Busting Some Common Myths Surrounding Blockchain
Blockchain Implies Truth
As suggested earlier, the truth or validity of transactions is done through miners working on thousands of mining nodes. However, miners can collude during this process and carry out malicious transactions that others may not pick up. Although the risk is lower in larger networks, collusion is a strong possibility in private blockchains, such as banks.
It is not just the miners that need to be reliable; blockchain cannot judge if the inputs are factually correct either. For example, fake invoices entered in the system would be considered valid if the blockchain’s conditions are met. “Blockchain is not the magic wand that generates immutable truth”. It’s just a means to an end.
Blockchain is the Ideal Technology
Blockchain enthusiasts believe in the massive potential of this technology, and it is possible, provided that what is on paper is actually practised. We have already seen that cryptocurrencies are centralised in many aspects, and it is valid for blockchain too. This impedes the technology from achieving its true capabilities.
On the blockchain, transactions must be validated through multiple nodes before acceptance. Anyone can add or validate transactions, but the process takes place one at a time. Therefore, it is time-consuming. Users generally have to pay substantial transaction fees to validate their transactions quickly. Those who cannot afford to do so have only two choices—wait longer than others or stop transacting all together. Similarly, mining Bitcoins on the blockchain network is expensive and resource-intensive, which have resulted in the formation of concentrated “mining pools”. These mining pools lead the way and validate a majority of the transactions.
Additionally, any person can suggest updates or changes that need to be made to the blockchain network. In reality, however, they are generally proposed by a select number of developers and commentators, making the process relatively centralised.
Private or Enterprise Blockchains Makes Sense
Among many stakeholders, IBM has been promoting and selling enterprise blockchain use cases. Several banks have formed use cases for blockchain consortiums to improve inter-bank data management, operation process improvements.
For any enterprise to use blockchain internally, or with other enterprises, we have had proven, scalable and efficient technologies for decades, including shared databases (SQL, Oracle, SAP).
Please note that blockchain is an expensive technology in terms of resources, as multiple nodes need to be set up, and multiple entities need to validate all transactions since the beginning (no concept of end-of-day final records, so next day’s transactions begin from next day only and not from the first-ever transaction like in blockchain). Decentralisation, by definition, slows down things and introduces security concerns. For a single enterprise with an already trusted set of internal groups, or a handful of external enterprises, private blockchain will not be the best solution. And for inter-banks transactions, payments, and trade settlements, several existing efficient workflows, platforms, protocols like Swift, FIX, etc., exist and work fine.
As an example, if some bank says that they can reduce the current trade settlement cycle from 2 days to 1 second, they should ask themselves why it is 2 days in the first place. It’s not that they were all waiting for blockchain technology to be invented for solving this problem.
If you do not believe this, ask any bank which announced any use case, proof of concept (years ago), if they actually scaled it further or not. Do you recall reading any such “scaled up transactions by banks” in the press release after the proof of concept announcement? The answer will be in the negative.
Transparency/Digitisation is Best Achieved by Blockchain
Several POCs or advocated use cases of blockchain are nothing but digitisation of data. Some examples are given below:
- Land Registry: Registry on the blockchain is done by several states and governments while none of them has allowed for independent miner validations, i.e., only states can decide who owns which property and when they approve the transfers. Therefore, it just makes way for online record-keeping instead of offline. Such processes by governments and companies have been digitised for decades without blockchain and more efficiently.
- Invoice Discounting: If a supplier sends an invoice to a client which gets accepted, then they can take, say 70% loan, against that invoice from a bank to develop the products, or get some cash-flow while the products are shipped, say from China to the US, which takes weeks. Typically in such a loan, the supplier, the supplier’s bank, the client and the client’s bank are involved in confirming the transaction, and the supplier's bank gives the loan after that. This approval process can take days.
The challenge in this loan issuance is that there can be fake invoices or companies can take bank loans from multiple banks against the same invoice, or that the counterpart client does not exist. Hence banks are cautious in giving such loans.
Now independent miners are banks’ risk departments who can help validate the authenticity of the transactions. And no bank will open their client data to other banks for validation (in fear of losing the client to other banks). So all that can be achieved is that document transfer between the 4 entities can be made faster from days to hours by using digital signing and digital documents transfer. Such solutions exist and work well without blockchain.
Most problems advocated here are typical digitisation problems that can achieve transparency by making the steps in the workflow public. Think about DHL or any other courier service tracking the package in transit or Uber’s car driver and trip details. People who need to know can know it online very easily, and without needing any blockchain technology implementation.
Blockchain is Efficient
Users have imposed exceptional trust in blockchain technology, but they fail to realise that it is beneficial in some cases, not all. It cannot be blindly implemented across industries. People who make the mistake of using blockchain without a thorough understanding of its consequences might end up with bigger inefficiencies. For example, in private or governmental centralised institutions, a decentralised technology does not fit in. It is the same as a dictator saying that the country is democratic, but only he will vote.
Furthermore, blockchain is expensive to implement and requires computational power, electricity, servers, and related infrastructure. Therefore, blockchain should be evaluated just like any other technology is and see if the benefits are enough to offset the costs.
Blockchain is Tamper-proof
Blockchain is a digital ledger, which means that blocks of information are connected in an unbroken sequence. This sequence is made up of digital signatures that form the blocks, and each block carries the signature of the preceding block. Therefore, changes to one block would require modifications to all blocks in the chain, making the system resilient to tampering.
However, attacks can still occur. For example, if a group of participating individuals control a majority of the network’s hashing power, then tampering might be possible. Hashing power is nothing but the power used by your computer or hardware to run and solve different hashing algorithms This can also lead to a double-spending attack in the case of cryptocurrencies, where high-value transactions can be reversed, and amounts can be spent a second time. To explain a double spending attack, think of money you hold in cash or in your bank. Once you use a part, the transaction is complete and you cannot use it again. However, on the blockchain, since there is no central authority to control transactions, users can duplicate digital files. So, a person can use a copy of a cryptocurrency to make a purchase while retaining the original as well.
All New Discounted IC Tokens Will Rise in Value
ICO (Initial Coin Offering) is the advance sale of a project’s cryptocurrencies or tokens, to be used within their platforms or outside, in advance, to fund the development of their platforms. These tokens can be easily sold and traded at anytime, on all cryptocurrency exchanges depending on their demand. So, an ICO is when a company raises money in Bitcoin or other cryptocurrencies for the technical development of their projects. These tokens are essentially the incentives, for several market participants to use and grow the platform in a decentralised manner. Such incentives are paramount in making a decentralised ecosystem operate sustainably. This allows for formation of new economic systems; possibly even capable of transforming/improving wider systems like “capitalism”.
Majority of the ICOs unfortunately don’t and won’t work because:
- Many ideas don’t need blockchain or ICOs at all. They are centralised, don’t need a community, or have no real business models. As explained above, you cannot “decentralise everything”.
- The teams behind ICOs have nothing to lose. Once they raise millions to billions on an idea, basic prototype at best, proven or unproven teams with “self-proclaimed experts” or “larger than life celebrities lending their names”, there is no major pressure to execute their idea well. There is no governance on the use of funds. Compare this to typical startups, where entrepreneurs get modest valuation, and have to be “all in” the project to see any returns after 5-10 years or hard work. They are “on the hook”, forever. And, a lack of regulation, accountability and legality of structures makes it the “wild west“ of finance and reduces the probability of success.