Where and how can Blockchain be a better option than the traditional centralized systems? — A straightforward answer for a very common question

After having written this article explaining a variety of consensus mechanisms for Blockchain available today, I have received hundreds of comments and positive feedback from those were struggling to understand what makes cryptocurrencies and blockchain securely working in a decentralized way, once they have clearly understood the foundation supporting Blockchain implementations after having reading my article(thanks for all my readers by the way). However, there are others that are still struggling to understand the benefits of a blockchain vs a traditional model based system, and where blockchain can be really a “breakthrough” when compared to what can be done and achieved by leveraging a centralized system model.

Among dozens of mails I have received regarding the same sort of questions, that is, where Blockchain can be better than those traditional systems that we have been using for decades, I have decided to share one of my answers to one of these colleagues, since I have noticed that this could benefit others that eventually could be questioning themselves about the same topic.

The Question

So, here is a sample question related to this concern mentioned above that I received from a colleague from the UK.

Hi Andre

I’ve read your comprehensive article and thanks for it being most useful and informative. I confess I may need to read it a second time to get a proper understanding of the intricate details and the “Proof of . . .” mechanisms and their pros and cons, but I think I understand the principle of Consensus Mechanisms.

My fundamental question (and the reason for this reply to you) is “what are the real-world applications of a blockchain, and (playing devil’s advocate, if you’ll forgive me, why is it any more than an interesting computer science project?”.

I can easily see its application to virtual currencies like Bitcoin (whose critics would decry it as no more than a baseless speculation mechanism), but I’m struggling to imagine real-world examples of why I’d need a blockchain, or why it’s better, in some way or other, than what already exists.

As an example — suppose I want to send £100 (or 100 Reais) to you. I contact my bank, tell them your banking details, and issue instructions to send the money: it arrives in your account, in due course, via the international banking system. Whilst I can imagine how the equivalent could be achieved via a blockchain in which you and I are both participants, why would doing so be any “better” than the existing mechanism? I speculate that your reply will include that it removes the need for the two banks acting as middlemen, but is that the only advantage?

Or have I imagined a poor example?

Thanks in advance for your expert reply.

The Answer

Here was my answer to him(except the comics that I added to it while writing this article):

First of all, thanks for spending the time to have a look at my article about consensus mechanisms found in some of the most popular Blockchain implementations available today. Hopefully it has helped you and provided some insights about key terminologies that are becoming more and more popular while talking about distributed ledger technologies.

As I initially mentioned in this article, people generally understand(and also associates) the usage of this technology with cryptocurrencies, which is natural indeed, since it was born due to undeniably ingenious invention, to be used as the foundation of the most popular and valuable cryptocurrency we know today: bitcoin.

However, sometimes it is a bit hard(I also agree with you) to get started with Blockchain and imagine something else that is different from the traditional model, based on the very common example related to money exchange between banking accounts. Therefore, let me try to provide you with a few other benefits and examples of usage that Blockchain technology can bring that go beyond the original usage leveraged by Satoshi Nakamoto, the creator of Bitcoin.

The first question one should be asking is: Why is Blockchain so important leading to everyone talking about it? Fundamentally, it cryptographically addresses the problem of shared trust. However, how can entities that don’t trust each other transact?

Before answering this question, let us try to answer the following: What are the current approaches used by financial services companies(the same used in your use case above applies here) for solving this problem:

1) Trusted intermediary, e.g.: Visa/MC, SWIFT, DTCC, EuroClear
Issues: cost, latency, single-point-of-failure
Blockchain can remove the need for intermediary and replace it with cryptographically secure protocols

2) Separate records stored by all the different entities
Issues: reconciliation costly and error prone, does not scale, delayed settlement
Blockchain’s distributed ledger is a single source of truth — no reconciliation needed

In a nutshell, Blockchain as a decentralized, peer-to-peer network with no central or controlling authority, means eliminating intermediaries that results in reduced transaction costs and near real-time transaction execution, which is a way different from what has been done by financial institutions, specially when transferring money overseas, which is exactly what you described in the use case below used to illustrate your question. Additionally, as a distributed ledger based technology, where all participants maintain a copy of the ledger, it eliminates manual efforts and delays due to reconciliation needs since data consistency is a key attribute of the distributed ledger. Often, data integration between systems of record (SORs) is driven by offline or batch reconciliation processes characterized by delays and manual exception handling. As such, Blockchain can help by using the cryptographically-secured consensus protocols that assure validation and agreement by all relevant parties, as well as real-time replication of data to each participant’s copy of the ledger.

So, getting back to the first question, Blockchain is important and different from what already exists because it enables distributed and autonomous marketplaces, reduces friction in business transactions and reconciliations, securely maintain and share decentralized records, which can be used for a variety of use cases, such as the provenance of products, documents, materials, etc, which are not necessarily related only to the financial perspective as can be noticed, but can be applied for a countless number of use cases, which by the way, I have put them together below for you convenience.

Potential Use Cases for Blockchain

Here is a sample list of potential use cases(of course not limited only to the ones listed below) to which you are likely to achieve real benefits by leveraging the key blockchain capabilities such as single source of truth, trusted transactions, immutable ledger store and near-real time data sharing, as highlighted above.

Supply Chain

• Genealogy and traceability of parts, components, ingredients
• Maintenance parts tracking in multi-layered distribution
• Parts & maintenance tracking for aircraft & other regulated assets
• Farm-to-table food provenance
• Country of origin traceability
• Electronic compliance records
• Quality control records
• Tamper-proof IoT sensor data, non-repudiation of monitored activities

Public Sector

• Government records (titles, birth certificates, licenses, etc.) sharing
• Customs (import/export licensing, excise taxes)
• Regulatory certifications (food, pharma, etc.)
• Procurement/Acquisitions
• Citizen services, e.g., benefits, multi-agency programs

Healthcare

• Electronic Health Record
• Service provider credential management
• Clinical Tamper-proof IoT sensor data, non-repudiation of monitored activities, trials
• Anti-counterfeit track & trace for drugs
• Cold chain track & trace
• Integration with IoT devices monitoring health or equipment

Telecom

• Roaming & Interconnect billing
• 3rd Party Service Providers
• eSIM

Key Characteristics to Remember

After reviewing the answer, we could summarize some of the key characteristics that make Blockchain unique, different, better and more innovative than a traditional centralized model based system.

Decentralized and Distributed (Ledger Storage & Integrity)

• Maintains distributed ledger of facts and history of the updates
• All participants see consistent data
• Distributed among participants
• Updates replicated across participants
• Authorized participants access data

Irreversible and Immutable (Validated/Non-Repudiable Transactions)

• Each new block contains a hash of the previous block creating the chain
• All records are encrypted, and only those authorized with corresponding keys can view the data
• Records cannot be undetectably altered or deleted, only appended
• Consensus from a subset of nodes on new blocks/transactions
• Existence and validity of the record can not be denied
• When consensus is reached under network’s policies, transactions and their results are grouped into blocks, which are appended to the ledger with cryptographically secured hashes for immutability

Near Real Time (Transactions verified and settled in minutes versus days)

• Parties interact directly. No intermediaries
• Changes to the ledger are made by smart contracts (business logic) when triggered by transactions from external applications
• Participants execute smart contracts on the validating nodes (peers) and follow consensus protocols to verify results

Blockchain is not a solution to all problems!

We used to say “there is an app for that” — but nowadays it seems there is a blockchain for everything. So, what is Blockchain good for? Besides the hype around Bitcoin and the people it made rich, what are the real applications?

The Hype around Blockchain

A lot of what we hear about the Blockchain is not what it is doing, but what it can do. In many ways, you can do with centralized systems what Blockchain promises to do — with one core difference; trust. That is the big advantage for Blockchain, however as stated, blockchain is not a silver bullet to solve all use cases, then there are a few useful questions that one should be asking to determine blockchain applicability. So, if your enterprises/customers can answer YES to these questions below, then it is likely that Blockchain can be a good fit for them. So, here are the questions to be used as a guideline for Blockchain selection (or not):

• Is my business process pre-dominantly cross-departmental/cross-organizational?
• Are there cross-system discrepancies that slow down the business?
• Is there less than full trust among transacting parties?
• Does it involve intermediaries, possibly charging expensive fees, adding risk or delay?
• Does it require periodic offline (batch) reconciliations?
• Is there a need to improve traceability or audit trail?
• Do we need real time visibility of the current state of multi-party transaction?
• Can I improve a multi-party business process by automating certain steps in it?

Although Blockchain technology is well-suited to record certain kinds of information, traditional systems such as Database systems are better suited for other kinds of information. It is crucial for every organization to understand what it wants from these different approaches, and gauge this against the strengths and vulnerabilities of each kind of solution before selecting one.

Conclusion

Blockchain is speculated, but it has great potential. The tech is getting better and better, and there are solutions evolving for many of the problems I have mentioned above. What is imperative is to see if a proposed Blockchain project is really a solution for the mentioned problems (i.e. it cannot be accomplished without using Blockchain), or is just trying to take advantage of the hype.

Please clap on this article if it has helped you to understand a bit about blockchain and where and how it can be properly applied for potential use cases, as well as understand the differences between it versus a traditional centralized system model. And please leave a comment and state your feedback. This is very important to help me keep writing new articles about this sort of content.