(Mis)Use Cases of Blockchain

Blockchains cannot supplant traditional databases. They have certain admirable features, discussed extensively in this module so far, which makes them an ideal fit for certain applications like crypto-currencies where traditional databases would never have succeeded, and bitcoin is a testimony to that. That blockchains can host and enable decentralised applications and help build open tokenised networks is in itself extremely promising as of now. But almost 99% of our existing digital applications are better off design-wise in their current state and gain next to nothing if they switch their architecture to the blockchain.

Let us look briefly at the deterrents and then at specific use-cases. 

First, almost all existing applications (or ledgers) are centralised in control. Replacing a traditional database at the backend with a blockchain does not alter the centralised control, and just replaces a fast and efficient database with a slow and inefficient one. Such blockchains with retained centralised control are being termed as “permissioned” blockchains or private blockchains.

Second, we have already seen that storage costs in a blockchain are very high, because every node stores the full ledger. While sharding in blockchains may ease this problem going forward, it is no match for the storage efficiency of the traditional database.

Third, the transaction processing speed of blockchains makes them appear as slow lumbering giants, unsuited to the super-fast transaction processing needs of the many applications.

Fourth, scaling a blockchain only happens by reducing the number and increasing the power of individual nodes —  which is nothing but centralisation in the first place. So why bother?

And last but not least, Blockchain development and execution is costly.

The Smartness of Smart Contracts

The words are deceptive, implying utopian qualities in contracts built on some AI-like magic. The reality is mundane. A smart contract is just a regular program, which reads and writes data from and to the blockchain’s (distributed) database. The code of the program also resides within the same database, so it may be looked upon as the equivalent of a “stored procedure” in traditional databases. Its execution can be triggered by blockchain transactions, thus altering the blockchain’s state. A stored procedure is a Structured Query Language (SQL) code that you can save for reuse in the future. The only additional characteristic is that the code must independently run on every node of the blockchain when triggered, and arrive at a consensus result before the blockchain’s state is altered.   

If such a smart contract or program is to respond to external events, the same information must be fetched by every node on the chain, and there must be a guarantee that this information will not alter in the meantime, or the blockchain consensus will fail. That will lead us back to the need for a centralised “oracle” that will guarantee this. Having a trusted entity to manage the interactions between the blockchain and the outside world undermines the goal of a decentralised system, and it’s simpler to have a traditional database at the backend rather than a blockchain.

An oft-cited example of smart contracts is their potential use to automate payment of interest on bonds and loans. But to guarantee such timely payments, the funds must be at the disposal of the smart contract, which would preclude their use anywhere else. In case the funds are at the disposal of any other entity in the system, which they will be because that is  the idea behind any bond issuance or loan appraisal, then the blockchain smart contract cannot guarantee timely payment. A stalemate, because a blockchain smart contract cannot transform what is essentially a risky instrument, howsoever low risk, into a risk-free one. 

Lately, the media has been chock-a-block with announcements and the launch of blockchain projects across the spectrum. Discussed here are some such projects and announcements where, to a discerning analyst, there is no use-case for the blockchain at all, yet Maslow’s hammer is hitting each one serially.

Banks and Fintech on the Blockchain

The biggest-ticket announcements have stemmed from the banks and the fintech sector where consortiums have been announced to build different versions of blockchains and apps — by “market disruptors” like R3 and Digital Asset Holdings LLC. In 2017, Bank of America Merill Lynch, Wells Fargo, HSBC, Deutsche Bank, HSBC, Reuters and even Intel invested $107 million in R3 product “Corda” blockchain. R3 also announced the integration of their blockchain product with SAP in the case of Commerzbank. R3 then announced another trade finance network “Marco Polo”  based on the same Corda blockchain technology but this time including BNP Paribas, ING, Commerzbank, Standard Chartered, DNB and others. Digital Asset, a competitor to R3 raised a $110 million of its own from private investors, and has formed its own consortiums including Goldman Sachs and JP Morgan. The latter is also a member of the blockchain consortium Enterprise Ethereum Alliance as well as the Hyperledger Project of the Linux Foundation. The Wall Street Journal list of top technology companies, dominated by blockchain companies, profiled both R3 and Digital Asset on that list.

Banks claim that they are funding and building these private blockchain networks to settle their transactions more efficiently. Blockchain certainly helps in creating a shared ledger among banks to settle their swaps or other financial product transactions, and save “billions of dollars”. But it’s interesting to analyse why banks spend billions of dollars in these transaction settlements in the first place. It’s primarily due to legacy mainframe systems in the banks’ back offices and workflows that are decades old, need high maintenance to keep running, and are coupled with inefficient manual processes on top. Banks can achieve similar savings if they just replace their back-office systems with any efficient shared database technologies like Oracle, SQL and layer some smart business logic on top of them. Besides, banks’ blockchain networks are private among those that know each other and have several legal contracts between them, and do not need or intend to use any independent mining. Hence, Blockchain serves very little purpose in these scenarios, if any.

Similar is the case of fintech and payment processors. You would be hard-pressed to find one that announced a blockchain use case or proof-of-concept years ago and then actually issued a successful “scaled-up blockchain transactions” press release after the initial announcement. 

So should it have surprised anyone when R3 too made its announcement abandoning blockchain technology altogether after spending US$ 59 million on its research? Corda would no longer be based on blockchain, and R3’s altered its description from a “blockchain startup” to a “blockchain inspired startup”. The irony, though, seems to be totally lost on the banks themselves, who continue to pour in funds at record speed.

Real Estate on the Blockchain

Traditionally real estate is driven by paper-based title records and involves a lot of third-party players, including brokers and banks. A blockchain-based design would certainly allow people to transfer funds, property titles and data in a peer-to-peer manner that is digital and open sourced. Dubai Land Department announced the creation of a blockchain based system using a smart and secure database to record all real estate contracts, including lease registrations, linking the dealer, land apartment management companies, phone and internet service providers, furnishing solution providers and even the banks. All this would be done by linking the user’s blockchain profile to his Dubai ID (given by the Dubai government for access to government services) and would contain all remaining information. 

Similarly, Deloitte announced the development of a platform to handle rental and other real estate contracts digitally, and invited Commercial Real Estate (CRE) companies and industry participants evaluating an upgrade or overhaul of their current systems to have blockchain on their radar. A third service provider, Ubitquity, announced a blockchain-secured platform for real estate transactions offering a simple user experience for securely recording, tracking, and transferring deeds. The platform prototype was released in March 2016 as a  Software-as-a-Service (SaaS) blockchain platform. Ubitquity claimed to provide e-recording companies, title companies, municipalities, and custom clients benefits from a clean record of ownership, thereby reducing future title search time, and increasing confidence/transparency. Citing a Lands Record Bureau in Brazil as one of their early clients, they claim to “use multiple permissioned and permissionless blockchains in an effort to remain fully blockchain-agnostic”.

The problems in this use case stem from the indispensability of paperwork, issues over transparency and time taken to execute transfers. Given that property deals are always going to be approved by some central authority or the other like a Municipal Corporation, or an appointed Government body, the decision making of property transactions shall always be centralised. In such cases, using a technology which touts decentralisation as its chief purpose is antithetical and purposeless. As far as the problem of digitisation of the paperwork and bringing transparency in the transactions process is concerned, this could be easily achieved by digitizing land records, and making the transfer process online where the buyers/sellers can raise their request online and approving agencies can approve it online too. It does not need a blockchain at all. Ubitquity is building on some shaky stilts.

Diamonds on the Blockchain

In the 1971 film Diamonds Are Forever, Bond’s nemesis Blofeld and his SPECTRE organisation use diamond smuggling to fund a space-based laser weapon.  In Bond’s 2002 film Die Another Day, his adversary ran an empire on conflict diamonds a.k.a. blood diamonds, something that also fuelled Sierra Leone’s long civil war and insurgency. And there is no heist that excites gangsters more than a diamond heist. So it makes a lot of sense to record a gem on a blockchain recording its provenance and future sales. 

Everledger, a startup, claimed to have proven this possibility by logging the identifying characteristics of over 1.6 million diamonds on blockchain, information that would be useful to various stakeholders — from claimants to insurance companies to law enforcement agencies, making counterfeit claims impossible. Little wonder then that IBM also announced TrustChain on its blockchain platform in collaboration with Asahi Refining, Helzberg Diamonds, LeachGarner, Richline Group and Underwriters Labs. Participants in the blockchain network hope to easily keep track of all of the components in a piece of jewellery from the time they are mined, as they’re fabricated into consumer products, such as diamond engagement rings, until they’re sold. Block Verify, another blockchain startup, claims to end counterfeiting and make the world more secure.

The problem in these use cases is the unique identification of assets like diamonds. It's the same problem with paintings (where, for example, an artist draws only five paintings to keep them exclusive and hence priced higher). The challenge arises when people make and sell fake diamonds or fake paintings. What is definitely not being decentralised here is the consensus on what’s original and what’s fake. That shall always be controlled by the firm producing the diamonds or some central authority appointed by the diamond firms, or a curator or museum in the case of paintings. If all they need is a unique digital stamp on each diamond, which could then be easily traced and tracked by the issuer firm, and since such digital stamping mechanisms exist like QR codes etc. are readily available, there is no need for the blockchain at all. We have already discussed the “oracle” problem of blockchains when it comes to physical assets in the Scalability Trilemma, and since diamonds, paintings, and precious jewellery all constitute physical assets, the blockchain cannot track them without a central intermediary to certify that the physical asset in question corresponds to one on the blockchain record. The Scalability Trilemma, in very simple terms, says that there is a trade-off between three important Distributed Ledger Technology (DLT) properties, i.e., decentralization, scalability, and security. This effectively nullifies any blockchain advantage, since that very same central intermediary can in any case directly certify the  asset in question to be genuine or fake.

Ripples’ Payment Mechanism on the Blockchain

Ripple has emerged as one of the early-movers and a formidable player in the domain of real-time gross settlement of funds, currency exchange and remittance. It has in a short span of time built a global network of participating banks and payment providers. The Ripple net blockchain network, using the token (cryptocurrency) Ripple (XRP) is meant to enable instant and direct transfer of money between two parties, and the exchange of any fiat currency, commodity or asset.

While the general impression is that Ripple is a permissioned blockchain, that is, a blockchain whose mining mechanism to validate transactions is private and controlled, the truth is somewhat different. As succinctly explained by the Blockchain Magazine:

It is the validating servers and consensus mechanism that tends to lead people to just assume that Ripple is a blockchain-based technology. While it is consensus oriented, Ripple is not a blockchain. Ripple uses a HashTree to summarize the data into a single value that is compared across its validating servers to provide consensus.

Banks seem to like Ripple, and payment providers are coming on board more and more. It is built for enterprise and, while it can be used person to person, that really isn't its primary focus. The main purpose of the Ripple platform is to move lots of money around the world as rapidly as possible.

Thus far, Ripple has been stable since its release with over 35 million transactions processed without issue. It is able to handle 1,500 transactions per second (tps) and has been updated to be able to scale to Visa levels of 50,000 transactions per second. By comparison, Bitcoin can handle 3-6 tps (not including scaling layers) and Ethereum 15 tps.

Ripple’s token, XRP, isn't mined like Bitcoin, Ethereum, Litecoin and many other cryptocurrencies. Instead, it was issued at its inception, similar in fashion to the way a company issues stocks when it incorporates: It essentially just picked a number (100 billion) and issued that many XRP coins.

As a technology, the Ripple platform may have real value and real history that validate the claims they make for its efficacy. The XRP token itself, however, seems to have negligible use cases. In fact, Ripple had planned to phase it out — at least, until fevered interest in cryptocurrencies began to take off in 2016 … The use of XRP is totally independent of the Ripple network in general; that is, banks don't actually need XRP to transfer dollars, euros, etcetera which is what many small investors might be missing when they are buying the token.

Thus, an appropriate way to view Ripple is as a super efficient SWIFT network rather than as a breakthrough application for the blockchain (SWIFT is the current global payment transfer mechanism used by banks, known to be slow and cumbersome). Often touted as one of the most successful examples of blockchain implementation, it is anything but, since it is not blockchain based in the first place.