Why you don’t need a blockchain

15.03.2018
7 min.
title

Blockchain has emerged as one of the hottest buzzwords in recent memory. Many investors are pouring resources into this technology. If you listen to the blockchain hype, it’s the next ‘big’ thing. But is blockchain truly a panacea?

This is an important question to answer, especially for those who consider placing money in blockchain development. Investments in blockchain hit $3 billion in 2017. In January 2018, investors poured $240 million into a pair of blockchain-focused Exchange Traded Funds. Statista reports that the size of the blockchain technology market worldwide will reach $2.3 billion dollars in 2021:

Blockchain Technology Market Size
Data source: https://www.statista.com/statistics/647231/worldwide-blockchain-technology-market-size/

If an investor believes that blockchain will be the next big thing, they might invest money into a blockchain project even if they don’t fully understand it.

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 solutions might do a better job of meeting needs and resolving pains.

Rather than investing in blockchain because it’s the hot topic of the moment, it’s important to understand the technology, its potential applications, its limitations, and how it stacks up against competing technologies.

As cybersecurity consultant Dr. Ingo Mueller puts it: “Instead of focusing on ‘what blockchain could do,’ one should address what blockchain can do better than other technologies.”

Understanding blockchain and its potential advantages

A blockchain is essentially a digital ledger. Every transaction is recorded and verified. Bitcoin makes the ledger publicly available, meaning anyone can see the entire history of the transactions.

Not every blockchain solution will use a public ledger, however. For certain applications, it will make 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.

Regardless, the blockchain technology yields several potential advantages. First, processing power can be distributed. Second, once confirmed, the ledger becomes an immutable record of the transaction. This yields a third advantage: a blockchain allows mutually mistrusting parties to engage in a transaction without the need for a third party.

These attributes could prove beneficial in some cases. However, that does not mean that the blockchain will always yield competitive advantages. For investors and companies considering blockchain solutions, it’s important to consider whether distributed processing power and a ledger is needed and if mistrust is a serious impediment.

Dr. Mueller sums this up nicely: “It is time to ask the right questions about blockchain if we want to understand its actual properties, strengths, and weaknesses, as well as its promise.”

When blockchain doesn’t make sense

In many cases, existing technology performs 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.

Decentralization is not a must

For bitcoin, the benefits are obvious. The currency itself is meant to be decentralized with no central authority, say a government, being able to influence it. 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 many of the products and services we use to be offered by a central party, such as a retailer. When a central authority is wanted or needed, the retailer can set up centralized servers 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, is a blockchain driven streaming service needed?

Distributed processing may offer declining benefit

Is distributed processing important when processing 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 June 2017, it cost about 6 cents. As processors become more powerful and cheaper, it’s fair to wonder if distributed processing will add value.

Companies that use massive amounts of processing power, say Amazon, have to set up huge processing farms. Yet these organizations also have access to vast resources, and processing power is rarely an inhibition. Meanwhile, high-end PCs and more affordable server solutions are often enough to meet the needs of scientific researchers and others who in the past needed to pay considerable sums to access or set up expensive servers.

Further, some companies have been working on ways to store personal and company data on other parties’ hard drives. Yet this runs risks. What if the other party’s storage drives are damaged? What if the parties storing data 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 2016, a gigabyte cost a mere 2 cents. Given the dramatic decline in storage costs, a blockchain distributed cloud storage system may not make a lot of economic sense, even for parties who have to store massive amounts of data.

Blockchain is less useful when identities are known

One of the key advantages of blockchain is coordinating transactions between mutually mistrusting parties. Consider 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.

A blockchain reduces these risks by verifying the transaction on both ends. If someone wants to sell a bitcoin, for example, the blockchain will first verify that the seller has the necessary bitcoin and that it has not been traded. When the seller goes to sell the 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 necessary funds.

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 receive the products or services in return, the wronged business will have legal recourse.

Is the blockchain itself flawed?

Beyond poor fitting use cases for blockchain, it’s important to consider if the technology itself has serious flaws. With bitcoin, one major flaw in the system is a 51% attack. If a party was able to secure more than 50% of the mining processing power, they could prevent new blocks from being added to the chain and would be able to reverse transactions during the time that they controlled the network.

Given how massive blockchain has grown, such an attack is unlikely as it would require an immense amount of processing power to pull off. But how about smaller blockchains? If a hospital set up a blockchain to process medical records, it might be possible for hackers to break into and overwhelm the system.

The prospect of a 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 have faced several hacks in the past. Once the bitcoins are stolen, they are lost forever. Those who have had their bitcoins stolen have no recourse. They don’t know the identity of the hackers and the ledger has already transferred the bitcoins to a new party, making the transactions official.

Applied to business transactions, data transfers, and other issues, this could become a serious hassle. 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.

Conclusion: blockchain has potential but it’s not limitless

Blockchain has shown promise in many sectors and areas. Early tests of blockchain systems for traditional financial systems have yielded encouraging results. Blockchain startup Axoni worked with Goldman Sachs and JPMorgan to track swap contracts over the course of six months. The test was 100% successful, which is no small accomplishment given that the $2.8 trillion dollar market generates huge numbers of transactions.

Yet some potential does not equate to limitless potential. Blockchain may prove useful in some cases, however, the specific applications need to align with the competitive advantages that the blockchain provides. Haphazardly applying blockchain to areas where it offers little-to-no benefit may result in wasted money, time, and other resources.

Tags: