Blockchain is a misunderstood technology that I see directed toward solving the wrong kinds of problems. According to a 2018 Gartner study, only 1% of CIOs report that their companies tried to implement blockchain. In order to further adoption, David Furlonger, a vice president at Gartner, notes, “It is critical to understand what blockchain is and what it is capable of today.”
What’s the problem with blockchain?
My team consults on and implements data management solutions, so the question around how to use blockchain has come up frequently. The issue to me is that too many teams are focused on solving data management problems with blockchain. This is a challenge because blockchain performance typically pales in comparison to the data processing capabilities already in place at most companies when they’re viewed side by side. We learned about these challenges early on when experimenting with blockchain prototypes.
Cryptocurrencies offer good examples of the data processing challenges to expect as blockchain projects grow, since they are the largest-scale blockchain implementations right now. One MarketWatch opinion piece noted that one of the most popular Bitcoin clients supports only five to seven transactions per second compared to the 25,000 per second processed by Visa. The consensus mechanisms built into blockchain significantly limit data processing rates compared to traditional databases.
Not only is data processing in blockchains slower but it also seems to be less energy efficient, a concept explained by a recent Economist article(paywall). In fact, a recent BBC article notes that cryptocurrency data validation operations (aka, crypto-mining) in Iceland are on track to consume more energy this year than all Icelandic households combined.
It’s understandable why tech teams are struggling to figure out where to use blockchain. What’s the point if blockchain is slower, harder to implement and less efficient than standard data management software?
Could blockchain remove operational friction?
Anyone who has tried to make a purchase, such as a car or a home, can appreciate how complex it is for two parties to complete a largescale transaction. Funds must be verified, disclosures must be made in writing, title searches need to be done, and so on. All that legal paperwork and bureaucratic wrangling is there just to ensure two or more parties follow through on what they already agreed to do.
Critical questions need to be answered any time large amounts of money or legal risks are at stake.
• Does this party legally own the asset I’m trying to buy?
• Will this party actually pay me what they say they will?
• How do I make sure this party delivers the goods once I give them my money?
Often, these questions need to be answered by multiple third parties. The problem here, in my opinion, is a lack of trust between parties. In many companies’ current operational model, the data management and approvals processes are performed by third parties. This creates operational overhead when this additional party needs to be involved to make sure any request is valid and that records are accurately maintained. A great deal of operational excess and middlemen could be removed from many industries if there were a way to verify ownership rights and then enforce follow-through on payment and delivery.
This is where blockchain’s focus on distributed consensus could come into play. Typically, data in a blockchain is replicated and stored across the participants. Updating this data requires approval from a majority of the participants, who verify the requested change is valid and allowable according to the programmed rules of the blockchain. The participants within each blockchain implementation act as both the users and the controllers of the data, which essentially removes the need for excessive middlemen and other bureacratic nonsense to arbitrate transactions.
I believe blockchain’s value is the automation of trust between parties. This is blockchain’s primary purpose. Blockchain is not just a fancier version of a database. It can significantly reduce the operational friction required to validate ownership, identity and contractual terms by allowing participants to interact directly with one another without someone in the middle providing verification.
When looking for places to implement blockchain, I don’t believe the question is where data flows or data management can be made more efficient. It’s where we can remove the need for trust-based overhead. Brian Behlendorf, executive director of Hyperledger, summed this all up perfectly to Barron’s when he said, “Blockchain is not a technological solution to a technological problem. It’s a technological solution to a political problem.”