Blockchain Really Only Does One Thing Well

by Tim Sloane 0

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This article in The Conversation was written by Stephen Wilson, a PhD Candidate at UNSW Australia and correctly identifies many of the misconceptions people hold regarding the Blockchain. Regrettably it doesn’t sufficiently describe or evaluate the current state of Blockchain development.

The article correctly describes the attributes of the Blockchain as implemented in Bitcoin, but starts going in the wrong direction after making this observation:

“The enthusiasm for crypto-currency innovation has proven infectious; the feeling is that if blockchain “squared the circle” in payments, then it must have untold powers in other domains.”.

The problem here is that the vast majority of investments being made in Blockchain today is to re-engineer the Bitcoin Blockchain construct into something that can be used for other applications. In fact, the bigger problem from Mercator’s perspective is that these many different designs are still called Blockchain, despite having thrown out core functions associated with the Bitcoin Blockchain. As an example, many implementations today have eliminated Proof of Work to speed up transactions between trusted partners. Call that product what you will, it isn’t anything like the Bitcoin Blockchain. Others utilize the full Bitcoin Blockchain to protect assets that are external to the Blockchain trust model. This is fine, as long as everyone recognizes that assets not created by the software may actually be counterfeits if trusted parties haven’t validated authenticity.

Next the article takes a specific look at Blockchain solutions associated with managing identity:

“In particular, many commentators have promoted blockchain for identity management.

The conspicuous thing about proposals to put “identity on the blockchain” is that they overwhelmingly come from blockchain advocates and not identity management experts. What’s missing in the great majority of blockchain-for-identity proposals – and indeed in most of the non-payments use cases – is a careful statement of the problem and proper analysis of why distributed consensus is important.”

Mercator is aware of identity experts that are building solutions on Blockchain, but we would agree with the statement that these lack a “proper analysis of why distributed consensus is important.” In fact, we would add that there are other aspects of typical Blockchain operation that may also not be required in an identity solution, such as pruning of the data structure using Merkel Tree technology. Or one could look at this as a business problem and ask, how will transferring the solution from a database construct to a Blockchain construct overcome the primary challenge associated with all identity solutions – gaining adoption by consumers, businesses, and government?

The article then points out that while research is taking place to free the Blockchain from Bitcoin, that progress has been slow:

“And it’s best to remember that the incentive to run blockchain nodes comes from the mining reward. Take bitcoin away from non-payment use cases and it’s unclear who will pay for the infrastructure, and how. The original blockchain is not separable from bitcoin. Now, there is certainly plenty of fresh research and development being done on alternative consensus mechanisms and participation models. But nothing yet is up and running like the established public blockchain, and nothing else has yet been proven with blockchain’s security properties.

Blockchain does just one thing: it establishes the order of entries in a distributed ledger, so as to prevent double spend without an umpire. The truth of the contents of the ledger is an entirely different matter. Blockchain doesn’t magically make the entries themselves trustworthy, let alone the people that created them.”

The limitations identified are fair, but doesn’t acknowledge that many of the alternative approaches to the Bitcoin Blockchain are designed to be operated between trusted parties. If a Blockchain implementation is applied to the proper use case and is deployed in a trust model already well established in financial services, such as the consortium model, then perhaps these limitations are acceptable. Then again, perhaps the collusion that led to the Libor incident should be considered and the full Bitcoin Proof of Work re-instated!

Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group

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