report

Blockchain for business

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Blockchain is not just crypto

Blockchain was first proposed in October 2008 by Satoshi Nakamoto as the main technology behind Bitcoin,(1)https://bitcoin.org/bitcoin.pdf the most popular digital currency, or cryptocurrency. Only two years later, Bitcoin surpassed for the first time the limit of 1000 transaction in a single day. At the beginning of 2012, 4 years later, the popularity of Bitcoin started increasing a lot, and now, in 2020, the mean number of transactions per day is around 300.000.(2)https://www.blockchain.com/charts/n-transactions In December 2017, Bitcoin reached its peak with an estimated number of $5 billion dollars exchanged through blockchain transactions.(3)https://www.blockchain.com/charts/estimated-transaction-volume-usd Today, 12 years after its debut, Bitcoin is only one of many applications based on blockchain technology. Government, identification, mobile payments, energy, railways, music, and fishing are only a few of the application fields for the technology blockchain(4)https://medium.com/@essentia1/50-examples-of-how-blockchains-are-taking-over-the-world-4276bf488a4b.

Blockchain technology has some special properties that contributed to its increased popularity. These features solve specific problems that would otherwise remain unaddressed.

The upside…

The revolutionary model at the base of the technology is related to data organization and management: in a blockchain, at the same time, nobody and everyone has the control of the data. Each participant of the blockchain owns a copy of the entire data of the system, but none have control over them and, for this reason, cannot manipulate them in a malicious way in order to take personal advantages, also thanks to the state of the data. This is determined by all the participants (or at least by most of them). Practically speaking, this is accomplished through the execution of specific algorithms called ‘consensus algorithms.’ The idea at the base of such algorithms is that participants agree on a single state of the system using a ‘majority-based’ mechanism. The output of that process is the creation of a new “block” of data made up of transactions that is “chained” to the existing ones. The term ‘blockchain’ derives from this process.

Blockchain is a distributed, immutable, append-only database where multiple participants contribute to writing records.

This mechanism ensures that data is kept synchronized over all the nodes that compose the network. The distributed nature of the technology, coupled with that mechanism of synchronization, makes blockchain very hard to be compromised: in order to accept a malicious transaction, the majority of the participants must act in a malicious way. In other words, the system can be corrupted if and only if most of the nodes that compose the blockchain are corrupted and act in a malicious way.

Another feature that makes this technology innovative is the way in which data are stored: the blocks that contain transactions are chained in chronological order. Each block contains a reference to the previous block. This reference has the scope of enforcing data integrity. This mechanism makes it practically impossible, from a computational point of view, to modify the data inside the blockchain system. This feature is called ‘data immutability.’

So, what is blockchain? Summing up, blockchain is a distributed, immutable, append-only database where multiple participants contribute to writing records.

The use of blockchain provides some benefits as high efficiency, speeding up financial transactions between parties, but also transparency by providing a real time view of trades. Another fundamental benefit is related to the increased resilience to attacks. The distributed nature of blockchain makes the overall system difficult to compromise. Centralized methods are prone to data corruption due to their limited number of point of failures. For all these reasons, blockchain appears to be a very good technology offering, at the same time, better performances and a higher level of security.

… and the downside

From a purely technical point of view, blockchain appears to have only advantages. However, this is not completely true if we analyze it from different perspectives. The first aspect to take into consideration is the energy required by the overall system: University of Cambridge estimates that Bitcoin energy consumption is around 95TWh per year. This value is comparable with the energy consumption of entire countries such as Kazakhstan, Finland, or Pakistan(5)https://www.cia.gov/library/publications/resources/the-world-factbook/fields/253rank.html and equivalent to 0,27% of global energy consumption.(6)https://www.cbeci.org/cbeci/comparisons This means that Bitcoin as a system has a non-negligible environmental impact, indirectly emitting huge quantities of carbon dioxide as an externality caused by its electricity consumption. Of course, is not easy to estimate with a good degree of confidence how much Bitcoin contributes to an increase in emissions, but obviously this factor must be taken into consideration. Also, when considering an investment in BC, you should take into account the costs and externalities associated with energy consumption regardless of whether your BC application’s energy consumption pales in comparison to Bitcoin’s. Another aspect to take into consideration is related to privacy, which is in high contrast with one of the main concepts behind blockchain: transparency. Trustability between participants is possible through that property of transparency. Every single operation performed is stored inside the blockchain and can be seen by all participants without restrictions. It appears pretty clear that this concept of transparency can represent a strong limitation in many use cases were personal data are involved.

Bitcoin energy consumption is around 95TWh per year, comparable with the energy consumption of entire countries such as Kazakhstan, Finland, or Pakistan

Summing up, transparency, immutability, redundancy, trustability, distribution, and synchronization are the key features behind blockchain technology. These features must be taken into account when considering the usage of that technology. If you plan on using blockchain technology, only do so when your use case can take advantage of all its features. Let’s try now to define some guidelines that can be useful in order to recognize whether blockchain technology is the right solution for your business use case. The following figure summarizes a possible self-assessment methodology to evaluate the application of that technology through a set of questions.

The five questions for blockchain implementation

The image is a flowchart of the following five questions to ask yourself before implementing blockchain in your business.

A flowchart of 5questions to ask prior to implementation

  1. Is there a need for a common shared database?
    By definition, blockchain is a distributed database. Using a distributed database when it is not needed is a waste of resources.
  2. Are multiple parties involved? Are there differences in the rules that govern these parties?
    Again, by definition, multiple parties contribute to the writing of records. Not only different users, but also users that belong to different organizations and that are governed by different rules. Blockchain, through the usage of smart contracts, enables parties to agree on events without needing to rely on third parties. A smart contract is a computer program that is executed in the context of blockchain applications acting like a traditional contract.
  3. Do the parties involved have conflicting incentives?
    This is, for sure, the key aspect of the technology. The overall system is organized in such a way that trustability between parties is enforced. Parties cannot maliciously manipulate data for its own interests. If parties have no conflicting incentives, maybe blockchain is not a suitable technology for your use case. Typically, in a business scenario, parties have conflicting objectives when, for example, they belong to different organizations.
  4. Is there a need for an unchangeable log of records?
    Blockchains contain so-called “ledgers”, i.e. consists the unchangeable log of records of previous transactions. Remember, every operation performed over the system is stored and cannot be modified. Use blockchain only if you need to track operations in an immutable way.
  5. Are treated data compliant with GDPR rules?
    Personal data should never be treated in a blockchain system. If your system needs to manage personal data, move to another solution or, at least, try to redesign your needs.

Conclusion

It’s easy to understand that blockchain is a technology that is far from universal in terms of applicability. In fact, it seems to be best suited for specific use cases able to exploit all its features. Creating a blockchain solution without taking into account all those aspects may represent a risk for your business. The risk is to create a complex and expensive system that doesn’t provide you with any added value with respect to an equivalent system based on traditional technologies. “With great power comes great responsibility”: blockchain is able to provide you great possibilities to create innovative and powerful solutions leaving to you the technical, economical, ethical, and legal responsibilities.

Notes

Notes
1 https://bitcoin.org/bitcoin.pdf
2 https://www.blockchain.com/charts/n-transactions
3 https://www.blockchain.com/charts/estimated-transaction-volume-usd
4 https://medium.com/@essentia1/50-examples-of-how-blockchains-are-taking-over-the-world-4276bf488a4b
5 https://www.cia.gov/library/publications/resources/the-world-factbook/fields/253rank.html
6 https://www.cbeci.org/cbeci/comparisons