What are the real risks behind blockchain technology? Get behind the hype and discover its true potential.
It claims to be the new, secure financial intermediary, allowing you to cut out the middleman (i.e. banks and governments), eliminating human steps needed for complex, technical transactions.
Blockchain ensures that data has not been tampered with, offering a layer of timestamping that removes multiple levels of human checking and makes transactions immutable. However, it isn’t yet the cure-all that some believe it to be.
Myth #1: Blockchain eliminates fraud and cyber risks
Some experts suggest blockchain is a panacea for ills such as fraud, identity theft and other cyber crimes. It is virtually impossible for a hacker to make changes to a blockchain because they would have to simultaneously access a multitude of different computers, or mine a new branch quicker than the entire network - requiring mammoth computing power.
What the blockchain does in reality is very limited. In essence, blockchain provides a mechanism to keep track of the order of transactions without the need of a third party that manages a central ledger. For Bitcoin for example, it prevents the same Bitcoin from being spent twice, without the need for central institutions like the banks.
Blockchain however provides little protection against someone putting something on the blockchain that should not go on there – for example a land transfer that a seller is not entitled to sell.
Additionally, a blockchain functions by distributing digital copies of the ledger, so there is no central database or single point of control. As a result, enterprises should carefully consider what data is actually put on the blockchain, how publicly accessible it is, and how confidential it is.
Fraud prevention, access management and confidentiality requirements will need to be addressed outside the blockchain technology itself.
Despite the commonly held belief, blockchain is neither cheap nor efficient to run – yet. It involves multiple computers solving mathematical algorithms to agree a final immutable result, which becomes the so-called single version of truth. Each ‘block’ in the blockchain typically uses a large amount of computing power to solve. And someone needs to pay for all this computer power that underpins the blockchain service.
In the Bitcoin application, anonymous ‘workers’ in the blockchain community are randomly rewarded with bitcoins. How much does the blockchain cost to run and who will pay is something that needs to be considered for each implementation.
In many scenarios, blockchain technology may provide immutability benefits, but the overall return on investment of the technology itself may still be uneconomical. A centrally maintained database ledger may just be what is required after all.
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Myth #3: Blockchain will revolutionise banking
Banks were among the first to pilot blockchain because of their urgent need to cut infrastructure and processing costs to keep pace with the fintech disruptors challenging traditional institutions.
In theory, blockchain technology can slash costs for banks and, in turn, for the consumer. Some experts claim it will cut the cost of compliance in the UK banking industry – totalling around £270 billion – by 10 percent. Whether the blockchain technology as we know it today will bring these benefits remains a question.
Most of the benefits will likely not come from using blockchain itself, but from redesigning, simplifying and automating complex processes. For example, the R3 consortium that is backed by many of the world’s financial institutions, decided after extensive trials that the current iteration of blockchain is not the answer to the sector’s needs for greater security and efficiency.
There are many different technologies that go by the name blockchain. They come in public and private versions, open and closed source, general purpose and tailored to specific solutions.
Common denominator is that they are underpinned by crypto, are distributed and have some form of consensus mechanism. Bitcoin’s blockchain, Ethereum, Hyperledger, Corda, and IBM and Microsoft’s blockchain-as-a-service can all be classified as Distributed Ledger Technologies.
They all differ substantially and from each other and have their specific advantages and disadvantages. Each one of these technologies should be therefore be judged on their own merits and are expected to evolve substantially over the forthcoming years.
Myth #5: Blockchain is going to change the world
We can use blockchain for complex and technical transactions – such as verifying the authenticity of a diamond or the identity of a person. There is also talk of a blockchain application for the bill of lading in trade finance, which would be revolutionary in terms of cost reduction and transaction speed.
While blockchain can support these cases and mitigate the risk of a fraudster tampering with the ledger, it does not eradicate the threat of fraud online and it still raises questions over confidentiality. Additionally, the use of blockchain technology will still be inefficient for many of these cases when compared to maintaining a traditional ledger.
For now, blockchain is a fairly clumsy, inefficient way to maintain a ledger. In most cases, blockchain isn’t yet the answer – but it could form part of the solution in the future when the technology matures. The best thing it has done so far is to ignite creative thinking, which we should applaud.
For more information please contact Martijn Verbree
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