Blockchain – Reality-Check beyond the Hype

Digitale Disruption
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Blockchain is often mentioned as a disruptive innovation that will dramatically change the way we do transactions on the internet and many people claim that it will at least revolutionize the financial industry (and potentially the rest of the world as well). On the other hand it is currently listed on the top of Gartners Hype Cycle in the “Peak of Inflated Expectations” and the next stop might very well be the ”Trough of Disillusionment“. So, will this just be yet another emerging new technology that fails to fulfill the lofty expectations and will end up as a solution looking for a problem?

Prospective Market Potential

Bitcoin – the digital currency and most prominent blockchain project – was the first project to implement a blockchain as a way to represent, store and transact monetary value. Currently, its market capitalization is at around 40 billion dollars. But while Bitcoin has been a notable example to how Blockchain technology can be implemented, there are tech leaders around the world, who are looking at the applications beyond Bitcoin. Looking at some of the current alternative Blockchain technology solutions that have breached out beyond crypto-currency, are “Ethereum”, where it uses Smart Contracts (programs stored on the blockchain which can trigger transactions based on conditions); ”STEEM“, focusing on a Social Network based blockchain, “Factom”, which uses blockchain for document management, or “Golem”, where everybody can share computing power with others in return for valuable tokens.

Technology Enthusiasts in the industry, the Public Sector and Academics are working on use cases – sometimes even where they don’t make any sense. The old saying comes to mind: ”If all you have is a hammer – everything else looks like a nail“. So while this new exciting technology is shiny new and unexplored territory, it‘s important to resist the urge to use it blindly and look carefully at each potential use case individually to determine if blockchain is the right tool or infrastructure for the job or if alternatives suffice, like a distributed encrypted database, for example.

The Down Falls of Blockchain

While looking at the sunny side of cutting edge technology is motivating and gives a sense of adventure, it’s important to gander into some of the limitations that have been pointed out by tech experts. One of the concerns is the scalability problem among Blockchain Technologies. The longer a specific blockchain is in use, the longer its chain gets, leading to an increased need for storage infrastructure across all of its full network nodes that store a copy of the chain. But an even more challenging problem arises when increased demand of the users for storing data in new blocks exceeds the time in which new blocks are created and validated by the blockchain network. The bitcoin blockchain, being the biggest out there is currently experiencing exactly this and struggling to find the right solution, leading to increased transaction times, sometimes up to days, which basically could be argued as a temporary down time for the service. While an increase of the data block size would seem like an easy solution it would just be a short term fix until the need for another size increase arises. Also, like any other update to a blockchain network protocol – an update cannot be forced onto a decentralized network (at least on a public blockchain). Consensus on the change must first be reached by a majority which can prove to be difficult.

Along with Scalability, there comes to the commonly mentioned issue of Interoperability and that the different variations of blockchain technologies aren’t compatible with one another.

What is often underestimated when trying to implement a blockchain solution is that it is non-trivial technology and requires experts which are highly skilled in cryptography, computer science, distributed networking and programming. Even in highly reputable projects, we have witnessed many problems in the past, as security flaws have been painfully revealed by hackers – for example the famous “DAO-Hack” of the Ethereum blockchain, which resulted in losses of 60 million dollars in ”Ether“, the currency of the network.

Decentralized Networks: A Blessing and a Curse

Further, as a Blockchain Technology Network is often praised for its decentralized, peer-to-peer network, there are often complications that go along side this structure. First, the Blockchain Network Community is only aware of what is inside the network itself, with that any outside information is not considered and would need to be manually integrated into the network. As this is a decentralized network in most cases, it leads to the issues of who is the responsible person or authority to do these updates, upkeep, and general maintenance. In greater detail, for public blockchains (like Bitcoin or Etherum) there is not a single entity that is responsible for watching over and controlling all the individual nodes, which leads to the issue of how is one to know that the nodes are up to date and are not running malicious code.

While supporters of the technology praise this fact as removing the need for a trusted third party and cutting out the middlemen, this opens up the network for different attack vectors like the “51% attack”, for example – which would theoretically allow a single entity to take control if it’s computing power exceeds the rest of the network. Private blockchains don’t suffer problems like this, but you could argue that valuable use cases for private blockchains are hard to find as many of the benefits of blockchains (I.e. being able to ensure data integrity and transparency in a trustless environment) are negated while having all the overhead of a blockchain. Let’s be clear here – there are often more cost and time efficient ways for companies to store their data in a secure manner than putting them on a blockchain. Having said all this – we also have to keep in mind that it is still a relatively young technology and it will eventually become more robust over the years as it matures. Many challenges, like the scaling problem might be solved with better technology and are being worked on as we speak (I.e. sidechains or block size increase).

Blockchain’s Relative Advantage

It is obvious that currently a lot of hype surrounds the blockchain technology and one of the most prominent problems is that many of the proposed use cases for blockchain in all these different application domains fail to consider the limitations that are inherent to the technology. And all this smoke blurs the blockchain picture considerably. However, if you look closer at the benefits without ignoring the limitations you can come up with use cases where blockchain provides a relative advantage over incumbent solutions. But this is of course the most difficult path on the road to the ”Plateu of Productivity“.

I would like to thank my colleague, Christopher Ruff for his valuable insight and long talks about this topic!

Leselinks:

Rachelle Sellung

Rachelle Sellung

Senior Scientist in the Team of Identity Management at Fraunhofer IAO/IAT. Provides a Socio-Economic Contribution to the EC funded project, LIGHTest. Research fields of interest are in the topics of Blockchain and Internet of Things.

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