‘Blockchain’ is like ‘post-modernism’: one of those words many of us think we should know but would be horrified to try and explain to friends.
Here’s a secret: we feel the same. Which is why we asked Calvium Technical Director Ben Clayton to explain what blockchain is, what it’s for, and why the technology attracts so much attention.
Here’s what he told us.
First things, first: what is blockchain?
Blockchain is a method of storing data, a little similar to a database. Each piece of data is a ‘block’, and once a block has been written, you can’t modify it.
In computing, it’s very hard to prevent data from being alterable. Even if a file on a computer is read-only, it’s actually very easy for someone with access to the machine to change that data.
Blockchain technology solves this using a ‘hash’. A hash is a number generated from a larger body of data. If any of the data changes, you get a different number. At any time, you can therefore compare the hash against the data to see if it’s been modified or not. Blockchain uses a unique type of hash, which includes the current – or latest – data plus the previous data. In doing so, the technology creates a long chain of blocks linking together, whereby every block can be used to check if the one before it is correct.
The second key feature of blockchain is that it’s decentralised. This means there isn’t just one centralised copy of a blockchain. Instead, there are hundreds of thousands of them all around the world, and the system ensures that any changes that are made to one of them are reflected in all the others, so that they’re synchronised and feature the same data.
At this point, it’s important to distinguish between blockchain and bitcoin, because the two are often confused. Bitcoin is a digital currency – or cryptocurrency – built on blockchain technology. Bitcoin was the first application for blockchain technology and has since been followed by thousands of other cryptocurrencies that also use the platform.
Why is there so much hype around blockchain?
I think blockchain is massively overhyped and, in some cases, a solution looking for a problem.
There are exceptions to this. In terms of cryptocurrency, it’s been brilliant for solving the double-spending problem and having a mostly useable system for spending money anonymously and sending money to people over the internet.
The double-spending problem is a way of ensuring that two people can’t make a transaction using the same cash at the same time. Traditionally, a bank allows customers to use their card in two different places at the same time using a centralised database. Every time you use a credit card, the transaction is logged into a centralised database and the money is deducted for every transaction.
A ‘distributed’ system like blockchain has no single point of truth; there isn’t a single database that holds the answer about who owns which money. Instead, multiple copies exist across the globe. Usually, distributed systems like these suffer from the double-spending problem. If you’ve got one copy of the database in India and another in the UK, and you make a transaction at exactly the same time in both locations, you might end up spending the same money twice. Blockchain prevents this.
Cryptocurrencies like Bitcoin are the most visible application of blockchain technology. How is blockchain beneficial to the financial sector?
Cryptocurrencies are blockchain applications that host financial transactions, and they’re highly valuable if you don’t trust banks. In countries with challenging political situations, bitcoin and similar cryptocurrencies offer a way to hold money that no-one can take away from you. This is because blockchain provides a level of anonymity. If you don’t trust your government or banks, being able to spend money on services without it being directly traceable back to you can be a good thing.
Of course, this also means cryptocurrencies have plenty of nefarious purposes and are widely used on the dark web and Silk Road, which has been closed several times. Anywhere you have total anonymity, you’re going to have negative things happening.
What are some non-financial uses for blockchain technology?
Personally speaking, I’ve seen very little evidence of really successful or convincing uses for blockchain beyond cryptocurrency. I’ve seen lots of press releases and a lot of success stories online, but these are generally focused on the work of consultants selling blockchain services, rather than directly solving a problem with, and using, the technology.
I’m sure other applications do exist so I won’t go so far as to say that there aren’t any – but it’s not easy to find really compelling examples. People are on record saying that blockchain has the potential to ‘profoundly disrupt’ sectors involving intermediaries, like banking, law, real estate and insurance – but whether the technology can make the transition from potential to actual is a question in my mind. Blockchain technology was first posited in 2009. A decade is a long time in technology and no killer blockchain application has emerged yet, other than cryptocurrency.
One interesting idea is ‘smart contracts’. No-one likes spending money on lawyers; the idea behind smart contracts is that if you and I want to make a transaction and we don’t trust each other, we can use a blockchain to set up a smart contract. In this case, the words of the contract will be written into a blockchain so that we can’t change it once we’ve written it up and signed it.
It’s also been suggested that blockchain can be used to ensure the delivery of the document itself – an architectural drawing, for example. The document is written up in the blockchain; each party is notified that this has happened and the contract is deemed ‘fulfilled’ – at which point money is released as a payment, or some other action is taken.
This seems to work quite well for documents that can be sent digitally, but not for other types of transaction. If you were painting my house, for example, who decides when the house has been painted? The blockchain can’t do that for you. You quickly get into a situation where you need an intermediary anyway, to decide when the conditions of the contract are fulfilled. I’d like to be proven wrong, but it seems to me that you end up needing lawyers or banks anyway!
What are the other limitations of the technology?
Underneath it all, blockchain is just a data structure. From a computer science perspective, it’s clever how the data is distributed, but the data itself is relatively simple. It’s just a special kind of distributed write-only database.
Processing data within a blockchain can be very slow. Take bitcoin, for example. Visa can process 24,000 transactions every second. Bitcoin can currently process 7 transactions a second. There’s a website that tracks how long it historically took bitcoin to process transactions, and the average seems to be about 10 minutes, which isn’t good. The most bitcoin has achieved in the last 12 months is 23 transactions per second.
Ripple, a faster cryptocurrency, can handle 1500 transactions per second. That’s still pretty slow compared to Visa. Partly for this reason, there aren’t huge numbers of people buying and selling things with blockchain-based cryptocurrency. It’s massive in terms of hype but not really in terms of high street usage.
The fundamental thing blockchain does well is the decentralised thing. There’s no central point, and that’s useful for a lot of applications but it also has limitations.
One simple example is to compare cryptocurrency with a bank in the event of a fraudulent transaction. The other day I tried to make a transaction and it was blocked. Ten minutes later, the bank called me. It was annoying at the time because it meant I couldn’t buy the thing I wanted to buy, but actually, this is great. It means if someone does try to get my money out, a central authority is monitoring this activity and can reverse it. Banks can reverse transactions, and that’s fundamental to how we ensure money isn’t stolen – and if it is stolen, how we can get it back again.
As far as I’m aware, you can’t do this in a blockchain-based solution, because the whole point of blockchain is that once something is done then no-one can change it. If there’s no central authority, who can decide the transaction was fraudulent and reverse it?
In this way, there have been several high-profile thefts from bitcoin wallets. A cryptocurrency wallet comprises a long series of numbers. If someone has access to this series of numbers, they can use your money. There was recently an attack on the world’s largest source code repository, NPM, where a hacker inserted malicious code into a library that was a sub-sub-sub dependency of some popular libraries used by millions of developers. This code detected if the software was being used for a specific bitcoin wallet application and if it was, it would steal the user’s bitcoins.
As far as I’m aware, it never actually stole any. But bitcoin is an ideal magnet for hackers, because as soon as someone has your bitcoin wallet, there’s no way for bitcoin to know it’s not you using it.
Imagine I transferred someone £1000 last Tuesday to pay for something. If a hacker wants to change that, they could find the block in the blockchain where that transaction was recorded, and they could change it. But for that change not to be rejected by everything else, they’d have to change the block before it, and the block before that, and the one before that, simultaneously, on every copy of the block. This is pretty much impossible.
In this way, bitcoin is less vulnerable to technical hackers trying to undermine the fundamentals of the system, but is likely to be more vulnerable to human issues, because there’s no comeback if a user makes a mistake. There was a story recently of Gerald Cotten, CEO of the Quadriga CX exchange – a website where people buy and sell cryptocurrencies – who had the wallet numbers of the bank written down because he didn’t trust himself to store them online.
Cotten died and no-one knows where he stored this document, which meant $200,000,000 of customer funds have disappeared. Another UK investor discarded the USB stick he’d saved his cryptocurrency to, losing funds worth – at their height – $75,000,000.
Is there anything else we should know?
One final thing to note about bitcoin, specifically, is its environmental impact. This year, bitcoin is due to consume as much electricity as Austria, or 7 million US households. Environmentally, it’s terrible.
It should be said that blockchain isn’t itself the problem here. Bitcoin is particularly bad because it uses an especially hard ‘proof of work’ algorithm. This means is that computers around the world are continually verifying bitcoin transactions while running a math problem which is designed to be extremely hard to find the answer to. If you successfully complete it, you’re given the next block of bitcoins.
These bitcoins are now each worth a huge amount. That’s why this system is using so much electricity – because people around the world are running large server farms in order to ‘win’ the next block to earn the high amounts associated with it.
So, to conclude: blockchain is over-hyped and yet to find a real use, beyond financial speculation?
Overhyped is about right. If our readers find any genuine uses for blockchain technology then we’d love to know. At Calvium, we’ve not yet seen a customer problem that could be solved using the technology, and I think that reflects the world more widely.
Blockchain is an answer, but we’re still looking for the right question!
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