Regulation

Blockchain: How to separate the myths from the realities

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No-one can doubt that blockchain technology has captured the minds and imaginations of people in a number of diverse and unconnected industries, ranging from logistics, intellectual property, financial services, creative industries and data management – to name but a few.

However, amid the hype accompanying blockchain technology’s rise, there is a growing confusion with regard to how it works and how it should be applied. It’s important to remember that the blockchain doesn’t enable people to do anything that can’t already be done – it merely enables tasks to be carried out more quickly and at a far lower cost than was previously possible.

This doesn’t however mean it should be applied to all industries facing infrastructure problems. There are a number of technical trade-offs associated with different blockchain platforms, and choosing the right one isn’t easy given the vast number of competing entities in a rapidly evolving space.

When weighing up the pros and cons of any blockchain as a service (BaaS) it’s important to take into account the following misconceptions and weigh up the reality of the situation before making any kind of commitment. One of the most common is that blockchains are trustless. The reality is that for all, blockchain reduces the need for trust. Participants at a bare minimum will need to believe in the underlying cryptography – and the coders writing it. In the case of a permissioned network, trust must be placed with the operator and the validators that make up the broader community.

Another myth is that of immutability – that all transactions on the blockchain are tamper-proof. This stems in large part from the append-only data structure that implies data can only be added to, but not removed from the database. It does however negate the possibility that in a Proof of Stake (PoS) blockchain, such as Nxt or Ardor, the majority of participants can decide what the ownership of a block is at any given moment in time (obviously getting 51% of a large community to agree simultaneously on something isn’t at all easy – but still theoretically possible).

Blockchains aren’t ‘trustless’ – though they reduce the need for trust. At a bare minimum, participants will need to believe in the underlying cryptography – and the coders writing it

Reversing transactions may be even easier with permissioned blockchains than public blockchains, where colluding miners would at least need to spend computational power and/or cryptocurrency funds to do so. Permissioned blockchain actors are bound by legal contracts and agreements that are designed to disincentivise collusion or other misbehaviour. The Ardor PoS blockchain also has a unique parent-chain and side-chain architecture that enables obsolete past transactions to be pruned, with both parties’ consent. Only when ‘mining’ in a permissioned blockchain is sufficiently decentralised across separate entities with different motivations, can people then consider the blockchain to be tamper-resistant.

Employing cryptography to automatically ensure all transactions are secure is another myth that needs to be examined in more detail. Cryptography undoubtedly makes the system more resilient as data storage and permissions are distributed – however, compromising the private keys of some network participants could give attackers full access to shared databases, including the ability to reverse transaction history. As a result, the management of private keys is a huge challenge – particularly should a 51% majority collude, as previously mentioned.

As with all computer systems, the data and assets stored are only as accurate as the person inputting the data ensures them to be. GIGO (garbage in, garbage out) applies just as much to blockchain as any other IT services provider. The ledger has no means to assess whether or not the input is inaccurate or wrong; as long as certain conditions are met, it will be seen as valid. The veracity of data coded on the blockchain still needs a trusted third party to verify and guarantee the accuracy of the input.

At EXYcount, we are very excited by the prospects blockchain technology can bring to the area of SME accounting. Individuals can buy a token and gain access to blockchain technology based on the Ardor platform that enables business ledgers to be updated and monitored by participants and independent third parties. The potential to remove paperwork, additional costs and guarantee transparency for governments and regulators is too big a prize to give up. The Ardor blockchain enables us to carry this out in a way that would have been unimaginable five years ago.

Blockchain technology is undoubtedly revolutionary and will disrupt many industries in the near future – however, be sure you know the reasons why you are applying it and the problems you are looking to solve. It is only as effective as the people managing and coding it.

 

Interested in hearing leading global brands discuss subjects like this in person? Find out more at the Blockchain Expo World Series, Global, Europe and North America.

 

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