Is Blockchain a real panacea?

Since the emersion of the blockchain technology nearly a decade ago, leaders across industries have often seemed unsure how to benefit from this technology and how to implement it in the core of their existing business models. Other enthusiastic participants in the blockchain revolution were only driven by the fear of missing out (FOMO), having a pervasive apprehension that others might be having rewarding experiences from which they are absent. And actually, in my opinion, FOMO was the main driver behind the Bitcoin revolution between 2017 and 2018. Nevertheless and without any doubt, blockchain technology embeds the high potential of achieving amazing things and offers a new way of doing business. It can serve as a pragmatic solution to business problems across industries and use cases.

Many see the problem of the current available frameworks for the different applications in their haphazard evolution and centralized nature. Centralized does not necessarily mean that there is only one central source for the digital assets and information, but rather that the digital assets or information are almost always provided by some third-party authority. In this case, the digital assets are centralized within the entity. Blockchain can provide an immutable, distributed, chronological, digital audit trail of transactions, and can be used to cheaply verify the integrity of data. It ensures that at any point of time, digital records reflect the true consensus among the key stakeholders involved. Blockchain eliminates the need for trust between peers, since this trust is powered by mathematical algorithms, or the need for intermediaries or central authorities to verify and maintain the records of transactions. However, when assessing blockchain business potentials, it is useful to understand what blockchain can’t do. Is blockchain technology a solution to all business problems? Is it really a real panacea? I will try in this blog to identify the real limitations and barriers of the blockchain technology and define a criteria that can be used to identify if the blockchain technology can be a solution for any business model.

The first limitation facing the application of the blockchain technology exists in bridging the last mile between the digital world and the physical world. Unfortunately in many applications, the interface between the real world and its digital representation still relies on the intervention of trusted intermediaries. Consider the case of creating clients medical records, using blockchain technology, for a hospital or an insurance company. In such case the technology would have to rely on humans to correctly verify the identity of the client, and also to rely on the client’s integrity not to manipulate or forge the provided data. However, as the blockchain technology becomes more mature and the ecosystem around it develops, certainly new models will emerge turning the problem of synchronizing the real world data with their digital records, into actual business opportunities.

Nevertheless, bridging the last mile between the real world and the digital world is not the only limitation. When it comes to performance, many other limitations can be identified. One of the darkest sides of blockchain, and a major challenge, is the energy consumption. Different blockchain platforms use different consensus algorithms. The Bitcoin blockchain, for example, uses the proof-of-work algorithm whereas the Ethereum blockchain uses the proof-of-stake. These consensus algorithms are used to validate each block in a blockchain. Due to the complexity of these mathematical algorithms, considerable computational power is required. Alex de Vries, a bitcoin specialist at PwC, estimates that the current global power consumption for the servers that run bitcoin’s software is a minimum of 2.55 gigawatts (GW), which amounts to an energy consumption of 22 terawatt-hours (TWh) per year, almost the same as Ireland.

Scalability is equally considered a considerable performance challenge facing the deployment of the blockchain technology in several business sectors. As previously described, the complex mathematical algorithms, used to validate each block, are time consuming. Scalability is reflected on the number of transactions a blockchain can perform per unit of time. Just to give you an idea, the Bitcoin blockchain can process 7 transactions per second (TPS), while the Ethereum blockchain can handle 20 TPS. If we compare these figures to the 15,000 TPS handled by Visa, it will become obvious why the actual blockchain technology cannot be implemented on a large scale where a high rate of transactions is required.

On the other hand, what is considered a strength point in the blockchain security structure can also be considered its flaw. Basically in a blockchain network, if more than half of the validating nodes validates something then that’s considered to be true. So what will happen if this validated information is a lie, then the lie will be considered as truth by the entire blockchain network. This is known as the 51 percent attack, which is an unavoidable security flaw in blockchain and its applications and may well be the most serious of all the blockchain limitations.

Hence blockchain technology has its limitations and barriers and cannot be considered for any business model. This is why a criteria should be defined as a guide for any business leader considering to develop a blockchain based solution for his business model. Blockchain can be considered most suitable for applications that meet the following criteria:

  • Decentralized problems
  • Peer-to-peer transactions
  • Beyond boundaries of trust among unknown peers
  • Require validation, verification and recording of time stamped immutable ledger
  • Autonomous operations guided by rules and policies

So if your business meets one or more of the above defined parameters, you might consider investing in developing a blockchain based model for your business. And even though, in some cases, blockchain might not be a necessity for all decentralized applications or cryptographically encoded assets, it can, nevertheless, be a powerful solution for different aspects of any decentralized framework by supporting the creation and registration of new records, authenticating credentials, providing a decentralized infrastructure for access control and date use consent, and potentially linking credentials to smart contracts for triggering automatic payments for example.

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