Blockchain - Benefits, Drawbacks and Everything You Need to Know
Blockchain: something we’ve been hearing about a lot these days. What started out with the popularity of Bitcoin, soon seeped into mainstream business applications. Blockchain has overcome the infancy phase and businesses today are ready to utilize it in its full-fledged form – beyond its obvious uses for financial institutions.
While cryptocurrencies were the first favorite uses of the blockchain, the technology is revolutionizing all leading industries today. Spotify acquired the blockchain startup Mediachain Labs to develop solutions based on decentralized databases to connect artists and licensing agreements with the multitude of tracks on the platform.
Another instance of blockchain’s widespread applications is Warranteer. This is a blockchain application that enables customers to access information on the products they purchased and get prompt customer service in cases of any malfunction.
It has become apparent that blockchain has broken shackles and entered mainstream business operations across industries to prove its usability.
How does blockchain work?
To explain how blockchain works, let’s assume the example of its most common application- Bitcoin. Bitcoin is a digital currency, similar to any other national currency. To keep track of how many bitcoins each person owns, blockchain uses a ledger system- a file that maintains and tracks all transactions.
The ledger file is not stored on a central server – bringing us to the USP of blockchain – that it is a decentralized system. The ledger file is distributed across the world and stored on private computers that are all used to store data and perform computations.
When X wants to send 5 bitcoins to Y, they will broadcast a message to all nodes (personal computers) saying that X’s bitcoins should be reduced by 5 and Y’s increased by 5. Now, each computer will get this information and update their copy of X and Y’s bitcoin balances.
Blockchain allows everyone to see everyone else’s transactions and does not force you to trust a person or entity. Instead, special mathematical functions and codes are implemented to enforce security and reliability.
Each wallet is protected with a cryptographic method that uses a unique and distinct pair of connected keys: a public and a private key.
Each of these features of the blockchain technology brings us to a specific advantage of using it.
Benefits of Blockchain
The blockchain is nothing short of a game-changing technology for anyone who chooses to use and master it. Let’s discuss the benefits of blockchain-
Transparency – Blockchain makes transaction histories more transparent than they ever were. Because it is a type of a distributed ledger, all nodes in the network share a copy of the documentation. The data on a blockchain ledger is easily accessible for everyone to view. If a transaction history changes, everyone in the network can see the change and the updated record. Therefore, all information about currency exchange is available to everyone.
Security – Blockchain is better than any other record-keeping system when it comes to security, by all standards. The shared documentation of transactions can only be updated and/or modified with consensus on a blockchain network. Only if everyone or a majority of nodes agree to update a record, the information is edited. Moreover, when a transaction is approved, it is encrypted and connected with the previous transaction. Therefore, no one person or party has the potential to alter a record. Blockchain is decentralized, and so, no one reserves the right to update records by their free will. Any industry that has a critical need to protect sensitive data such as governments, healthcare, financial services, etc., can use blockchain to enforce stringent security.
Efficiency – With traditional, paperwork processes, completing a transaction is exhausting as it needs third-party mediation and is prone to human errors. Blockchain can streamline and discipline these legacy methods and remove the risk of mistakes, making trading more efficient and faster. Since there is only one ledger, parties don’t have to maintain multiple documents, a fact that leads to much less clutter. And, when everyone has access to the same information, establishing trust is easier. Without any need for intermediaries, settlements can be made smooth and effortless, too.
Traceability – In complex supply chains, it is hard to trace products back to their origins. But, with blockchain, the exchanges of goods are recorded, so you get an audit trail to learn where a particular asset came from. You also get to know every stop the product made on its journey & this level of traceability of products can help verify the authenticity and prevent frauds.
Auditability – Another aspect of the point mentioned above is auditability. As each transaction is recorded for its complete lifetime in blockchain, there is an audit trail that already exists for you to see and check the authenticity of your asset.
Cost reduction – As blockchain eliminates the need for third-parties and middlemen, it saves enormous costs for businesses. Given that you can trust the trading partner, you don’t need anyone else to establish the rules and policies of exchange. The cost and effort spent on documentation and its revisions are also saved as everyone gets to view a single immutable version of the ledger.
Drawbacks of Blockchain
Each coin has a flip side. Blockchain is a notch above its infancy today, and there are some drawbacks with the technology that needs to be handled before it can be widely used for everyday transactions.
Scalability – Blockchain’s application Bitcoin is massively popular. However, it can only handle seven transactions per second, where Hyprledger can handle 10,000 and Visa 24,000. The practical use of blockchain gets a bit hard to imagine with the issue of scalability in view. Each participant node needs to verify and approve a transaction, and so one Bitcoin exchange can take up to several hours.
Storage – Since blockchain databases are stored indefinitely on all network nodes, the issue of storage surfaces. With the increasing number of transactions, the size of the database will only expand, and there is no way personal computers can store unlimited data which just gets appended. To put this in perspective, the Ethereum blockchain is increasing at the speed of 55 GB/year.
Privacy – Data on a public blockchain is encrypted and anonymous, but lies in the hands of all nodes in the network. So, everyone in the network has rightful access to this data. There is a possibility someone could track down the identity of a person in the network through transactional data, just as web trackers and cookies are used by businesses normally. This proves that blockchain is not 100 percent secure, unfortunately.
Regulations – Regulatory regimes in the financial arena are a challenge for blockchain’s implementation. Blockchain applications will have to lay down the process of pinpointing the culprit in case a fraud takes place, which is a bit of a challenge. Other regulatory aspects of blockchain technology will need to be laid down first in order to facilitate its broad adoption.
Security – Satoshi Nakamoto highlighted the ‘51% attack’ when he launched Bitcoin. The attack can be simply put like this – if 51% of the nodes in a network lie, the lie will have to be accepted as truth. Therefore, everyone in the network will have to continually have a watch on it to perceive any unwanted influence.
As the blockchain technology nears its widespread adoption, these challenges may get resolved over time. For its sweet advantages, developers and blockchain enthusiasts will surely find a way out of these bumps on the way!
Public vs Private Blockchains
A public blockchain, a fully decentralized platform where anyone can read and send transactions. The valid transactions are included in the ledger. Public blockchains are secured by cryptoeconomics, a combination of economic incentives and cryptographic verification. The degree of influence in the consensus process is proportional to the quantity of economic resources brought in the system.
Ethereum, Provider of a decentralized platform and programming language that helps running smart contracts and allows developers to publish distributed applications.
Blockstream – Provider of blockchain technology, focused on extending capabilities of cryptography and distributed systems. Their vision is to form an ecosystem for solving problems in financial systems related to fraud, counterfeiting, accountability and transparency.
Factom – Have developed underlying blockchain data infrastructure for an open source platform called Factom technology.
In a private blockchain write permissions are kept centralized to one organization. In this system the access and permissions are tightly controlled and rights to modify are restricted to the central authority. This could be a concept with huge interest from FIs and large companies. A proprietary system built on private blockchain will reduce the transactional cost and increase validation efficiency.
Eris Industries – Provider of multi-network blockchain client. It is a controllable, smart contract-enabled, proof-of-stake based blockchain design.
Blockstack – Developers can use APIs by blockstack.js to authenticate the user, fetching and storing application data.
MultiChain – Provides an open source distributed database for financial transactions.
Chain Inc. – Similar to Multichain, it’s an enterprise grade blockchain infrastructure that enables organizations to build better financial services from the ground up.
The Way Ahead: Some Predictions for Blockchain
The future looks bright for blockchain. Here are a few promising applications of the technology-
DLT-based governments – The Distributed Ledger Technology is not a fad. Dubai has gone all in to replace all government systems with the ones backed up by DLT by 2020. The transition from a paper-based system to DLT seems the logical next-thing for government institutions.
A collaboration of blockchains – While there may be different blockchain networks operating in a single organization, aimed toward different business purposes, actual benefits for the customer can only be realized when these networks can be made to collaborate in an open standard.
Transparency for industries – Blockchain promises that all transactions are for everyone to view and that any change can only be made when it is verified by all nodes in a network. Therefore, blockchain will help industries introduce transparency in operations- at the least.
As blockchain rises far and above our perceived challenges, it will be put together with the Internet of Things to create trust between parties, reduce the risk of tampering, lower costs by removing intermediaries, and accelerate the pace of settlements from days to almost instantaneous.
Note – This post was originally published on 18/11/2016 and has been updated on 20/11/2018.