As with any new technology, some people want to make a quick buck by telling people about it, or selling something that uses it. This article aims to help people see through some of the hype.
What is blockchain?
Firstly, a blockchain is just a database, i.e. a file on a computer. A very bad database in many ways: it is slow to add records, and once a record is added it cannot be altered or deleted.
What if you make a mistake? What if garbage data goes in? So, what is good about it then? The most amazing property of a blockchain is that it is so secure that it can be exposed on the open internet for anyone to inspect or copy. So how does it work? There are two fundamental elements. Firstly, blockchains use the most advanced cryptography available. No-one has broken it yet, and most experts agree that it does not look likely that anyone will in the foreseeable future. Secondly, if many eyes are looking at something, it is harder to do something sneaky. Blockchains gain security by having many copies of the database distributed around the internet, and each computer that has a copy is continuously verifying that it has not been messed with.
There’s a lot more to blockchain technology than that, but these features are enough for the purposes of this article.
Blockchain technology has immediate applications for financial transactions, because it can provide a trustworthy public ledger. Two people can trade digital tokens (cryptocurrencies) without the need to use an intermediary (e.g. a bank) and both trust that the exchange has happened and will be recorded forever and never altered.
This is important for two reasons: firstly, users can cut costs associated with third parties that provide trust services (e.g. banks). Secondly, in some situations no-one can be trusted not to mess with the records (e.g. corrupt governments).
What is it good for?
A recent example of blockchain being an element of solving a problem is the WWF (previously World Wildlife Fund) plan to combat illegal fishing. Apparently the plan is to put electronic tags in fish, and then read the data in the tab with a smartphone or similar device and then record it using a blockchain. Fine, except for two things. First: the value of blockchain is that it provides a tamper-proof (so far) public ledger.
But it cannot guarantee that the data that’s entered is "true" in any sense. One could easily fake the data in an electronic tag, for example. GIGO: garbage in, garbage out. Secondly, is there really no-one that can be trusted? What about the government of New Zealand? The UN? Some international trade body? If so, they could easily provide current database services that are far superior to blockchain (faster updates, error fixing etc.) using existing infrastructure, rather than paying some start-up to develop something new.
What is it not good for?
There is a variation on blockchain known as permissioned blockchains, that some people do not agree with calling blockchain at all. In one sense, a blockchain is just a data structure, i.e. a way of organising data, and verifying that it has not been tampered with. In another sense, it is the data structure plus the rules for updating it (i.e. adding a block). In the Bitcoin blockchain, for example, a node gets to add a block to the blockchain by being the first to solve a mathematical puzzle. The key point is that anyone can add blocks, and no-one can deny someone from trying to solve the puzzle, or transacting on the chain. No-one administers the database; the rules for using it are all in the software. In contrast, in a permissioned blockchain, one or several entities authorise access to the database. So, what is gained? We are back to having to trust a third party, rather than the system itself. As another example Centrality, an Auckland start-up, is in talks with the Department of Internal Affairs to develop some kind of national ID system. This implies that we do not trust our own government to keep our data safe. Why else look into a blockchain alternative?
In summary, Blockchain is not magic pixie dust that will solve the problems of people being sneaky. There are many ways to be sneaky without altering a record on a database.
It is very, very good at some things (e.g. cryptocurrencies, smart contracts) but that does not mean it is good for everything. People who make purchasing decisions should think twice, and seek advice from experts, before they commit money to blockchain projects.
- Dr John Williams is a Senior Lecturer in the Department of Marketing, Otago Business School, University of Otago.
