Blockchain Technology: Myths and Misconceptions
In a recent article, we discussed some myths and misconceptions that people have about tokenization. In fact, many of our articles focus on tokenization and token economies partly because we are a blockchain infrastructure company developing a token economy operating system, but primarily because it is through token economies that blockchain becomes practically useful in the real world. However, blockchain technology itself is still commonly misunderstood, so in this article we’ll break down some of the most common misconceptions around blockchain itself.
Before we start, it’s probably worth addressing why these myths exist in the first place. Certainly, some confusion is to be expected from the public about new and emerging digital technologies; but the main reason these myths exist is thanks to the social media hype machine surrounding cryptocurrencies, speculation, and DeFi. While Crypto currencies and their fans are certainly a vital part of the blockchain space, they tend to monopolize the media coverage, and as such color the general impression and understanding of what blockchain technology is, how it works, and what it’s good for.
Myth: Blockchain, Crypto, and Tokens are all basically the same
This is one of the oldest confusions that just can’t seem to go away. A big part of this is the fact that many non-technical media outlets use terms like these interchangeably and further spread the confusion. It’s somewhat understandable, as the blockchain we know today can be traced back to Satoshi Nakamoto’s original Bitcoin whitepaper in 2008. Of course, the idea of distributed ledger technology (DLT) goes back even farther, but that’s a story for another day. It wasn’t until Ethereum made distributed applications (dApps) possible a few years later that blockchain technology started to be talked about as its own thing, separate from cryptocurrencies, and with its own revolutionary promise.
Very simply, blockchain is the technology that makes cryptocurrency and tokens, as well as the act of “tokenizing,” possible. Tokens also don’t necessarily need to be financial in nature, but that in itself is yet another myth. “Crypto” means “cryptocurrency,” which refers to a digital currency, that exists only on a certain blockchain, and neither has nor needs a physical backing. Most importantly, a cryptocurrency doesn’t have a human or institutional issuer; the blockchain it runs on is the issuer, and the algorithms of the chain help to guarantee some value in the crypto.
In contrast, a “token” is a certificate, not unlike a piece of paper, which someone (the issuer) has created. This certificate may or may not have something backing it, but in either case you have to trust the issuer that the token has the value they say it does. Because cryptocurrencies don’t have issuers, you only have to trust the math. We will cover this issue of trust later in this article, because the term “trustless” is often thrown around in relation to blockchain and people tend to misunderstand what that actually means.
Myth: Blockchain Uses are Only Financial
Aside from misunderstanding what blockchain actually is, most of the others myths stem from what is probably the biggest confusion; that blockchain is only good for fintech or financial uses. One of the main reasons for this is again the connection to cryptocurrencies, and the fact that crypto enthusiasts seem to spend the vast majority of their time on Twitter et. al. talking about their preferred coins. While blockchain does make cryptocurrencies possible, it’s true ‘revolutionary’ uses are in areas like supply chain and logistics, digital barter, identity protection, and cyber security. There’s far too many cases to get into here, so check out some of our past articles for more use case breakdowns.
Myth: Blockchain can replace traditional banking & credit cards
In traditional finance, there are hundreds of millions of transactions each day. But most blockchains are limited in their transaction capability; it’s part of the distributed and confirmed nature of each block that makes the tech so safe and secure.
Although there are solutions being developed to address the speed and throughput issues, like the Lightning network for Bitcoin, or just sharding an existing chain to improve its throughput, these solutions are still in their infancy and nobody knows if they will be the ultimate problem solvers.
This leads us to one of blockchain’s biggest issues when compared to a conventional IT infrastructure — transaction speed and cost. Last year, as DeFi became all the rage, the sheer amount of transactions on the Ethereum blockchain, the most popular public chain, drove up the transaction cost so high that it became unaffordable for many to use. But fortunately, as a new technology, you still have options, with different chains, both public and private, as well as consensus mechanisms to choose from.
Myth: Blockchain removes all 3rd parties
Let’s get back to the issue of trust and value. We actually covered this in the Tokenization Myth article, but it’s worth repeating here. Blockchain is usually referred to as “trustless,” with people claiming that it removes the need for middlemen like banks to guarantee a transaction. This is technically true, and indeed a great innovation. However, this statement requires multiple caveats;
While it does indeed remove the need for 3rd parties to guarantee that a transaction takes place, you still need some way to guarantee that the input being transacted actually exists. With cryptocurrencies this is simple, because most addresses are public and so it’s possible to confirm that the other party does indeed have the funds, and that the other party then received them. But when you’re talking about other kinds of digital assets, such as physical asset-backed tokens, then you still have to check the actual asset to confirm its physical condition and value. If someone tokenizes their old Ford but sells it as a Ferrari, blockchain itself isn’t going to keep the buyer from getting defrauded. In short, blockchain makes it easy to digitally trade physical assets, but it doesn’t magically solve issues of physics or human nature that have plagued traders for millennia.
Myth: Blockchain technology fixes everything
This segue’s nicely into our final myth; the over estimation of blockchain’s ability to solve problems. It’s worth saying again that blockchain is just a technology like any other, not a magical miracle cure for every modern problem that some of its more hype-driven proponents claim. Yes, it is revolutionary in many ways, but the simple fact is that blockchain has a specific set of things that it is really good at, and other areas that it just isn’t. Once again social media tends to overhype blockchain, or rather emphasizes the revolutionary aspects at the cost of nuance.
One other overlooked factor is legal clarity. As most of the improvements and big changes blockchain can bring involve rethinking business models, economics, and even things like the concept of ownership, what’s possible on a technological level may not actually be possible legally. And because it’s such a new technology, the legal question is usually murky at best. Take real estate tokenization; in the early days of blockchain, this was one of the most popular examples. By tokenizing a house and then fractionalizing that token into multiple holders, you could share ownership costs while still allowing people to have some sort of equity; this would effectively lower the barrier of entry to the housing market and improve financial inclusion. On paper it’s brilliant, but in reality not only is this model largely impractical, it’s also illegal in many jurisdictions, or at least not explicitly defined. Until there is greater legal clarity, in many cases blockchain pioneers need to look for country’s with clear blockchain laws, like Switzerland and Liechtenstein, or look for creative ways to apply blockchain to existing legal models, like usufruct.
So what is blockchain good at? Lots of things! We like to think of blockchain, and specifically the ability to tokenize, as a bridge that connects the physical and digital worlds. If you have a business case that can leverage tokenization or a token economy in any form, then there’s a good chance that you can benefit from blockchain. Think outside the box here; remember, tokens aren’t necessarily financial products, you can tokenize just about anything. This also goes for government applications like identification, legal entities protecting documents, and even, as we recently discussed, communities who want to organize regional currencies. If you already have a profitable business, you can create revenue sharing models to raise liquidity, or use the blockchain ledger via a secured device for tracking and supply chain applications. You can even use blockchain to securely control connected devices such as smart locks. As long as you have a good understanding of the limits of blockchain, it can be a powerful, and yes, even revolutionary, tool to bridge the physical and digital gap.
At CoreLedger, we believe that blockchain is a practical technical solution to improve and solve a wide variety of issues across industries and sectors, which is why we try to cut through the hype and focus on real world applications, not just what’s technically possible.
CoreLedger’s mission is to help businesses of all sizes quickly and affordably access the benefits of blockchain technology. From issuing a simple token, to enterprise- grade token economy solutions, we have all the tools you need to quickly and affordably integrate blockchain into your business.