What’s Blocking Blockchain?
Digital technologies have impacted almost every facet of society – from medicine to communication; and shopping to entertainment. Our relationship with financial currency has also changed in the last few years: physical cash is no longer king and like it or not, we seem to be edging ever closer to a cashless society.
Central to this trend is the development of systems and solutions that allow money to be held and moved digitally. But despite the digitalisation of many financial transactions and processes, they are still often subject to the heavyweight governance of controlling intermediaries. Then came Bitcoin – a truly digital or crypto-currency that showed it was possible to circumvent much of the centralised governance behind fiat currencies and instead use a public ledger or ‘Blockchain’ to authenticate, record and secure monetary transactions, even between otherwise trust-less parties. Blockchain is essentially a distributed database that contains a sequential series of transaction blocks that are immutably linked together and cryptographically secured.
Whilst the idea of a truly digital currency is interesting and may help us move even closer to a fully cashless society, it is the underlying public ledger technology in blockchain that is destined to bring the most disruptive changes. This disruption will impact not just the financial services industry, but will propagate through the whole spectrum of B2B and B2C interactions.
However, for all the excitement and hype that surrounds blockchain, it is not a panacea for all digital transaction woes, nor is it a one size fits all solution. There are a number of obstacles to overcome before it can be considered to be a key solution component, particularly within the modern world’s financial institutions.
What’s it worth?
One of the barriers to adoption of crypto-currencies is their valuation. How is it determined, how is it governed and can I trust it in the same way that I trust cash (the value of which is underwritten by the issuing government)? To some extent however you could ask the same question about fiat currencies. The value of any currency is pretty much determined by what I can do with it because of its perceived worth. Unfortunately for me as I prepare to go on holiday to the US, my British Pounds are going to buy me much less than they would when I first decided to go – simply because of changes in market perception that are way beyond anyone’s real control. Even the value of gold, that long trusted bastion of security, fluctuates according to market sentiment. Being provocative, you might ask whether in principle, crypto-currencies are really to be trusted any less than cold hard cash. Yes, some governments offer savings protections - If my bank crashes and I lose my money, I will be compensated to some extent. But I have no protection for the fact that my British Pound will buy me fewer rides for my children at Disneyland, that’s just the way the market works.
Size (and Speed) Matters
Focusing on blockchain, one of most significant hurdles to overcome is the issue of transaction throughput limitations. Whilst blockchain works for the bitcoin system that typically handles less than 10 transactions per second (tps), applying it to more mainstream payment methods may prove difficult. Visa, for example, handles an average of 2,000 tps while Paypal can take on 115 tps. In terms of scalability, blockchain hits a major sticking point very quickly – and as we progress towards a cashless society, these transactions rates are only likely to increase.
The solution may lie in the implementation of blockchain variants: for example, using larger block sizes; different ‘proof-of’ protocols; or sidechains that are able to offload certain transactions from the core ledger.
The size of the ledger is also something to consider. Is it practical to continue to hold every transaction in the chain in order to guarantee integrity and immutability? Blockchain pruning is muted by some to be a possible answer, where only the latest set of transactions is held by certain users. However, the minute you do this, you start relying on other ‘full-nodes’ in the network to ensure the integrity of the entire chain – eroding the ‘trustless’ principle of blockchain.
Almost inevitably solving these challenges will require a compromise of one or more of the fundamental ideals on which blockchain is based.
Another potential barrier to the mainstream adoption of blockchain is the technology’s reliance on ‘mining’. Mining is the process that creates new blocks of authenticated transactions. It is a computationally expensive process and is typically rewarded by a crypto-currency payment to successful miners.
The reward aims to keep the miners working and ensures that transactions are regularly committed to the chain. Currently the reward is seen to be sufficient to keep the mining community happy. However, as with any currency, values can fluctuate quickly and quite severely and it’s not inconceivable that the value of a particular cryptocurrencies could suffer a crash. At the same time, mining is getting harder and often requires an investment in specialist hardware – including application-specific integrated circuits – before the user generates any meaningful returns. With the reward for transaction mining having recently halved to 12.5 bitcoins, there are serious concerns that the enthusiasm of the mining community may decline should the ratio of risk to reward continue to diminish.
Of course if mining ceases, then so does transaction validation. Understandably, this has created some nervousness in larger organizations that are considering running business critical processes on a system that has the potential to grind to a halt. Inevitably, alternative mining schemes will be proposed and private managed chains with guaranteed SLA’s will be established to address these concerns. But once again these are compromises of the original blockchain ideals.
Who Are You?
Questions over the ability to verify and protect the ownership of digital assets have also caused problems for blockchain. User wallet identities (which are created as public / private key pairs) are stored locally and are the sole means of accessing user assets recorded on blockchain. Lose your keys – which are randomly generated and pseudo-anonymous – and there is no way of proving your ownership of assets in your wallet.. Earlier this year, it was reported that one user lost $67,000 worth of bitcoins during a computer upgrade!
It’s likely that society would demand greater levels of individual protection as well as a more rigorous identity verification system if blockchain were to be used for more mainstream applications, and in fact third party crypto-wallet backup and recovery services have already been launched.
Blockchain is not the final answer in our journey towards a digital-first society, but the current levels of research and trials of innovative variants will inevitably address many of the perceived challenges.
It is almost certain that variants of the blockchain principle will allow us to devise new systems and secure transaction protocols that allow us to edge ever nearer to the cash-less society and truly embrace the digital economy.
Blockchain is the focus of this year’s Atos IT Challenge, the 1st international student competition dedicated to technological innovation launched in 2011. The students will come up with an innovative concept for an application based on blockchain technologies demonstrating how the principle of secure, public ledgers can be used to disrupt conventional business models – visit www.atositchallenge.net