Looking beyond the blockchain hype
Blockchain comes in handy if you don’t want to put your trust in a specific third party. It is great if you want the transactions made in the system to be unchangeable but it also adds inefficiency compared to regular databases. It can be slow, cumbersome and it has scaling problems. Blockchain is not perfect.
Blockchain is a relatively new concept that was first introduced in the Bitcoin whitepaper in 2008 as a “chain of blocks”. It is a critical component of Bitcoin, the digital currency that allows people to send and store money without the need to trust a specific third party. Also, it is a fully transparent decentralized ledger shared by a peer to peer network. It’s not just removed the need for trust, it has created a new type of accounting system that is immune to changes or counterfeiting.
Now there is great hype about this blockchain. More and more money is poured to R&D in order to figure out what else can be done with a blockchain besides the management of the Bitcoin system. In theory many things could be stored in a blockchain based ledger but is it actually a good idea? Not necessarily. Blockchain is great if you do not want to trust a specific third party. It is great if you want the transactions made in the system to be unchangeable. It is great if you want a high level of auditability. If you want speed, efficiency, scalability — then blockchain is not necessarily the best option. Instead, it could be useful to look at regular database solutions.
Blockchain is not a magic bullet
Then there is the problem of data that is blockchain native versus data which is not. As long as all the data in the blockchain is created and stored in the blockchain and can be cryptographically verified, the system can achieve a fully trustless status. This applies to Bitcoin, as this currency only exists in the Bitcoin blockchain. If you try to store data in the blockchain that is created elsewhere, we circle back to the trust issue.
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For example, if I include status information from IoT sensors to blockchain, who or what guarantees that the data from the IoT sensors is accurate and not faked? The blockchain cannot guarantee that; it can only guarantee data that exists in the blockchain itself. This does not mean blockchains are useless for everything else. It only means that blockchain in another type of scenario is less useful than with Bitcoin. In other scenarios, it does not fully eliminate the trust issues, however it can still be of use.
In 2016, one million transactions were recorded to the Bitcoin ledger that included extra data as part of the transaction. This is a significant increase from 2015. Many of these transactions were likely related to timestamping data that exists outside the blockchain. Blockchain timestamps are useful since the provide irrevocable proof that the timestamped data existed at a certain time.
The Bitcoin blockchain is the most secure platform for the purpose of trusted timestamping. It is secured by the most powerful computer network in the world, it is highly reliable and extremely robust. Bitcoin is running 24/7/365. The last time the Bitcoin network experienced an outage was in early 2013. That problem was solved in a few hours. This level of reliability cannot be provided by any other blockchain platform at the moment.
Problems blockchain does not solve
It is curious to me that blockchain is often considered a solution to increase efficiency. That is rarely the case. Blockchain often adds inefficiency compared to regular databases. It can be slow, cumbersome and it has scaling problems. What it does offer is the elimination of a trusted third party, increased security and reliability, and a high level of auditability.
In the case of Bitcoin, we have a system that actually takes advantage of all the true benefits of blockchain. Thanks to blockchain, Bitcoin has a currency system with a fixed amount of units that cannot be manipulated or changed by any human being. It has a transaction system which allows for completely irreversible transactions. It allows for accounts that cannot be frozen by anyone in the world. And, at the same time, it allows value transfer across the world with little friction.
Bitcoin is a true revolution of the whole financial system. It is the first asset that is fully independent, cannot be manipulated, cannot be frozen, cannot be controlled. It allows people to actually take control of their own money instead of being forced to rely on a third party such as banks.
Finally, I would like to stress that blockchain is not an invention that will eliminate the middleman. Many services that banks or payment processors now offer are also very relevant in the Bitcoin world. This leads to massive business opportunities. The key difference is that the core system does not force people to use specific third parties. It is their choice to use third parties, if their services offer added value that makes it worth it.
With Bitcoin we are eliminating the natural monopoly of banks and that is a true blockchain revolution. This level of disruption is what I find most interesting and I look forward to seeing more of it in the blockchain space.