Six Myths about Blockchain Technology
Slow, but tamper-proof? There are a lot of myths about the blockchain. A number of companies claim to be able to change the world with their blockchain solutions. Blockchain technology does not make all our problems disappear — however, so-called distributed ledgers offer valid use cases in many areas. Now that mm1 has analyzed the status quo of blockchain projects in the Swiss financial sector with the Blockchain Laboratory, we would like to eliminate the most common errors in the following.
An article by Severin Kranz and Franziska Foeller
1. Blockchain = Bitcoin
With his whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System”, Satoshi Nakamoto for the first time technically prevented the problem of dual use of digital assets and thus created Bitcoin as a digital means of payment. The decentralized data structure, which is subject to the Bitcoin, is today known under the term Blockchain and enables secure data storage of transactions of all kinds without regulatory intermediaries. The blockchain is therefore much more than a digital currency.
2. Data on a blockchain cannot be tampered with
Public blockchains such as Bitcoin or Ethereum offer high data integrity due to distributed data storage, a large number of network nodes and the common validation of transactions. Data manipulation in a traditional blockchain (proof-of-work) requires more than half the computing power of the entire network and is therefore considered unlikely. Nevertheless, hacker attacks on various blockchains occur from time to time, some of which are successful. In general, blockchains with fewer network nodes are easier to attack. In addition, program errors (especially with smart contracts) or the compromise of access data occur more frequently. Private blockchains often validate transactions by participants with admin privileges who are able to damage the network. The security of a blockchain therefore depends strongly on its type and architecture and is in direct competition with the efficiency of the respective platform.
3. A blockchain is slow and needs a lot of energy
A common argument against Bitcoin and Blockchain is the high energy consumption. This is based on the joint transaction validation of the so-called miners by solving complex cryptographic computing tasks. While the proof-of-work algorithm is considered secure, it requires low efficiency and high energy consumption. To solve this problem, however, there are a number of approaches. Numerous programmers are working on the use of alternative algorithms (e.g. proof-of-stake) for the validation of transactions or are trying to achieve energy efficiency through higher transaction throughput by restricting and controlling the network participants (e.g. private or permissioned blockchains).
4. All data on a blockchain is public
As the name implies, transactions on a public blockchain can be viewed without restriction at any time. Although participants interact through pseudonyms, transactions can theoretically be traced back to their origin ( using a lot of effort). Private or permissioned blockchains try to increase privacy by controlling the participants or role concepts. Public blockchain projects work on encryption techniques or on solutions where certain transactions are carried out outside the blockchain to increase privacy. In general, there is a trade-off between security and privacy. The choice of the appropriate data architecture therefore depends strongly on the respective use case.
5. Blockchain projects are not regulated
A blockchain creates trust between unknown players and can thus partially replace intermediaries such as banks and insurers. As this is still a very young technology, the market is not yet regulated. Nevertheless, crypto exchanges must comply with existing legislation when issuing crypto currencies and thus comply with KYC (know your customer) and AML (anti-money laundring) processes. Regulators are observing the market and are already implementing initial measures. For example, Switzerland and Germany would like to adapt existing legislation selectively in order to address open questions pragmatically. Countries such as Liechtenstein, Malta and Luxembourg, on the other hand, regulate the new economic sector with a dedicated law. It is important for regulators to stay close to current technological developments and to avoid over-regulation at this early stage.
6. I need a blockchain for my project
Triggered by the hype surrounding Blockchain and Distributed Ledger Technologies, numerous companies from a wide variety of sectors launched pilot projects for the application of blockchain last year. Although it is exemplary to familiarize oneself with the new technology, existing use cases will have to be examined in a structured manner in the future. In general, the use of a blockchain makes sense if trust between different parties is to be established via a common database and a high level of security and thus data integrity is required.
mm1, the consultancy for connected business supports companies from the idea generation to the choice of technology and partners to the realisation of your blockchain initiatives.
This article is part of an article series on blockchain technology. Read more articles from our blockchain team:
- Blockchain in 100 words
- 6 Myths about blockchain (this story)
- Different types of Blockchains
- The token economy
- Application areas of blockchain technology
- mm1 blockchain use case assessment
- Blockchain in the mobility sector
- mm1 roadmap for blockchain initiatives
Severin Kranz has worked for several years as a consultant in the Fintech sector and in asset management. Since 2015 he has also been intensively involved with crypto currencies and distributed ledger technologies. Through his Master in Business Innovation at the University of St. Gallen, he has specialized in business model innovations as well as human-centered innovations through design thinking.
Franziska Foeller is an experienced Consultant, managing complex and innovative projects, especially in the area of mobility. Her technical and methodical expertise within the automotive industry and the digital transformation allows her to delvelop new and value-oriented solutions, while embracing new technologies such as blockchain. This is complemented by her intercultural experience she gained during her stay in China and her work in international and diverse teams.
Sources:
Brandenberg, L. (2018, 15. Dezember). Der Bund will massvolle Regulierung und verzichtet auf ein Blockchain-Gesetz | St.Galler Tagblatt. Abgerufen 20. März, 2019, von https://www.tagblatt.ch/wirtschaft/bund-verzichtet-auf-blockchain-gesetz-ld.107862
Busby, M. (2018, 1. Februar). Blockchain is this year’s buzzword — but can it outlive the hype? Abgerufen 3. März, 2019, von https://www.theguardian.com/technology/2018/jan/30/blockchain-buzzword-hype-open-source-ledger-bitcoin
Nakamoto, S. (2008). Bitcoin: A peer-to-peer electronic cash system
Weizsäcker, F. v. (2018, 26. September). Acht Missverständnisse über Blockchain. Abgerufen 28. Januar, 2019, von https://netzpolitik.org/2018/acht-missverstaendnisse-ueber-blockchain/
