Promises and perils of the blockchain technology

Promises and perils of the blockchain technology

The financial crisis of 2008 left the world with devastated economies and a grave distrust of financial markets. Amidst this huge crisis that led to layoffs, bankruptcies and tremendous destruction, a research paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” by Satoshi Nakamoto, gained grounds for its invention of the blockchain and the cryptocurrency of Bitcoin. Its promise of a tamper-proof and transparent financial instrument attracted businesses, banks and even governments. But today after over a decade, we have come a long way from using blockchain as just a ‘digital currency’ to driving the entire supply chain. So, what is the future of blockchain? And can it fulfill its promise of transparency, accountability and traceability?

What exactly is a blockchain?

The blockchain is a distributed ledger system to store data securely. Every data entry is stored as a block on a decentralized server network made of multiple computers called nodes. The block contains the data, an encrypted id called hash and a pointer to the next block. This structure allows it to form a linear chain. One can only add blocks to the network and once it’s added, it can’t be altered (possible in some cases) or changed. Each block is added after taking the consensus of numerous users in the network.

The consensus is determined by an algorithm, using which each user (also called miner) verifies the transaction by solving a cryptographic puzzle. The user in need for a new block pays a share of cryptocurrency to the users validating his request for a new block. Although this is the general structure of how a cryptocurrency system operates, each organisation has its different procedure; Bitcoin focuses on “Digital Money” while Ethereum works on “Smart Contracts” which give an additional feature of building Decentralized Applications (DApps).

Towards every walk of life

Previously the only application of blockchain was digital money. Over time it has been majorly used in the supply chain and digital verification systems. However presently, the blockchain community has made large developments in using this technology across all domains of our life. In the entertainment industry, companies like LIVE are making crowdfunding possible on the blockchain. Music giant Spotify is also trying to better connect artists and licensing agreements with the tracks using blockchain Teams like Aidcoin have revolutionized the anonymous charity process using decentralized apps. MIT Media Labs have also come up with MedRec that stores Electronic Health Records on the blockchain. These records can be accessed by any hospital in the network to know a patient’s history.

In the present day, this technology has gained trust to an extent that states such as Dubai and Estonia claim to entrust the entire nation’s identities and documents with the blockchain. Blockchain is also being used to exchange carbon credits for green energy.

Blockchain is gaining fame as a secure tamper-proof storage system but the question is if it living up to its promise or not.

Storing wrong data forever

In Supply Chain Management, the entire life cycle of a product, from manufacturing plants to reaching the retail stores, is recorded using the permanent data ledgers of the blockchain. This can be used to trace the origins and shipments of any product.

But the sensors and systems of major production plants are old and the guarantee that correct data is entered in the blockchain is very less. Corrupt data entries could also be due to human errors in the network. The corrupt data if once entered in a blockchain will stay there forever. Therefore, it is necessary to have high precision instruments that can be automated.

Restrictions within nations and networks

The dreams of a unified currency which will enable seamless transactions across borders are yet to be fulfilled. If a country does not permit use of blockchain, the use of simple applications like supply chain and smart contracts becomes very difficult. Nations such as China and Taiwan have prohibited the system and do not allow the use of cryptocurrencies. Some, like India, are yet to give a clear stance.

In response to the questions raised in the Parliament of India, Shri Pon Radhakrishnan, Minister of State for Financial Affairs in his recent reportdeclared,

“The government has not recognized cryptocurrencies as legal tender. The issue of permitting trading in cryptocurrencies is currently under examination by an inter-ministerial committee.”

Since the use of cryptocurrencies is not allowed, some countries in the supply chain or chain of other transactions might not be able to be a part of a blockchain network. Hence the end to end networks cannot be established.

Another issue is that there are many types of blockchain, each taking a different approach to the same end goal of efficient data storage. The lack of interoperability restricts consumers and traders to exchange goods and services with those who are not on the same blockchain.

Volatile markets and wary investors

The bitcoin boom in the winter of 2017 led to skyrocketing prices of cryptocurrencies. This buzz led many people to invest in these crypto coins. But as soon as the wave passed, the values dropped sharply by almost 75%within six months. Many people lost their hard earned savings in the boom and are yet to recover from the setback of this volatile market.

These days, fraudulent startups have also become a big nuisance. As investors clamour in to bet their money early-on in blockchain startups, there have been numerous cases when the team ran away with their investors’ money. In recent times, Confido [7] is one of the most talked about example. The co founders pulled an exit scam after raising around a half a million USD in cryptocurrencies. These losses have led to a slight hesitation of investors in the blockchain based startups.

Brad Garlinghouse, CEO of the fourth largest cryptocurrency, Ripple, [8] said in an interview that a lot of Initial Coin Offerings, or the IPOs of cryptocurrencies, are frauds and people must study the company well before investing.

Trust Issues

The Ethereum Project, launched in 2015, introduced additional features in the prevalent Bitcoin system. It deploys smart contracts into decentralized applications (Dapps) in addition to its own language Solidity. Its currency unit Ether has become the second largest blockchain project in terms of market cap. However, on the 5th of January 2019, many reports claimed that the entire Ethereum Classic (ETC) blockchain was hacked. The assurance of a tamper-proof system was completely quashed. The problem is that if any user gets control over more than 51% of the computing power or blocks in the blockchain then (s)he can add a different branch of blocks to hack the complete data. The hack caused losses worth 219,500 ETC (~$1.1M) to multiple companies that deployed their software on the ETC framework. As the losses were not as high, the blockchain community has survived with a tale to tell. Ethereum’s newer products have also shifted from the conventional proof of work consensus method to the proof of stake and concept methods.

The road ahead…

Despite all the issues, the road is very long for this tech and such setbacks will only mean that the research community will be coming with solutions to the above problems sooner or later. There are startups and ventures already working to solve the problems mentioned above. Efforts have already been made to hold elections on the blockchain. With many candidates funding their election campaigns using cryptocurrencies, the elections are slowly moving towards an entirely blockchain based experience.

Startups like VeChain and WaltonChain are building different methods to improve the supply chain. The recent GDPR Laws by the European Union shows that they are strongly deliberating over the uses of blockchain across borders. Regulator companies have been able to reduce frauds to quite an extent. The recent research on consensus algorithms and cryptography show that there is more to the tech than meets the eye and it is a mere matter of time when blockchain will take over our secret diaries and bank lockers! Has the blockchain been able to fulfil its promises? Somewhat. But is it going to fail in the long term? Probably not!

 
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