Blockchain. What is that?
FRIEDEMANN BRENNEIS, RADIO AND ONLINE JOURNALIST
No other word fascinates the financial industry quite like “Blockchain”. Some see it as a technology offering great potential for the future, while others dismiss it as completely exaggerated hype. As so often, the future lies somewhere in the middle.
Technically, Blockchain is doubtless a ground-breaking innovation which will not only alter the financial industry permanently. Yet, it is far from being able to live up to all the promises that are made in its name. For Blockchain is both:brilliant and insufficient at the same time – at least for the time being. “Blockchain” is the “mot du jour” - and not only in the financial industry. Thus, the health care industry will be staging a Blockchain meeting in the United States in early October, while UNICEF is considering using the technology to register children in war and crisis regions and NATO itself recently organised a competition to gather ideas for the military use of Blockchain technology. But, how justified is all this hype?
Anyone seeking an answer to the question first needs to consider what Blockchain is, how it works and, most importantly of all, what problems it can even solve. This, namely, is the key to separating the overblown Blockchain hype from the true potential offered by this technology. First of all, it is important to realise that Blockchain does not solve any specific problems in the financial industry. Rather, it is the solution for a problem in computer theory: the problem of the Byzantine generals. This is remarkable in that it has hitherto always been assumed that there is no solution to this problem. What it says is that it is impossible to create consensus in a decentralised network as you can never know what participant is playing by the rules and what participant is not.
Welcome to the Internet of values
Just how relevant this problem is in our daily lives is demonstrated by the Internet, the world’s largest distributed network. After all, it has long since been possible to send and manage data and information online free of any problems using servers, clouds and also distributed peer-to-peer networks. However, problems arise as soon as this data contains any value. If, for example, you want to send money to someone online, you still need an intermediary who verifies the genuineness of the transaction, executes it and guarantees that the money flows to the intended recipient. Although this process works, it is complex and therefore slow and expensive. What is more, it is exposed to security vulnerabilities as central institutions, such as the bank’s servers, constitute single points of failure on which intruders can focus their efforts and wreak the greatest possible harm.
By contrast, Blockchain is a database which has overcome the problem of the Byzantine generals. The upshot of this is that for the first time it is possible to manage unique data directly on the Internet without the need for any intermediaries. Data containing value, e.g. money, election votes, certificates, patents, to mention just a few things – Blockchain adds entirely new technical functions to the Internet. At the same time, it makes the previous complex validation processes requiring intermediaries swifter, cheaper and more secure.
Security, in particular, offers an impressive success story. Although Blockchain is currently managing assets valued in the double-digit billions and its source code is freely available on the Internet, no one has yet managed to compromise the system in more than seven-and-a-half years. On the contrary, the Bitcoin network that Blockchain operates is growing steadily and is now the world’s most powerful network.
No Bitcoin without Blockchain
Yet, how does Blockchain manage to solve the problem of the Byzantine generals? What does it do differently from all the researchers and developers who have never been able to solve the problem over many decades? The answer is Bitcoin. Although this digital money is not popular in the financial industry in particular, it is the key to Blockchain’s success. The truth of the matter is that Blockchain has not really solved the problem of the Byzantine generals. Rather, it simply works around it by rewarding those who help to maintain the network and preserve its integrity with Bitcoins. This provides the economic incentive necessary to create a collective bulwark in the form of computer power making it almost possible for potential attackers to overcome it. As Blockchain inherently does not have any single points of failure, attacks must always be aimed at the entire network.
To date, however, no one has been able to do this. As a result, Blockchain data is considered to be safe from censure and manipulation. No government, no institution, no company and no individual can change anything that ever enters Blockchain. Only the network itself can add anything to existing entries. These two characteristics, the documentation of all entries ever made in connection with complete resistance to censure and manipulation make Blockchain highly suitable for many applications all around the world. And as Blockchain technology is freely available at no charge, it is already being used by millions of people, who are experimenting with the possibilities offered by this technology.
So this makes Blockchain a technical innovation which solves a very specific problem of distributed networks and therefore offers enormous potential as it opens up a variety of new options for using the Internet. Thus, unique and valuable data can be managed quickly, inexpensively and securely via the Internet, obviating the need for many services by intermediaries, for example. At the same time, Bitcoins are of elemental importance for the proper functioning of Blockchain as it requires its own internal economic system.
Blockchain - brilliant but not the holy grail
So, Blockchain is a solution for a very specific problem, namely how to create consensus in a distributed network. In this way, it has achieved something unprecedented. Yet, this has its price. Compared with previous database solutions, Blockchain is anything but efficient. It is criticised for being resource-hungry and also for the fact that the technology cannot be scaled quickly enough to meet the requirements of a global economy.
Indeed, Bitcoin/Blockchain hit the limits of its growth some time ago in view of its inability to process more than seven transactions a second even though thousands of computers all around the world do nothing else apart from working permanently on Blockchain. This is far more than would be necessary to manage a comparable database in a centralised network. Yet, while Blockchain currently does not live up to all the ideals, it would be a mistake to see this status quo as being static. The fact that it cannot yet do everything expected of it today does not mean that it won’t be able to tomorrow. This is because Blockchain is not a product but a process and hardly any other technology is currently being developed more quickly and intensively by businesses, scientists and a global community.
Moreover, the current debate frequently neglects to realise that Blockchain is not a one-size-fits-all solution for all problems. Rather, it must be seen as a type of special tool. After all, it was originally created for only a single purpose: to establish digital money and to manage it on the Internet entirely without governments and banks. This is precisely what Blockchain has been doing for seven-and-a-half years with growing success. And we are only at the very beginning of finding out what else it is capable of.