What can blockchains actually do?

An article by Olya Green

The usefulness of blockchain technology will sink or swim based on whether trusted intermediaries can bridge the gap between the digital and the physical.

Harvard Business Review, 2019

A question that many C-levels frequently ask when considering new tech tools is ‘How much will this cost us?’ But prior to that, there probably comes another no less important one — ‘How can this actually improve our internal processes?’ The relevance of this question is multiplied when applied to novel and complex technologies like, for instance, the distributed ledger technology, especially considering the number of false assumptions circulating in the space. The consequences of those stand in the way of the enterprise understanding blockchain’s strengths and weaknesses and hinder the creative thinking behind its applications to generate new revenue streams.

Let’s take a closer look at some of the ubiquitous notions about the blockchain’s ‘superpowers’ to find out what this up-and-coming technology can and cannot do.

Dangers of the extreme mentality

For those who are new to crypto, it certainly looks like a close circle of speculators and crypto-anarchists who put blockchain on the pedestal of being able to solve each and every inefficiency of the modern economic system. While seemingly harmless, in fact, this kind of polarized opinion triggers a lot of mistrust and unrealistic expectations that might confuse business leaders looking for the next-gen tech.

Exaggerating the technology’s potential to alter the trust and reputation mechanisms in business.

No doubt blockchain has the potential to greatly change the mechanisms of trust in business and society at large. But there is a problem that persists with the majority of crypto start-ups: their failure to understand that blockchain solutions will eventually get integrated into larger industrial systems. Microsoft, Google, Walmart, and J.P. Morgan’s continuous investments into distributed ledger tech only prove the point. This kind of thinking has another dangerous implication — the abundance of isolated solutions built for isolated groups of crypto enthusiasts, while it is obvious that we get more efficiency and faster adoption when crypto is merged with traditional businesses. Large corporations will naturally benefit the most from blockchain applications, whether it is via smart contract software, decentralized governance, or a simple benefit of an immutable ledger for their commercial data. By delegating selected tasks to a distributed network, these companies can reduce operational costs and scale faster thanks to DLT’s capability of bridging confidence gaps (whether it is confidence in the data being collected enterprise-wide or the authorizations of stakeholders) more efficiently than any of the other solutions available on the market that generally employ multiple third parties and very labor-intensive (e.g.hiring a team of auditors to validate internal reports). Essentially, it all comes down to having a robust trust validating mechanism in place that is far faster and better at closing trust issues between the stakeholders.

Wrong expectations on the user adoption side

If we look at some of the major crypto projects and applications they are targeting, we immediately spot one characteristic typical for very many of them — the huge load of responsibilities imposed on prospective users expecting them to do all the work. This rosy view common to the blockchain community leads to a naive belief that users will want to deal with ridiculously complex things like private keys and passphrases losing which leads to permanently losing access to funds. With all the promise that blockchain brings, this trade-off between the perks and the effort is still too painful. Of course, there are ways to ease this cognitive load: if we approach the fundamental design of blockchain systems from the standpoint of keeping centralized systems honest, then that design principle can help you abstract away almost all the complexities and hide them from the users. On the UX-side, that is oftentimes overlooked in crypto, building easy-to-onboard and user-friendly interfaces — both on the front and back-end — will also contribute to faster and more smooth adoption in the enterprise.

No place for crypto-anarchism in the enterprise

While seemingly harmless, in fact, that kind of polarized opinion triggers a lot of mistrust and unrealistic expectations that might alienate business leaders looking for the next-gen tech. This is especially applicable to enterprise blockchain where there’s no space for such idealistic assumptions. We need to be practical to build useful applications that will prove viable in the real world. Here are some tips about possible avenues of research that companies might want to explore before actually implementing a blockchain solution to adequately optimize internal and external processes.

Cost and efficiency

Key questions every C-level should ask here:

  • What are the bottlenecks in the processes we are replacing with the blockchain?
  • What are the main drivers of cost in our implementation of the blockchain?

Another misconception common in business circles is that blockchain solutions are expensive. Yet again, it all depends on the particular chain. Using, for instance, Ethereum blockchain for your in-house data log might not be the best idea because apart from being poorly architecture, it, in fact, has a very low TPS (transaction per second) ceiling, which inevitably leads to very slow/expensive processing. The takeaway here is that one should carefully examine all the technical aspects of a concrete blockchain.

Regulation and governance

Key questions every leader should ask:

  • How do current regulations impact our application of blockchain?
  • What will a regulator want to know about our application?
  • Should we go ahead with a public or private blockchain?

Regulation has long been on top of the concerns list when it comes to real industrial applications. When choosing between private and public, you might want to consider going with the latter, because as a general rule, regulators tend to have more affinity with them, since public chains are way more transparent than the private. This applies to all sorts of regulatory oversight — from general financial to more industry-specific, like CMS for the healthcare sector.

From the governance standpoint, using private networks for blockchain applications might seem attractive for the purpose of retaining the crucial concept of corporate liability, while attaining the benefits of decentralization. However, we must realize that with control comes a higher risk of the network’s corruption. More so, if you have complete control over the blockchain network, you actually abandon trust and immutability. A public network, by contrast, preserves the core qualities of the blockchain per se — immutability, transparency and trustless interaction between all the stakeholders. For concerns over data privacy, those are in fact overrated, as there’s actually no risk of data being leaked if you deploy encryption to hashes and signatures to conceal certain transactions when needed.

Security

On to the technical aspects: is blockchain really ‘unhackable’? There have been no instances of successful attacks on either Ethereum or Bitcoin blockchain so far: it is badly written smart contracts on BTC/ETH that are getting hacked. And while no technology is completely safe from attackers, a lot of community effort goes into creating novel fixes and researching bugs. While there are opinions that private chains are safer, there is a lot of research and development in applying security-enhancing tools to public blockchains, too. Ethereum blockchain, for example, already comes with several mechanisms that could be leveraged to ensure the privacy of the network participants — ring signatures, stealth addresses and storing private data of the public blockchain. Of course, there are ways around it like choosing an alternate arrangement for the chain architecture, like, for instance, the block DAG.

Now it’s time to explore the real capabilities of DLT that are, in fact, still many.

A quick reality check: here’s what blockchain not so good at.

To distill the useful features of blockchain, let’s consider what makes this technology unique in the first place: a combination of economic incentives and cryptography that ensures that at any point in time digital records reflect the true consensus among the key stakeholders. Now, to assess blockchain business models, it is useful to understand what blockchain alone can’t do without additional tools — whether offline or online.

Guarantee the 100% trust

Consider this: when you put coins to a crypto exchange or download a dApp, there are still people who run the nodes and maintain the software. While there is an interface between the offline and the online, any technology (and blockchain is no exception) will critically depend on trusted intermediaries to effectively bridge the ‘last mile’ between a digital record and an individual, business, or a device. Hence, keeping digital records in sync with their offline counterparts is a hardly plausible task for any blockchain out there.

Be the single source of truth

The digital records may be immutable and verifiable, but how does one know which digital record is attached to which physical asset? How do you know that this warehouse operational data was gathered by this particular sensor? That’s why it’s extremely important to secure data at the source both on the identity and processing/transmitting level. To do that, we need to give objects physical identifiers like chips or tags to link them to a specific digital record. But blockchain alone can’t do that. We need more hardware helpers like sensors and specified software here.

Guard against poorly written smart contracts

Smart contracts are supposed to act as a safeguard to ensure that a transaction doesn’t go through until terms have been guaranteed. The problem is that smart contracts themselves can be fooled by malicious actors who try to corrupt the network.

Eliminate the risk of human error

For example, if you use blockchain technology to keep track of boxes in a warehouse, it’s possible to scan the same box twice, therefore falsifying the record by accident.

But don’t get discouraged too quickly, because even after we peel off these layers of mythical representations, there is one thing that holds the truth about the real value of DLT. Blockchain can provide an immutable record, or digital audit trail, of transactions, and can be used to verify the integrity of data. Where can this capacity be used to add value to the business? Think about any use case that requires recording stakeholders’ actions to be able to trace responsibilities. Encrypted identities created within a blockchain offer a high level of assurance that a party is who they claim to be, which can be applied for use cases that require tracing responsibilities across a supply chain. A good example here is reducing the fraud levels in the telecom sector by building a tamper-free audit log of virtual identities with digital signatures and private keys.

Considering the scope of promise that DLT holds, it by no means should remain a curiosity among crypto enthusiasts. It is due to its power to surface operational data faster and cheaper by virtue eliminating third parties completely and build a 100% credible audit log that will ultimately allow to tap actionable insights to fuel the enterprise growth and customer acquisition.

Eventually, when understood and applied correctly, blockchain’s capabilities can help to release novel business models, spearhead innovation and optimization across a number of industries.