconds for a saved credit card transaction customers are accustomed to in the age of fast mobile interfaces and instant gratification.
PR: [This] is true for the current public blockchains, but several newly proposed public blockchains (including our own) achieve high speed and low costs by shortening the list of blocksigners, something I've covered in detail in our [High Fidelity] blog post. Our blockchain is up and running and has 2 second settlement times, for example.
Philip also went into detail defending blockchain specifically as a payment system for online virtual worlds, something both he and Adam have experience in. (Frisby ran a couple large online businesses within Second Life during its heyday, which of course Philip founded.) Adam's concerns first:
Blockchain cannot be everything it aspires to be at the same time As it stands, blockchain is caught between three competing objectives: fast, low-cost, and decentralized. It is not yet possible to make one chain that achieves all three. Fast and decentralized chains will incur a high cost because the storage and bandwidth requirements for historical archiving will be enormous and will bloat even with pruning... At high volume, a good credit card processor can settle a typical $2 transaction for somewhere around $0.10. Some of the largest online game economies manage more than a million user-to-user transactions per day, instantaneously, with no fees. And yet, I can name half a dozen startups trying to inject an expensive and slow blockchain into this very problem.
PHILIP ROSEDALE: It's a great point to "not fix what isn't broken". If you are talking about people living in the United States (who have Visa, Mastercard, or American Express) making in-game purchases for more than a couple dollars from a game developer (not an individual content developer), I agree that using the blockchain is a dumb idea.
But the important cases (including Second Life) do NOT fit those three above statements, and need to be addressed with something else more similar to a blockchain. The author casually mentions "Some of the largest online game economies manage more than a million user-to-user transactions per day, instantaneously, with no fees." And right after says that credit card processors can do a $2 trade for $0.10 fees" -- that's not the same thing at all -- those transactions are NOT direct using credit cards. Those 'largest online game economies' do NOT settle directly through credit cards, instead they have built their own complete currency and/or balance systems (like Second Life), complete with millions of dollars in MSB (Money Service Business) licenses for every state and big fraud departments. It's possible that the author has actually built such a system for his own virtual world, but it is by no means "frictionless" to do so.
Also, if you don't have Visa/Mastercard/Amex CREDIT (not debit) cards, you can't transact with anyone else. And this is most people outside the US. So basically, unless you are well-off US consumers, this doesn't apply to you. And 65% of internet users are not in the US, right?.
So if you are trying to make a system where individuals can make money from each other, and most people are in different countries, this doesn't work. China has its own systems, but like credit cards they work only for China residents. So if a Chinese person is trying to sell a virtual good to an American, that will not work.
Which is why we had to build all the stuff we did for Second Life. If you want a system that allows people to pay each other directly for virtual goods, you need to use either a cryptocurrency or a custom-built solution which takes and makes payments in each of the local forms of currency where your customers are located. The custom solution is a lot of work!
The cryptocurrency approach shares the work with other companies, because the actual exchange of local currency into or out of the cryptocurrency can be done by an exchange (for example Coinbase, if you are using Bitcoin, Ethereum, or Litecoin).
So the virtual world company can use the blockchain currency as payment between users, but they don't need to build an exchange or get all the various licenses. This is a huge development savings.
I'm obviously biased, so I'll just say there are very valid points on both sides. Ultimately, the best case is the one that is sustainable with consumer usage -- both now and in the long term, when (hopefully), online worlds with their own exchangeable virtual currency become more commonplace.