Busting top 7 myths of Blockchain

Team Hashcove
October 27, 2021

Blockchain has become the most “glorified” database of the 21st century. While there is some proven value of Blockchain (example Bitcoin application) and great future potential; its existing value is being taken out of proportion by the Blockchain “enthusiasts”, “experts” and “advisors”, who do a “lot of conferences”.

Lets look at some of the Blockchain hypes, myths and examine them by “first principle” analysis why they are unlikely to work.

  1. Anything on Blockchain means truth

Blockchain achieves truth (transactions validity) in Bitcoin transactions with the help of 1000s of mining nodes, with up to 1000s of servers supporting each node. Miners are incentivized by Bitcoins to perform the mining exercise.

For any Blockchain use case, worth asking the following,

  • Are all transactions going to be public? (example, Banks Blockchain use cases won’t like this)
  • You will allow decentralization in the workflow? i.e. Some consensus algorithm (say majority of miner votes), will make final decision in transactions validity (example, Governments or any Central authorities won’t like this)
  • Miners understand and can help in validating transactions (example in supply chain finance, how can miners validate any facts about fake invoices, workflows or multiple discount loans?)

“Blockchain is not the magic wand that generates immutable truth”. Its just a means to an end.

  1. Private or Enterprise Blockchain makes sense

Among many stakeholders, IBM has been promoting and selling enterprise blockchain use cases. Several Banks have formed use cases for Blockchain consortiums, to improve inter bank data management, operation process improvements.

For any enterprise to use Blockchain internally, or with other enterprises, we have had proven, scalable and efficient technologies for decades, including shared databases (SQL, Oracle, SAP).

Please note that Blockchain is an expensive technology (in terms of resources, as multiple nodes need to be setup, multiple entities need to validate all transactions since the beginning (no concept of end of day final records, so next day’s transactions begin from next day only and not from the first ever transaction like in Blockchain). Decentralization by definition slows down things and introduces security concerns. For a single enterprise with already trusted internal groups, or a hand full of external enterprises, private blockchain is not the best solution. And for Inter-Banks’ transactions, payments, trade settlements; several existing efficient workflows, platforms, protocols like Swift, FIX etc. exist and work fine. Blockchain as a magic wand will not help at all.

– As an example, if some bank says that they can reduce the current trade settlement cycle from 2 days to 1 second, they should ask themselves that why is it 2 days in the first place. It’s not that they were all waiting for the Blockchain technology to be invented for solving this problem.

If you do not believe this, ask any bank who announced any use case, proof of concept (years ago), if they actually scaled on it or not? Do you recall reading any such “scaled up transactions by banks” PR (press release) after the POC (proof of concept) announcement? I guess not. And I rest my case.

  1. Transparency / Digitization is best achieved by Blockchain

Several POC’ed or Advocated use cases are nothing but digitization of some data. Examples below,

  • Land registry on Blockchain is done by several states, governments etc. Whereas none of them has allowed for independent miner validations (i.e. only states can decide who owns which property and when they approve the transfers), so it just makes online record keeping instead of offline. Such processes by Governments and Companies have been digitized for decades, without blockchain, and more efficiently.
  • Invoice discounting If a supplier sends an invoice to a client, that gets accepted, then they can take say 70% loan against that invoice from a bank to develop the products, or get some cash-flow while the products are shipped (say from China to US) which takes weeks. Typically in such loan, supplier, supplier’s bank, client and client’s bank are involved in confirming the transaction and supplier’s bank gives loan after that. This approval process can take days.

The challenge in this loan issuance is that there can be fake invoices, or companies can take bank loan from multiple banks against the same invoice, or that the counterpart client does not exist. Hence banks are cautious in giving such loans.

Now independent miners are bank’s risk departments who can help validate the authenticity of the transactions. And no bank will open their client data to other banks for validation (in fear of losing the client to other bank).

So all that can be achieved is that document transfer between the 4 entities, can be made faster from days to hours, by using digital signing and digital documents transfer. Such solutions exist, and work well without Blockchain.

Most problems advocated here are typical digitization problems that can achieve transparency by making the steps in the workflow public. Think about DHL or any other courier service tracking the package in transit, or Uber’s car driver and trip details. People, who need to know, can know it online very easily, and without needing any Blockchain technology implementation.

  1. Blockchain is an efficient way of managing data and transactions

Bitcoin gets around 300,000 transactions per day. To achieve these transactions, there are millions of servers running around the world, consuming more electricity than several countries, to validate these transactions. It takes seconds if not minutes to confirm the transactions. This is of course slow and inefficient.

Blockchain and decentralization by definition slow things, make them inefficient. They should be used only if the “real” benefits of decentralization are likely to be achieved. In most Blockchain use cases, centralized non Blockchain implementation will work best.

  1. All crypto-currencies make sense

Bitcoin is owned and run by the community. There is no “known” majority Bitcoin holder. It makes sense for community to adopt it as decentralized currency, as an alternate to fiat currencies.

But different countries like Venezuela launching their crypto currency, or centralized crypto currencies like Ripple make no sense. All they need maybe is a digital currency instead of fiat currency, or digital payment mechanism like Paypal, which has worked well for years.

But if the transaction validation is done by Government or 1 company like Ripple, its not decentralized and is not a crypto currency.

  1. Smart contracts are perfect and legally enforceable

Smart contracts on Blockchain maybe useful for achieving conditions based trigger conditions in the Blockchain. Some known challenges with smart contracts must be understood,

  • It’s debatable whether such contracts should be coded within the Blockchain, or at the application layer on top of the Blockchain.
  • Many smart contracts are poorly coded and hence end up hurting the use cases rather than helping them.
  • Very few proven scaled up use cases of smart contracts exist till date. The most successful ones so far are ICO tokens and Crypto-kitties.
  • If smart contracts go wrong, good luck. And also, they are not legally enforceable in any jurisdiction so far.

The above challenges maybe overcome over time, as the Etherium alike protocols mature improve and become scalable, making them more accepted widely. And smart contracts shall be more relevant as automation & Iots grow, leading to more “machine interacting with machine” scenarios.

  1. All new discounted ICO tokens will rise in value

ICO (Initial coin offering) is the advance sale of a project’s crypto-currencies or tokens, to be used within their platforms or outside, in advance, to fund the development of their platforms. These tokens can be easily sold and traded at anytime, on all crypto-currency exchanges depending on their demand. So, an ICO is when a company raises money in Bitcoin or other crypto-currencies for the technical development of their projects. These tokens are essentially the incentives, for several market participants to use and grow the platform in a decentralized manner. Such incentives are paramount in making a decentralized eco-system operate sustainably. This allows for formation of new economic systems; possibly even capable of transforming / improving wider systems like “capitalism”.

Majority ICOs unfortunately don’t and won’t work because,

– Many ideas don’t need blockchain or ICOs at all. They are centralized, or don’t need community, or have no real business models. As explained above, you cannot “decentralize everything”.

– Team behind ICOs have nothing to lose; Once they raise millions to billions on an idea, basic prototype at best, proven or unproven team, “self-proclaimed experts” or “larger than life celebrities lending their names”, there is no major pressure to execute their idea well. There is no governance on the use of funds. Compare this to typical startups, where entrepreneurs get modest valuation, and have to be “all in” the project to see any returns after 5-10 years or hard work. They are “on the hook”, forever.

And, lack of regulation, accountability and legality of structures; makes it the “wild west“ of finance and reduces the probability of success.

So where does Blockchain work then? Lets take the most successful Blockchain app. How Bitcoin Blockchain REALLY worked, see below the key factors in its success.

  1. Shared Beneficial Ownership– Bitcoin Blockchain is owned by the public, striving to build a decentralized financial system where trust is built in a democratic fashion. While Bitcoin was initiated by smart hackers, it was scaled by the tech community and eventually became mainstream, because it seemed to help the whole world and everyone had an equal opportunity to build their businesses around it (like all miners, bitcoin exchanges, etc.). Wikipedia, Linux and several other open and crowd-sourced platforms have scaled in a similar fashion.
  2. Independent mining achieves trust– Blockchain does not create trust inherently. Several nodes independently validating all transactions, for some incentive, build trust in a Blockchain. If the Blockchain app did not have enough independent miners, Bitcoin transactions would not have been so trustworthy.
  3. True decentralization – Bitcoin is truly decentralized. There is no central point of failure. There is no dependence on 1 person, 1 node, 1 company, 1 Ceo, 1 nation, or 1 leader.
  4. No contract among transacting parties– While doing a Bitcoin transfer, payee and payer do not need to know each other. They do not need to have a legal agreement between them defining terms and conditions of their transaction.
  5. Some other factors –There are other factors that need consideration, including, multiple parties executing the transactions, transparency of transactions acceptable to all parties, public or private blockchain, etc.

If you can see several / all of the above factors in your Blockchain use case, maybe it can work.

In my humble opinion, majority use cases being developed on Blockchain do not qualify for, or need Blockchain at all.

PS: I truly believe in Bitcoin and the potential of Blockchain and potential of ICOs to disrupt the corporate structures. I am not even too bothered by inefficient or un-scalable Blockchain protocols yet; those would become better in time, for sure. My concern is that Blockchain is taken out of proportion to solve problems that it’s not meant to and never will.

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