Blockchain is the current hype. For those who still aren’t familiar with it, it is a ‘distributed ledger’ for recording transactions between various parties. The technology behind this ensures that this is done in a fraud-proof way. The validation code that is generated depends on all the previous codes and on the details of the transaction itself. If these details change, the calculated code is no longer correct, and therefore neither are all the following codes.
Moreover, as the file of all the transactions is stored on various computers, a change must be made on all these computers.
Organizations can use this ledger as a form of security for transactions between two parties, but also to prove the origin of specific goods. A blockchain has already been set up for precious stones to prevent blood diamonds getting into circulation. It enables governments to issue official documents electronically, with a blockchain ‘hash’ as security instead of a stamp on paper.
But there are still a number of weaknesses in the blockchain concept. As the calculation of the transaction codes, and the coordination between the various powerful servers that store this ledger, takes quite a lot of time, the number of transactions is fairly limited. For the Bitcoin blockchain this is currently 2 transactions per second – a fraction of the many thousands needed to reach the same level as the payments that go back and forth between banks. Technology is available to increase this number, but ‘the community’ must reach a consensus on it, something that is not easy at present.
The size of the ledger, that by definition must contain all transactions as it is to be expanded, will also increase considerably with bigger numbers. This means that larger servers will be required to store them.
Because of the technology used, it also takes a few minutes before a transaction is confirmed – not very handy if you are a shopkeeper and want to be certain of your money before the customer leaves. With a bank or credit card this confirmation is immediate, or at least the bank provides a guarantee in the case of fraudulent transactions.
Another problem is that there is still no clear reference technology. Perhaps this reference technology won’t happen, but currently in addition to the Bitcoin blockchain there are many others who are looking to penetrate the market. Consolidation is necessary for this to be widely accepted as a reference system. If an organization selects a version at present, there is a risk that this will no longer exist shortly, or at least it will not be developed further.
However, to dismiss the whole blockchain concept as a temporary hype would be to throw the baby out with the bath water. If we take a purely functional look at the added value of unchangeable transactions that can be validated by everyone, then we must recognize that here alone there is considerable potential benefit.
One solution could be for organizations to set up their own private blockchain. These organizations must be a ‘neutral party’ in the transaction, such as a public body, bank, auditor or IT service provider. This means that they themselves would have no interest in a transaction being manipulated and people can continue to trust the central ledger.
This is, of course, a radically different approach to the fairly anarchistic view that the blockchain adepts-have of the situation. This world view does have disadvantages too. The fact that a large group of members of a community must agree to changes in the setup acts as a block to fast innovation. Proposed changes to the Bitcoin blockchain to allow a greater number of transactions per second are being prevented by a group of miners who would then see a reduction in their income. This could result in a split where the continuity of business users is not guaranteed.
The low transaction costs are another major advantage of the blockchain. This means that a lot more transactions can be recorded than is currently the case. Therefore in principle in one process each step can be indisputably recorded if there is an added value for this. This advantage would also still apply to a private blockchain. Obtaining a closed validation of a birth certificate or extract from a judicial record completely online is a lot cheaper that having this kind of document drawn up and stamped by a counter official.
It is therefore too early to use the disadvantages of this new technology as an excuse not to get to know it.