Being a Blockchain practitioner, I am a great advocate of this technology. However, it is pretty complicated, and therefore, to achieve greater adoption, we need to find the simplest possible way of explaining it to the public. There are many evangelists doing this job and I do appreciate their efforts. It is totally normal, however, that sometimes they overpromise. After all, most prominent sales people do.
The purpose of this post is to note the typical overpromises of Blockchain. It is worth studying, especially if you deal with an enterprise customer that will eventually ask you to put your promises into a legally binding contract.
By the myths of Blockchain, I understand the promises which cannot be delivered either with the current software realizations or ever. I will also talk about existing features of Blockchain which make it legendary. I will start with the myths and finish with the legends for the purpose of making this article optimistic as the blockchain technology well deserves it.
Myth 1. Decentralization
Blockchain is lot more decentralized than most other systems we know, however, the devil is in the details. The software runs in totally decentralized manner, but there are two very important questions: who writes the code and who runs the nodes. To illustrate the importance of the first one: there are just fifty developers of bitcoin with more than ten commits. It is a pretty small community which can totally affect how the bitcoin evolves as a system. The bitcoin blockchain is a perfectly decentralized rule enforcement machine, but the rules are created by a few people.
The situation is even worse when it comes to the second question: the mining of bitcoin is dominated by a one-digit number of ASIC vendors, which can easily sit around one table. In fact, they do so from time to time.
As we see from the past events with public blockchains, such as Ethereum and Bitcoin, if the network is under attack or at a capacity threshold, the rules can be changed quite quickly by a very small number of people. All the users do not have a choice but to trust those people. Which brings us to the next myth of Blockchain.
Myth 2. Trustlessness
Blockchain is a trustless system. Indeed, if you send the money over blockchain, you don’t have to trust the second party. More importantly, your transfer is not processed by trusted central authority. However, there should be many trusted ecosystem participants in order for the blockchain to function. Here are some examples:
The developers. We have to trust that the core contributors will not change the rules of the game on the fly.
The oracles. The external applications feeding the data into the smart contracts have to be trusted. For example, if the smart contract pays out an insurance for the delayed flight, the information on the delay has to be kosher.
The cyber-physical gateways. Whenever the physical asset is being digitized and tracked on a blockchain, there has to be a trusted way to confirm that the particular physical item corresponds to the particular digital token in the blockchain. The good example is the Bitnation integrated with Estonian e-residence. In this case, Estonian government is a trusted cyber-physical gateway because before issuing an e-residency they perform a KYC and therefore can confirm that the digital identity corresponds to the physical person.
The custodians. When the digital tokens are issued against the real money, shares, bonds or other similar assets, there should be an organization which holds the asset and issues the tokens and vice versa, delivers the asset against the tokens balance. The example of such an entity is the bitcoin exchange which holds the deposits both in bitcoin and fiat currency. It comes without saying, that this entity has to be trusted.
As you can see, the blockchain is not totally trustless. Moreover, if any one of the entities mentioned above cannot be trusted, the whole system looses its attractiveness.
Myth 3. The Internet of Value
Blockchain is often referred to as the Internet of Value. It is not exactly accurate. The thing is that blockchain transfers digital tokens, not value. There is no intrinsic value in digital tokens unless all the participants are in an agreement on that. It can be quite difficult to reach such an agreement, especially if the number of participants is large. This problem is not in the technology itself but rather in adoption and presence of the legal and regulatory frameworks. The situation will change when either an existing fiat currency will be re-digitized as the crypto currency or when an existing crypto currency will get the legal tender status. I guess it is a very long way to go.
Myth 4. The interoperability of blockchains
The interoperability of blockchains, which is the ability to receive a blockchain transaction from another blockchain, for example, to send bitcoins from an Ethereum smart contract, is currently not possible. It is because all current blockchain realizations are based on the asymmetric cryptography scheme. To sign the transaction, one has to be in possession of the private key. The wallet software signs the transaction with some interaction with the user, who enters the password which protects the private key. After that, the transaction is being sent to the blockchain network. Interoperability assumes no human interaction which means that the private key for the blockchain receiving the transaction has to be stored in the blockchain sending the transaction. If this is the case, the private key loses its privacy and the owner of the account loses the control over it.
Now let us talk about the bright side of the things: the "killer features" which make Blockchain legendary.
Killer feature 1. Automation, distributed by nature
Old school IT people remember how difficult and expensive were to build the distributed databases. Algorithms like Paxos were used in some file systems, but aside from those, there was no progress in using consensus algorithms for distributed applications before blockchain. Now, your smart contract, which is essentially the virtual machine containing the application and an embedded database, can be replicated easy and cheap as many times as necessary. Intrinsic consensus scheme guarantees that the data is in the same state across all the nodes and that the application logic is executed as programmed. This is the foundation for building the systems which are orders of magnitude more reliable than before.
Killer feature 2. Resolving conflict of interest
Imagine the following scenario: the business process involves several parties. Let's take an example of motor accident which will include a customer, an insurance broker, an insurance company, a reinsurance company, a service provider which fixes the damage, and a regulator. Some of the parties have an inherent conflict of interest and therefore are motivated to obtain full control over the transactions and prevent transparency. Blockchain in this scenario creates an opportunity unseen before: every party can have the exact replica of the entire application with all the business logic enforced automatically, where all the transactions are transparent and any interference from a conflicted party disabled by design.
The blockchain-based information system for the business process can be created and maintained by the third party software company which is paid by all the participants proportionally to their use of the system and which does not have any control over the data.
Killer feature 3. The money is blended into the application
Imagine, that in the insurance example above, all the parties agreed on the value of the digital tokens of the blockchain and that there is a trusted custodian holding the real money, emitting the tokens and settling the tokens balances with the real money once the agreed period ends.
Effectively, we now have the business application which automates not only the business process but also payments. The money flow can now be programmed in the same way as the information flow used to be programmed before. The money is now blended into the application which is totally unprecedented.
Killer feature 4. Irrefutability and non-repudiation
In order for the consensus to be achieved, blockchain is designed in a way that all the changes to the data are stored since the system started. Moreover, all the requests to change the data are digitally signed by the initiators. Two very important things are derived from this design.
First, one can check the state of the data at any given moment in the past. It makes the data irrefutable and creates totally new horizons for the audits, investigations, and research.
Second, one of the main characteristics of the digital signature scheme is non-repudiation which means that any data change initiator is not able to challenge their authorship of this initiative. Therefore, if the proper KYC procedures are put in place, the information system becomes unprecedently transparent.
To summarize, I am a bit skeptical of blockchain becoming the medium for the global value exchange over the Internet available to anyone to use. This may or may not happen because of various non-technological reasons. What I firmly believe in though is that blockchain has a humongous potential to disrupt the corporate IT and streamline corporate business processes. This, in turn, will make the life of those using corporate and government services easier while giving the ability to use these services to people not currently able to do so.