Blockchain has been touted as "the future" of a wide variety of processes, but can it really replace the trusty ledger?
Blockchain, the technology that underpins the cyptocurrency, Bitcoin, has had a rapid rise to fame. Conceived in a paper in 2008 by the mysterious Satoshi Nakamoto - a person or persons unknown - Bitcoin was created in 2009 and has risen steadily in prominence since.
Blockchain (and other distributed ledger technologies) have been suggested for a huge range of applications including, to name but a few:
- Everledger using distributed ledger technology to tackle fraud and theft in the diamond industry
- Royal Bank of Canada is looking to set up a loyalty platform on Ripple
- Honduras wants to move its land registry system to blockchain
- Linq is a blockchain-based system for buying and selling the shares of private companies
- Musician Imogen Heap release her song using a distributed ledger to prevent copyright infringement
- Ethereum uses blockchain as a platform for contracts, apps and other forms of decentralised trust
- The decentralised autonomous organisation called DAO that is instantiated on Ethereum has no management structure, no board of directors and is funded by crowd-funding.
- Swarm and Koinify run decentralized crowdfunding on blockchain
Gartner estimates that the added business value of blockchain will grow to over $176 billion by 2025, then surge to exceed $3.1 trillion by 2030.
As the blockchain hype cycle climbs towards its peak, boards of directors are showing interest in it and many CIOs have initiated blockchain projects. However few of these projects have been implemented into production and fewer still have delivered any benefits to the organisations.
The benefits that blockchain can bring are significant:
Trust. The authenticated blockchain is the single version of the truth, validated and accepted by all parties. This means that you do not have to rely on the word of a trusted 3rd party, especially beneficial in countries with poor governance and trust.
Disintermediation. Blockchain removes the cost, delays and complexities of using and of establishing trust in intermediaries
Security. Blockchain is based on public key cryptography, so integrity and confidentiality is built into it from the outset
But there are significant risks to blockchain as well:
- Immaturity. Many blockchain suppliers are immature and unproven in mission-critical, scaled business operations. Of approximately 75 current providers, the vast majority of the are start-ups and it is likely that many will fail.
- Processing Power. Consensus in the blockchain is built on processing power. If a malefactor can garner enough processing power, it can subvert the entire process. This is especially true where there are relatively few miners, as the aggregate processing power required to control the blockchain in these cases is much smaller.
- Energy Consumption. The estimated energy usage of blockchain in 2015 is 1.46 terawatt-hours per annum, which is equivalent to the consumption of 135,000 American homes. Bitcoin miners are now only economical if they use bitcoin-specific integrated circuits in huge numbers and locate their data centres in polar climates to make cooling inexpensive.
- Security. If flaws are exposed in the blockchain software or in public key cryptography, the whole edifice will tumble. In June 2016, The DAO had a problem with a backdoor in its software that allowed ⅓ of its currency (called Ether) to be stolen. Bitcoin was hacked in the Mt. Gox incident.
- Self-defeat. While financial services companies (and other entities performing the role of centralised intermediary in an industry) will benefit from the efficiencies brought by blockchain, they face the threat that the technology will lead to a completely decentralised, distributed network that eliminates their role altogether.
Modern society has evolved over many years to address the challenges that blockchain purports to solve. We have created strong and stable institutions that provide safe, trusted intermediaries for our legal and financial transactions. And these transactions are recorded in ledgers, whether physical or electronic, that do not require the enormous quantities of energy that blockchain processing does.
While Bitcoin is an example of a successful implementation of blockchain, it is still a niche currency, somewhat tainted by its association with illegal trade. We have not yet found the “killer application” of blockchain - one that outweighs the risks and the substantial costs of harnessing distributed ledger technology effectively.