We are all familiar with ICOs and whitepapers: they propose a new token/currency that they want to develop, convince people that their idea is revolutionary because of the power of the blockchain, and money flows in. But does every problem need blockchain technology?
The truth is, most businesses do NOT need blockchain technology. In here, we have compiled the top 3 problems commonly ‘solved’ by the blockchain, and explain what is true, and what is just rubbish.
False: ‘It is more secure’
Blockchain technology has often been touted as being more secure because it is encrypted and decentralized. However, how true is the statement? Just last month, Verge (price as of writing XVG $0.06) was hacked, and $1 million worth of tokens were stolen. Not exactly the kind of thing that makes investors feel more secure.
True: It is Trustless and Decentralized
When projects talk about security, it can be broken down into two parts.
A large part of the reason why blockchain technology is so revolutionary is the element of trust. If we take banks as an example, individuals ‘trust’ that the bank keeps their money safe, and will allow them to withdraw and transfer their funds at any time. Every time they perform a transaction, the bank will record down the changes accordingly and update the account.
With blockchain, tokens are sent from wallet to wallet, and does not require a central authority to maintain records. Rather, every participant in the network holds a copy of the ledge, and can verify that the transaction occurred.
Decentralization simply means that the records are not all kept in a central server. Since the ledger is spread out across all participants in the network, it has a large amount of redundancies: as long as a single node survives, all the data can be re-constructed. This means that it has no single point of failure.
That being said, decentralization can be a very misleading term. Two computers set side-by-side in the same server could be considered ‘decentralized’, but is it any safer? An accident, such as a fire, could easily destroy all the information, leaving it just as vulnerable as a central server.
False: Smart Contracts Are Necessary to Automatically Execute Agreements
Smart Contracts are not that smart. In essence, they are bits of code that are triggered if conditions are met, and then execute their programming. However, this function is not exclusive to the blockchain, nor is it new technology. IFTTT is a website that allows people to set their own ‘If-Then’ code, such as turning on the air-conditioning when they are on their way home.
Moreover, smart contracts are not necessarily safe. The contract is only as good as the code, and there have been incidents with smart contracts that demonstrate its fallibility. For example, the Parity bug on Ethereum led to about $168 million worth of Ether being compromised, permanently.
True: Smart Contracts Are Useful On The Blockchain
While smart contracts on the do not provide new functions, they still play an important role. When a smart contract is executed, it is run by all other validators in the network, and the entire network comes to the same conclusion.
All participants can rest easy knowing that the results of the contract are the same across the network; it cannot be changed or modified to favour one party over another. A great use of this would be for things such as escrows, where the money can be held in safety without the use of a third party.
False: Every Business Can Benefit From Being On The Blockchain
Blockchain technology is useful. However, not every business needs to be on the blockchain.
For one, Proof of Work requires a tremendous amount of energy. Taking Bitcoin alone, the amount of energy needed to mine could power an entire country. For projects that are looking to create their own blockchain, they need to heavily consider if the cost is worth the benefit.
Moreover, blockchain smart contracts are forced to operate within the ecosystem. For example, it could be set so that ‘when Person A sends ETH to Person B, Person B sends back EXP Tokens to Person A’.
However, to be used in the real world, blockchain technology has to be integrated into live data-feeds. Taking food delivery as an example, the blockchain needs to be updated when the driver has reached, and when the food has been delivered safely into the hands of the right customer. All this requires an ‘oracle’ to connect the live data to the blockchain.
It is just as vulnerable as centralized systems in that regard: humans are still required to input the information, and there is no guarantee that the information is accurate. Even worse, its much harder to edit information that has been added to the blockchain: errors are even harder to fix.
True: Certain Businesses Benefit From Blockchain
Blockchain does have several key points that are unique: decentralized ledgers, borderless, permission-less, and without. If a business is contingent on these two points, the blockchain is for you.
Beneficial to Business: Finance
Pundi X is a company that aims to facilitate cryptocurrency payments through their Point of Sale (POS) machine. Using their POS machine, people would be able to buy, sell, and even purchase everyday products with cryptocurrency. Why does a project like this need to be on the blockchain?
For anyone who has wired money overseas, you should be familiar with the fees and wait time. Sending money overseas takes time, and there are significant fees (10% or higher) when wiring it to another country.
Cryptocurrency, built on blockchain technology, is a way to minimize these costs, and allow vendors and customers to transact directly without having to pay a fee just for administrative work.
On the other hand, cryptocurrencies are currently in a volatile state. The tokens sent over differ in value from minute to minute. A drink worth 0.00006 BTC could well be worth 0.00008 BTC the next day. This makes it a poor form of currency at this point of time.
As a company dealing with large amounts of money, Pundi X has to demonstrate beyond a shadow of a doubt that is responsible and secure. Vendors accept POS machines from Visa because of its long-standing reputation and how established it is in the financial industry. On the other hand, they are less inclined to use a POS machine from a smaller, lesser-known company. The blockchain technology means that Pundi X’s finances are transparent and public, and no funds can be siphoned off.
That being said, the moment the tokens are converted to fiat, there is no way to track how it is spent. Blockchain technology might grant transparency as far as the tokens go, but they are unable to track fiat.
Beneficial to Users: Personal Data
Personal data is another aspect that benefits tremendously from the blockchain. On the internet, people have dozens and dozens of online profiles. This also means that their information is given to large, centralized companies who are free to use and sell it in whatever way they see fit.
Under projects such as Airbloc, data from users is saved privately in the blockchain, and only fully accessible by themselves. They can choose to sell their data, and are able to restrict how much data is sold, and how many times it can be disseminated.
The blockchain enables this information to be sent across borders, and the information is only accessible to the company that paid for it. Smart contracts are in place to ensure that the terms set by the user are upheld, and that users are compensated for selling their data.
While useful, it is still not a perfect solution. Companies could print and photocopy the information to re-sell, and such transactions would not be recorded on the blockchain. Moreover, smart contracts are not infallible. A mistake in the code could easily lead to another data leak, much like Apple had.
The blockchain technology is still new, and has much room to develop. Companies are leveraging on the ‘hype’ that is going on in the market to raise funds, and blockchain technology is a keyword that helps to improve their visibility online, and attract investors who are unfamiliar with the space.
As for practicality, while many rave about the lack of a central authority, they have grown accustomed to a level of ‘hand-holding’: passwords that are forgotten can be retrieved, credit cards that are stolen will not be charged to them, and money transferred incorrectly can be restored. There is no such gatekeeper in the blockchain space. Money stolen can never be recovered, accounts lost can never be retrieved. Mainstream adoption will hinge on people becoming accountable for themselves. Even then, the trade-off might be too high for regular everyday use: who wants to lose their email account just because of a forgotten password?
I am hopeful that the technology improves over time, and I do believe that it will be a disruptive force when that happens. However, at this point in time, there are precious few businesses that NEED to be on the blockchain, and far too many that WANT to be on the blockchain.
30 April 2018