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The Difficult Truth about Blockchain

Last updated on February 4th, 2018 at 08:09 am

No new technology since the Internet itself has created such excitement as blockchain. Designed to run unregulated electronic cash, the blockchain is thought by many to have far greater potential. Blockchain is definitely important, and provides valuable inspiration for brand new digital infrastructure.  But it’s a lot like the Wright Brothers Flyer, the first powered aeroplane: wondrous but impractical.

Not quite eight years ago, Bitcoin was launched by the mysterious and still unknown Satoshi Nakamoto.  The first electronic cash that doesn’t need a digital reserve, Bitcoin works by broadcasting every single transaction to a global community of participating servers which vote on the order in which transactions appear, to stop double spending.  The “blockchain” is a specially encrypted, authoritative record of all Bitcoin (BTC) movements.

With no central administrator, the continuous arbitration of blockchain entries requires a massive peer-to-peer network to resist fraud or manipulation.  The incentive to participate is a random reward, which currently stands at 25 BTC roughly every 10 minutes.  The odds of winning or “mining” the reward go up with the amount of computing power you bring to the network.

Blockchain account holders operate “wallet” applications which show their balance and lets them spend it, moving BTC to other accounts.  Counter-intuitively, these wallets actually hold no money; all they do is control account holders’ private keys.  In fact Bitcoin is entirely ethereal.  There are no coins, even virtual ones!  The blockchain only records the movement of BTC, and calculates virtual balances as the difference between what people have spent and what they’ve been paid.

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, including land registries, medical records, voting and identity management.

But when you look closely, the blockchain just doesn’t do what many think it does.  There is nothing “on” the blockchain.  All it holds is a trace of Bitcoin movements and associated metadata.  To put anything metaphorically on the blockchain requires additional technologies and processes.  Blockchain only just one thing: it establishes the order of entries in a distributed ledger.  The contents of the ledger is an entirely different matter.  For anything of value other than BTC to be transacted via the blockchain requires additional layers of agents, third parties and auditors – all those things the anarchist Satoshi Nakamoto was trying to get rid of.

Few businesses have escaped the call to evaluate blockchain technologies.  If you are persuaded to have a look, first re-examine your security and record keeping needs.  Beware of what blockchain does, and all the things it can’t do.  If your business is decentralised and your assets are purely digital, then blockchain has a lot to offer, but otherwise, it’s just another database.

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Steve Wilson
Steve Wilsonhttp://www.constellationr.com/
Steve Wilson has worked in digital identity and data privacy for over 20 years. He leads Digital Safety and Privacy at San Francisco-based Constellation Research. Steve’s research agenda includes authentication technologies, biometrics, blockchain, the ecology of identity, and the complex relationship between privacy and security. See http://constellationr.com/users/swilson.