“Kodak’s cryptocurrency ploy hits all the major buzzwords – blockchain, smart contracts, distributed ledger, ICO, etc. But look through the PR spin, examine the true merits of using blockchain for the proposed service, and it’s obvious the project is poorly thought out and will never work as promoted.”
The above is taken from Kerrisdale Capital’s unforgiving assessment of the attempted pivot by Kodak towards blockchain technology. And if that wasn’t brutal enough, the hedge fund also described the move by the 138-year old photography company as being nothing more than “a last-ditch stock promotion gambit for a company hurtling towards bankruptcy.”
Companies of all stripes continue to show keen interest in implementing blockchain. Juniper Research’s Blockchain Enterprise Survey found that nearly three-fifths of large corporations – those with over 20,000 employees – are either actively considering, or are in the process of, deploying blockchain technology.
However, there's also a lot of unnecessary hype surrounding this technology, as the Kodak example illustrates. This can be confusing, especially for new projects trying to decide whether or not it is advisable to implement blockchain.
Countless new projects have ridden this wave of hype to boost their profiles – and of course to cash in, given that blockchain enables an entity to issue its cryptocurrency and host ICOs to raise potentially millions of dollars. Indeed, with over 80% of ICOs recently revealed to be scams, it is clear that the crypto-blockchain craze raises serious concerns.
However, scams aside, even if a project is legitimate, does it need to use blockchain? In many cases, the answer will be a defiant yes. But it's also worth taking into account a few pertinent factors that may well influence that final decision.
1. Blockchain vs. Traditional Databases
At its core, blockchain represents a significant advancement in data management. Its most prized feature is that it facilitates consensus within a trustless environment. Through an incentive system, a set of actors who have no reason to trust one another can reach an agreement over what is regarded as the truth before it is added to the chain.
Also, the technology can also withstand the emergence of bad actors without the security of the network being compromised, i.e., it has fault tolerance.
With the ledger itself being replicated across this network of validators and secured using cryptography, moreover, the blockchain is virtually impossible to hack. In turn, this decentralized system removes the need for one authority to be responsible for database management. This has considerable advantages over existing technology, such as security, cost, and efficiency.
However, blockchain does not render existing technology redundant. On the contrary, it may be even less desirable to use blockchain vis-vis more traditional database solutions. For example, securing the blockchain is a markedly slower process than it is for relational databases. Rather than sharing processing power, nodes in distributed blockchain networks operate individually before comparing their results with the rest of their network peers to achieve consensus. This is a time-consuming process.
Indeed, the scaling challenge has become a major issue for blockchain projects, not least Bitcoin, whose transaction speed pales in comparison to centralized payment services such as Visa and PayPal. Although it is expected that scaling solutions such as sharding and the Lightning Network will help blockchains to boost throughput, the current performance of Bitcoin and Ethereum leaves a lot to be desired. That said, some more recent blockchains such as IOTA and BitShares are achieving impressive performance levels, and are worth investigating.
In contrast, relational databases developed by the likes of Oracle, SQL Server, and Postgres possess clear advantages in performance and have been providing successful data management solutions for years. As observed by Gideon Greenspan, the CEO of Coin Sciences, such databases have “been deployed on millions of servers running trillions of queries. They contain some of the most thoroughly tested, debugged and optimized code on the planet, processing thousands of transactions per second without breaking a sweat”.
The major constraint of relational databases, however, is that they are centralized, in that management of the data is placed in the hands of just a single or a few entities, who must bear responsibility for its integrity and security.
So, if fast performance is a distinct priority for your project, the undeniable superiority in speed of an existing database solution might appeal more than a blockchain. However, if trust within the network and data security is more important, then blockchain may well be the ideal solution in the long-run.
2. Permissionless vs. Permissioned Blockchains
Ultimately, deciding on whether blockchain is a good fit will also depend on the type of blockchain you intend to implement:
Permissionless Blockchain – The open, decentralized blockchain. Anyone can join the network and participate in the consensus process for block verification. Bitcoin and Ethereum are permissionless blockchains, in which anyone can operate as full nodes and start mining. There is no centralized authority in a permissionless blockchain, and as such, no single user has the power to validate transactions.
Permissioned Blockchain – Only a limited number of users are authorized to join the network. Also, a centralized authority allocates responsibility to individuals pertaining to operations of the blockchain. It may also involve maintaining the identity of each participant in the network.
Public permissioned blockchains are permissioned blockchains where the public can view the data. This could be suitable for food supply chains, where traceability back to the source is important to the consumer.
Private permissioned blockchains are permissioned, but the data is restricted from public view. Financial services players are showing great interest in this type of blockchain (for example, the banking consortium R3).
It's the permissionless blockchain that includes many of blockchain's original innovations, such as decentralization and openness. Private permissioned blockchains, in contrast, involve a much smaller network of known entities and rely on some degree of centralization. While likely to be faster, private permissioned blockchains are a far cry from the open, decentralized environment of the Bitcoin and Ethereum blockchains.
As once observed by Princeton computer scientist Arvind Narayanan, with such private blockchains, “you’re left with a system where a set of identified (rather than pseudonymous) parties maintain a shared ledger, keeping tabs on each other so that no single party controls the database. What is it about a blockchain that makes this any better than using a regular replicated database?”
Other than perhaps the use of cryptography for added security, you should ask yourself if choosing a private permissioned blockchain provides any significant advantage to you over, say, a shared centralized ledger.
3. Smart Contracts
One of the most anticipated aspects of blockchain is the development of smart contract functionality. Indeed, this may well be the reason you are considering blockchain adoption.
A smart contract is an agreement written in code that predefines how a certain transaction will play out. When conditions are met, the agreement is self-executing, and the blockchain is updated in real-time. And due to the self-executing, self-enforcing nature of smart contracts, human input is largely superfluous to the process.
Smart contracts could fundamentally transform the way many industries operate, enabling greater autonomy to insurance, legal and arbitration issues. But that’s assuming that they will always work as intended. And as we’ve seen to date, that’s not been the case. The Ethereum blockchain, for instance, experienced a disastrous breach in June 2016 when a coding loophole in ‘The DAO’ smart contract began leaking funds to an unknown entity. Tens of millions of dollars were stolen.
The incident highlighted some of the vulnerabilities of public blockchains. Smart contracts are only as ‘smart’ as their coding. And while the technology is expected to become more sophisticated in the future, much work still needs to be done to ensure smart contracts are designed as intended.
4. Environmental Considerations
Energy consumption is among blockchain’s biggest concerns. Protocols that use the Proof-of-Work consensus mechanism, such as Bitcoin and Ethereum, are notoriously power-hungry.
Some estimates equate the power consumption of cryptocurrency mining with that of 5 million US households annually, while Digiconomist’s Energy Consumption Index sees the amount of power consumed by Bitcoin as the same as the entire Czech Republic, and a hefty 0.31% of the world’s electricity consumption.
In a world that’s becoming rapidly more aware of its environmental footprint, is the crypto space’s growing contribution to global CO2 emissions something that concerns you? Could it be antithetical to the values of your business? If so, is transferring to the blockchain creating more harm than good?
Substantially more energy-efficient consensus mechanisms can be considered, such as proof-of-stake, but given the widespread use of PoW in the "cryptosphere," this issue is certainly worth acknowledging.
It should be stated in no uncertain terms that blockchain will have a profound impact on the world during the next 5-10 years. With an architecture that enables a trustless environment, the redundancy of third-parties, unrivaled security, and the development of smart contracts, industries ranging from supply chain management, healthcare and financial services are already utilizing blockchain to solve challenges that were previously unsolvable.
So while businesses may want to futureproof themselves by shifting to blockchain as soon as possible, the current environment doesn't necessitate such a shift – alternatives are available that may align more closely with your preferences.
Indeed, if you’re satisfied with your existing setup, think carefully about whether a switch to a technology that still requires many years of development to achieve maturity is the right decision at the moment. And of course, be sure to look beyond the hype.
The original Data Driven Investor article was posted here. The views and opinions expressed in this article are those of the author and do not necessarily reflect those of CDOTrends.