The downside of blockchain

Imagine an invention that deliberately wasted resources. Maybe a car that burns oil just to create smoke that is easy to see or an electric light that uses twice as much energy to avoid burning out. That’s exactly what blockchain is doing, consuming large amounts of electricity for no purpose other than making fraud prohibitively expensive.

I recently had the privilege of collaborating with my colleagues from the Australian Deloitte Centre for the Edge on a report looking into distributed ledgers and the blockchain technology. Reading the result, it is striking how far we still have to go to invent our digital business future.

As a quick reminder, blockchain is a technology to support the exchange of value or contracts in an environment where anonymity is important and no one is to be trusted. The best known application of blockchain is in the exchange of Bitcoins, a virtual currency.

Business models for the future

In recent years, all of the talk of digital business has been the creation of new platforms as the success stories, like Uber, Airbnb and Amazon, wield increasing power and value. Of course, platforms aren’t new, banks and credit card providers have long played this role in our financial services sector.

One of the big questions for the future of the internet is whether we want to see more platforms with trusted parties or do we assume the worst of everyone and “trust no-one”. The potential advantage of moving away from platforms is the “democratisation” of business.

Instinctively, there is a lot to like about democratising business and taking the power away from a few platforms. The problem is that such a move comes with a tremendous cost. There are good reasons why consumers tend to gravitate towards these providers who have scale, even when it might not align to their view of an ideal world.

The downside of blockchain

There are usually good reasons to be worried when any technology is over hyped and this has never been truer than with the excitement that currently surrounds blockchain. There are two fundamental challenges that are particularly worthy of highlighting:

The first is that it relies heavily on the cost of electricity and use of computing resources to protect against fraud. Don’t be fooled, blockchain can be hacked allowing fraudsters to gain access to the payload. The most common payload of blockchain, and the product with which it is synonymous, is Bitcoin. The safeguard on the payload isn’t that it can’t be defeated but rather that the cost of fraud in electricity and computing resources is higher than the payoff.

Motivating anonymous participants, “miners” to expend computing resources sits at the heart of Satoshi Nakamoto’s clever invention of blockchain. Of course, Satoshi Nakamoto is a pseudonym with the real author or authors choosing to keep their identity a secret.

Christopher Malmo, writing on the Motherboard site estimates that each Bitcoin transaction uses the same amount of electricity as 1.57 households in a 24 hour period. That is not a function of the immaturity of the technology, it is a feature that protects transactions from fraud.

The second issue facing blockchain is that far from being open, it is the ultimate closed system. While no-one takes ownership of the data, it is deliberately encrypted in such a way as to make transaction details virtually unavailable for aggregation. That means many of the advantages that platforms provide are simply unachievable using an approach such as blockchain. Some of the platform capabilities that are lost include recommendation engines, transaction aggregation and fraud detection.

Potential roles for blockchain

Despite these challenges, blockchain is an incredibly clever solution. The challenge is finding the problem that it best solves.

Faced with the issue of openness or processing overhead, some organisations exploring blockchain have looked at closed communities where there exists a level of trust between the participants. This approach will allow some of the overheads to be reduced and models to be devised to share transaction information. The problem, however, is that once there exists at least some trust in the network it is likely that a platform model will provide greater functionality at a lower cost and complexity.

The strength of the technology comes in low volume, high value environments where no-one is able to be trusted and there are complex rules. This challenge exists when managing assets of many kinds in jurisdictions where there is little trust in the integrity of government or other holders of records. A related opportunity for blockchain may also be to support the trading of new types of assets where there isn’t yet regulatory support.

Maybe the future of blockchain is as a bridging technology while a community waits for a trusted platform.

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About infodrivenbusiness

Robert Hillard is the author of Information-Driven Business, available through John Wiley & Sons. Find out more at www.infodrivenbusiness.com. Robert was an original founder of MIKE2.0 which provides a standard approach for Information and Data Management projects. He has held international consulting leadership roles and provided advice to government and private sector clients around the world. He is a Partner with Deloitte with more than twenty years experience in the discipline, focusing on standardised approaches to Information Management including being one of the first to use XBRL in government regulation and the promotion of information as a business asset rather than a technology problem. Find out more at www.infodrivenbusiness.com. The opinions expressed in this blog are entirely his own.
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4 Responses to The downside of blockchain

  1. Blockchain is not necessarily a synonymous with Proof of Work. Proof of Work is only one consensus-mechanism that can be utilized to secure a Blockchain. Proof of Stake and PBFT are near-zero electricity wasters for securing a Blockchain. Your argument on “Blockchain being the ultimate closed system” is opaque to say the least, care to elaborate on that argument? Blockchain is the ultimate platform that ensures interoperability between communities and applications of any kind.

    Either way, we need to move away from the notion of a single, “true” Blockchain brought forth by Bitcoin. We have known for years that PoW is a complete and pointless waste of resources. In addition to that, Blockchain is not just for financial transactions – it is really great for data transfer (authenticity + integrity, and everything can be encrypted). Exactly that’s one of the reasons why we’ve created IOTA (http://iotatoken.com), which is a revolutionary distributed ledger that brings forth new technology as well as new concepts to achieve consensus and trust in a system. It is also the first quantum proof ledger with no fees.

  2. Derick Smith says:

    Blockchains do not all use POW like Bitcoin. Our permissioned blockchain platform is exceptionally efficient, highly scalable and fast.We see this as bridging ecosystems where regulations and commercial imperatives ultimately support trust, with “wild west” ecosystems where there is a total lack of trust, thus justifying POW/public blockchians.

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