Blockchain has been the hottest buzzword for the past few years. The hype is so intense that many private and institutional investors are pouring millions into this technology as the next big thing. But are blockchain virtues stronger than blockchain challenges?
It is an important question, especially for those considering investing in blockchain development. Believing that blockchain is the future, investors might place money into a blockchain product without a complete understanding of the potential benefits and limitations of this technology.
Likewise, a software company might push forward with a blockchain project even if the end product will add little value to an already competitive market. Becoming more knowledgeable about the technology, assessing the blockchain viability in advance and involving blockchain consultants is a sound way to avoid such failures.
In many cases, other technologies perform just as well or even better than blockchain. When developing a solution, it is important to ask whether blockchain offers a competitive advantage in the given situation.
Decentralization is not a must
Cryptocurrencies have their benefits. A cryptocurrency such as Bitcoin is inherently decentralized. When there is no central authority, such as a government, nobody can influence the network. Could Bitcoin be decentralized if it ran through central servers? There would be a risk that the parties controlling the servers would somehow manipulate the cryptocurrency and community.
Consider YouTube’s video streaming services. It might be possible to set up a blockchain to stream videos, but if we could turn to a central authority like Alphabet’s YouTube to administer the network, is a blockchain-driven solution needed?
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Distributed processing may offer declining benefits
Is distributed processing important when computing power is cheap? In the past, setting up server farms and mainframes was cost-inhibitive, even for large organizations. Over time, however, the costs for high-end PCs, servers and mainframes have declined dramatically. These devices offer compelling and affordable blockchain alternatives.
One way to consider processing power expenses is to look at the cost to process gigaflops, or one billion floating-point operations per second. In other words, how much does it cost to process 1 billion operations? In 1984, it would have cost roughly $18.5 billion. As of 2022, it may cost a couple of cents. As processors become cheaper and more powerful, it is fair to wonder if distributed processing will add value to your particular project.
Companies that use massive amounts of computing power, like Amazon, set up large processing farms. Yet these organizations also have access to vast resources, and computing power is rarely a problem. Meanwhile, high-end PCs and more affordable server solutions are often enough to meet the needs of enterprises and those who would have needed to pay considerable amounts to access or set up powerful servers in the past.
Further, some companies design ways to store personal and corporate data on other parties’ hard drives.
Yet it is risky. What if the other party’s storage drives are damaged? What if the data-storing parties figure out a way to hack the encryption? Any party considering blockchain-based data storage will face a mistrust dilemma—can they fully trust the other party with their data?
Meanwhile, storage costs per gigabyte have plummeted. In 1990, a gigabyte of storage space cost $11,500. As of 2022, a gigabyte costs a mere 2 cents. Given the dramatic decline in storage costs, a blockchain-based cloud storage system may make little economic sense, even for parties who have to store massive amounts of data.
Blockchain is less useful when identities are known
One of the key advantages of blockchain is coordinating transactions between anonymous parties. For example, in a Bitcoin transaction, neither party knows the actual identity of the other party. If scammed, the wronged party would have little recourse because they would not know the scammer’s identity.
Blockchain reduces these risks by verifying the transaction on both ends. If someone wants to sell Bitcoin, the blockchain will first verify that the seller has the necessary funds and that they have not been traded. The seller will not confirm the transaction, by providing their 64-digit long private key, until they get the stipulated amount.
Thus, this system allows two mutually mistrusting parties to carry out a complex transaction without knowing their identities.
In instances where both parties know each other’s identities, the benefits are less obvious. If a business sends payment to another business but does not get the products or services in return, the wronged party will have legal recourse.
Conclusion: blockchain does not fit every project
From nonprofits and governments to banking and healthcare organizations, blockchain technology expanded adoption to almost every industry sector.
Though blockchain has vast technological potential due to security and trust, some of its benefits, such as decentralization or distributed processing, can turn into limitations.
Companies should ensure that blockchain’s specific applications align with its competitive advantages. Haphazardly applying blockchain to areas where it offers little-to-no benefit may result in wasted money, time and resources.
