October 11, 2019
Table of contents
Head of Blockchain Competency Center
If there were a contest for the hottest buzzword of the past few years, blockchain would take the first place. The hype is so intense that many investors, both private and institutional, are pouring millions into this technology as the next ‘big’ thing. But are blockchain virtues stronger than blockchain challenges?
This is an important question to answer, especially for those who consider investing in blockchain development. According to IDC, blockchain spending is expected to grow at a CAGR of 60% within the 2018-2023 forecast period. Blockchain spending is expected to reach $2.7 billion in 2019, which is an 80% increase from 2018.
If an investor believes that blockchain will be the next big thing, they might place money into a blockchain product even if they don’t fully understand the potential and limitations of this technology.
Likewise, a software company might push forward with a blockchain project even if the end product will add little value to an already competitive market. Existing technologies and ready-made solutions might do a better job of meeting needs and addressing pains.
Rather than investing in blockchain as a hot topic, it’s important to understand how it works, its potential applications as well as its weight against competing technologies. If blockchain has the same application range as other existing technologies, then there’s little sense to adopt it. However, if blockchain can do something way better, then it’s a good reason to invest in it asap.
A blockchain is essentially a digital ledger, either public or private, where every transaction is recorded and verified. For example, Bitcoin makes the ledger publicly available—anyone can see the entire transaction history.
Not every blockchain solution uses a public ledger. For certain applications, it makes more sense to keep the ledger private.
With Bitcoin, the number of stakeholders is massive. Everyone who owns Bitcoin has an invested interest, thus necessitating the public ledger. With private transactions, say, B2B deals, only the parties involved need to be privy to the ledger.
Blockchain technology offers several advantages. First, the processing power can be distributed. Second, once confirmed, each transaction record becomes immutable. This is a prerequisite for one more advantage: blockchain allows mutually mistrusting parties to engage in a transaction without the need for a third party to validate it.
These attributes could prove beneficial but not really competitive in some cases. For investors and companies looking to adopt blockchain solutions, it’s important to consider whether both the processing power and the ledger need to be distributed, and whether mistrust is a serious impediment.
Right now, decentralized applications built on blockchain are becoming popular in a great variety of sectors and areas. From identity management to data verification to supply chain management, dapp development may become the next frontier of blockchain proliferation. For example, in 2018, the Swiss city of Zug successfully tested the first electronic voting system based on blockchain. The citizens of electoral age can vote on important city events via their smartphones. Considering the ease of use and a high level of security, everyone, the mayor included, are enthusiastic about further adoption of this voting system.
The same year, the Danish shipping company Maersk adopted a blockchain-based shipping tool called TradeLens in cooperation with IBM. In 2019, Maersk announced a couple of other major shipping partners on board. As of now, TradeLens covers almost half of the world’s cargo container shipments.
In many cases though, other technologies perform just as well or even better than blockchain. When developing a solution, it’s important to ask whether blockchain offers a competitive advantage in the given situation.
For Bitcoin, the benefits are obvious. The currency itself is meant to be decentralized. When there’s no central authority, for example, a government, nobody can influence the network. Could Bitcoin be ‘decentralized’ if it was run through central servers? There would be a risk that the parties controlling the servers would somehow manipulate the currency and community.
Yet we expect a party, such as a retailer offering many of the products and services we use, to be centralized. When a central authority is wanted or needed, there is no need for any decentralized platforms to handle the requests. Consider YouTube’s video streaming services. It might be possible to set up a blockchain to stream videos, but if we can turn to a central authority like YouTube to administer the network, is a blockchain-driven solution needed?
Is distributed processing important when computing power is so cheap? In the past, setting up server farms and mainframes was cost-inhibitive, even for large organizations. Over time, however, the costs for high-end PCs, servers, and mainframes have all declined dramatically. These devices offer compelling and affordable blockchain alternatives.
One way to consider processing power costs is to look at the costs to process GFLOPS, which refers to one billion floating-point operations per second. In other words, how much does it cost to process 1 billion operations? In 1984, it would have cost roughly $18.5 billion. As of the early 2018, it cost about 3 cents. As processors become cheaper and more powerful, it’s fair to wonder if distributed processing will add value.
Companies that use massive amounts of computing power, like Amazon, have to set up huge processing farms. Yet these organizations also have access to vast resources, and computing power is rarely a problem. Meanwhile, high-end PCs and more affordable server solutions are often enough to meet the needs of enterprises and those who would have needed to pay considerable amounts to access or set up powerful servers in the past.
Further, some companies design ways to store personal and corporate data on other parties’ hard drives. Yet it’s risky. What if the other party’s storage drives are damaged? What if the data-storing parties figure out a way to hack the encryption? Ironically, any party that is considering a blockchain-based data storage will face a mistrust dilemma—can they fully trust the other party with their data?
Meanwhile, storage costs per gigabyte have plummeted over time. In 1990, a gigabyte of storage space cost $11,500. As of 2018, a gigabyte cost a mere 2 cents. Given the dramatic decline in storage costs, a blockchain-based cloud storage system may make little economic sense, even for parties who have to store massive amounts of data.
One of the key advantages of blockchain is coordinating transactions between mutually mistrusting parties. Let’s take Bitcoin. When a Bitcoin transaction is carried out, neither party knows the actual identity of the other party. If someone were to be scammed during a transaction, the wronged party would have little recourse since they would not know the identity of the scammer.
Blockchain reduces these risks by verifying the transaction on both ends. If someone wants to sell Bitcoin, the blockchain will first verify that the seller has the necessary funds and that they have not been traded. When the seller is going to sell Bitcoin, they will have to provide their 64-digit long private key. The seller will not confirm the transaction, meaning provide their private key, until they are paid the stipulated amount.
Thus, this system allows two mutually mistrusting parties to carry out a complex transaction without needing to know the other party’s identity. In instances where both parties know each other’s identities, the benefits are less obvious. If a business sends payment to another business but does not get the products or services in return, the wronged business will have legal recourse.
Beyond poor-fitting use cases, investigate how blockchain disadvantages may affect your project. With Bitcoin, one major flaw in the system is the 51% attack. If a party is able to secure more than 50% of the mining processing power, they can prevent new blocks from being added to the chain and reverse transactions during their control of the network.
Given how massively the blockchain network has grown, such an attack is unlikely—it would require an immense amount of computing power to pull off. For example, if we take the size of the Bitcoin blockchain, it grew to 226.6GB as of the end of June 2019:
But how about smaller blockchains? If a hospital sets up a blockchain to process medical records, hackers may break in and overwhelm the system.
The prospect of the 51% attack raises the question of whether blockchain ledgers are truly immutable. There’s another important question: do we really want immutable ledgers? Bitcoin exchanges and wallets were hacked several times in the past. Once Bitcoins are stolen, they are lost forever. Those who have had their Bitcoins stolen have no recourse. They can’t know the identity of the hackers, while the ledger has already transferred the Bitcoins to the new parties, making the transactions official.
Applied to business transactions and data transfers, companies could face a serious blockchain challenge. For example, if businesses were to use an immutable blockchain to record transactions and an accidental transaction were to occur, correcting the records might be a headache.
From blockchain for nonprofits to healthcare organizations, this technology has been widely adopted in almost any industry sector. Though blockchain has a strong technological potential in terms of security and trust, some of its benefits, such as decentralization or distributed processing, can turn into limitations.
In this light, apart from the obvious disadvantages of blockchain, companies should make sure that blockchain’s specific applications are aligned with its competitive advantages. Haphazardly applying blockchain to areas where it offers little-to-no benefit may result in wasted money, time, and resources.
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