Blockchain is Not a Silver Bullet
Take a guess. What is gaining so much popularity that they were talking about it on the radio morning news, that two taxi drivers mentioned it to me last month, and that almost all the customers I talk to have a question on it? Blockchain.
Can I use Blockchain to pay my bills? Can I use Blockchain to replace my transactional database? Can I use Blockchain to run my business?
It seems to be one of the current buzzwords, and even if I am a big proponent of Blockchain technologies, it is always weird to hear such enthusiasm from so many different people. Blockchain can help solve some specific business problems, but it is not the universal answer to all business needs. So let’s take a look at look at use cases where Blockchain may not be the right answer.
Data confidentiality requirements are really strict.
Blockchain can handle privacy and confidentiality through different built-in mechanisms (e.g. encryption, signature, channels, etc…). But by design, data is distributed on nodes across different locations, so potentially across different countries (data residency cannot easily be enforced). Even if data is encrypted, it circulates, and it is stored on all the nodes that have a copy of the shared ledger. As of today, most regulation entities for data privacy do not recognize Blockchain solutions as compliant with their requirements.
The use of external services is required to process transactions
In Blockchain, transactions are handled and processed by smart contracts. Smart contracts are designed to ensure consistent execution over time, and they are not meant to access external sources of evolving data. A mechanism exists to push information to a Blockchain, though external entities called “oracles”. But a smart contract should be deterministic, which means that it should not rely on external data, and that the transactional operation performed on different nodes should return the same result.
A large amount of data must be stored on the ledger
Blockchain is based on a decentralized database technology. The entire ledger is stored across multiple nodes, and every single change has to be replicated. The beauty of a shared ledger is that everyone get access to the information it contains. But replication has a cost. Real-time or near real-time replication of high number of transactions per second is difficult to achieve. So if the information to store is quite large, and if a very high transaction rate is critical, then a Blockchain system may not be the most efficient solution.
The business processes change frequently
Blockchain business processes are predefined and stored on the network. This is really useful to ensure that business rules are always applied the same way. When a transaction happens, specific rules attached to it are then automatically executed. But if the rules to govern transactions change very frequently, then they must be recreated and redeployed. In such scenarios, a Blockchain solution may not be the best approach, as ability to constantly and quickly apply changes is limited.
Digital payment at scale
This may be a controversial topic, but can Bitcoin really support digital payment needs on a large scale? In its current form, given the energy consumption needed for coin mining (Proof-of-Work consensus), Bitcoin may not be sustainable (nevertheless, we can imagine that an evolution of the current Bitcoin mechanism could solve that problem). I am absolutely not a Bitcoin expert, but if some recent reports I have seen are true, the amount of energy needed to run Bitcoin (~45 TWh per year) is equivalent to the energy consumption of countries such as Iraq, Peru, or Singapore. The average energy used per Bitcoin transaction is enough to power one U.S. household for more than a week (see Digiconomist reports on bitcoin energy consumption )
However, Bitcoin is still away from a large majority of the business transactions as is it mostly used for investment, funding, and speculation. So what would happen if suddenly Bitcoin was used for daily payments around the world? What would be the amount of energy needed to support worldwide Bitcoin transactions? Would it be really viable to dedicate so much energy to a digital currency model?
Blockchain is a compelling new approach to address some specific business problems. The Digital Ledger Technology (DLT) is a promising concept for multiple domains (Financial Services, Governments, Accounting, Healthcare, Supply Chain, etc…). But Blockchain cannot replace all existing systems. It has its limitations and one must consider very carefully the pros and cons of a Blockchain system before beginning an adoption journey.
In another post coming soon, I will focus on some specific supply chain use cases where Blockchain technologies could play an interesting role.
