On the 31st of October 20081 Satoshi Nakamoto published a ground-breaking paper titled, Bitcoin: A Peer-to-Peer Electronic Cash System (Nakamoto, 2009). The paper proposed a solution to the double-spending problem using a peer-to-peer network (DxChain, 2018). With that proposition Satoshi draws the world’s attention to the fact that he/she has found a way to solve a contemporary technological problem, which holds the potential to induce a seismic shift in the landscape of fiat money. In other words, an electronic peer-to-peer version of an online payment system, which enables the transfer of digital assets (in particular, those of monetary value) directly from one party to another without going through a central financial institution (CB Insights, 2018).
The following literature review considers various sources of literature, which range from books, online as well as published articles and blogs that were written and published during the last decade. With blockchain being such a young and deeply untapped technology, it is only fair to pay close attention to a variety of contemporary voices on the subject itself.
Cryptocurrencies are born
In the aftermath of Satoshi’s paper a plethora of digital currencies exploded onto the scene and threatened the stability of the world’s banking systems (Tarud, 2019). Between 2008 and 2018 the world witnessed the rise and fall of the crypto giants. Everyday seemed to bring with it a new cryptocurrency such as UFOCoin, PizzaCoin, EvilCoin, BongCoin and InsaneCoin. Insane indeed, as the Winklevoss twins became Bitcoin billionaires when Bitcoin reached the ridiculous peak of $19,783.21(US) on December 17, 2018.
Distributed Ledger Technology (DLT)
Whilst the fever pitched hype around Bitcoin et al. was running at full steam not many realized that the true technological hero of the moment was the underlying DLT named, Blockchain (Wikipedia, 2019a). Blockchain was indeed the solution to the double-spending problem that Satoshi referred to in his/her infamous paper. In the aftermath of the crypto currency crash, whilst overzealous punters where drowning their sorrows in Bourbon as they prepared themselves to inform their wives that they “invested” Johnny’s college fund into oblivion on the cryptocurrency market and that they had to hand the Mustang keys over to the bank, the world started noticing Blockchain (Lee, 2018). Suddenly, Blockchain was the new kid on the block. Forgotten where the days of frivolous crypto currency investments. No, that was only the warmup run to the real race – immutable, distributed ledgers.
Nirvana
With the idea of recording transactions in a ledger that is both distributed and immutable, the world’s hype talkers could not resist to start the next wave of innovative ideas such as transparent and un-rigged elections (Somvanshi, 2018), smart contracts (Wikipedia, 2019d), fraud prevention (Szrama, 2017), a regulatory technology to enforce the law (João Pedro Quintais, 2018), etc. Blockchain became the tool of choice with which humanity would solve all its social, economic and environmental problems – it literally became a god idea. Not just that, it also placed a huge band-aid on the scar that all those crypto currency losses incurred on our souls.
Reality
As investors and technologists started taking a closer look at blockchain, they realized that it is indeed an idea with plenty of potential. They realised that the underlying components of blockchain, which is cryptography, P2P network, consensus mechanism, ledger and validity rules are indeed solid, mature technologies. They then realised that these technologies, used collaboratively, could enable companies to reduce the trust between stakeholders, build a secure value transfer system, streamline business processes across multiple entities or increase record transparency and ease of audibility (Hileman, 2017).
Myths
Unfortunately, as the realists where making in-roads into understanding the true potential of Blockchain, some misguided ideas started to emanate around Blockchain. The idea that Blockchains are `trustless` started to surface (Jiang, 2018). Although blockchains may help reduce the need for trust, they do not completely remove the need for trust. Trust, at a minimum, can be placed in the underlying cryptography, but trust should also be placed in the operators and validators. At best, blockchains are trust-minimizing (Hileman, 2017). Blockchain was also thought to be immutable and tamper-proof (Doubleday, 2018). This would seem to be the truth – after all, the great Satoshi evangelized it in his original paper. Unfortunately, the concept of absolute immutability is only a pipe-dream – it does not exist (DxChain, 2018). The illusion that blockchain transactions are absolute immutable originates from the appends-only data structure, which suggests that data can only by added on and not removed. In theory, blocks comprising transactions can be reversed if enough nodes decide to collude (Dourado, 2013). Yes, it is a very specific condition under which it could happen - but still, it is possible. The next myth stems from blockchain’s underlying cryptography technology. Cryptography creates the illusion that blockchain is 100% secure. The mere application of cryptography, however, does not automatically make the system more secure per se. Encrypted data is only as secure as the private key with which it was encrypted. Thus, compromising the private key of network participants could give attackers full access to the shared database and the ability to reverse transaction history. The last myth is the idea that blockchains are indeed truth machines (Gazdecki, 2018). Blockchain is well suited to the transfer of data native to the blockchain, e.g. crypto currency. But when it comes to the tracking of real-world objects, there is no way that blockchain can physically verify that the physical inputs from the outside world is correct. Therefore, every blockchain, which uses non-native digital assets are susceptible to the quality of data that it is entrusted with.
What are the true applications of Blockchain?
A large portion of the literature available on blockchain touts on about the financial and nonfinancial applications of blockchain. Thus far (AD 2019), the only real successful and commercial en masse application of blockchain has been cryptocurrency. Every other industry is currently investing unholy amounts of money in blockchain R&D in the hope that it might transform their own sectors into the next ultra-optimized, sanitized and transparent industry. Granted, a few players have claimed to implement blockchain successfully in terms of tracking physical commodities such as diamonds through complex supply chains (Iansiti & Lakhani, 2017). It is also claimed that such technology is now available off-the-shelf. The diamond industry, mainly controlled by large self-serving conglomerates, happens to be a very powerful and financially strong industry and it is in its own interest that it could, with mass funding and the sheer will to protect its assets, successfully implement a blockchain supported supply chain. Many industries want to or would like to implement blockchain solutions but lack the funding to do so. It is important to note that the will of an industry to implement a blockchain solution is directly proportional to the financial backing it has i.e. money breeds boldness. From this, the very important question arises - where does the real incentive lie of a blockchain? Does it lie in monetary value? Does it lie in social change? Does it lie in political accountability?
With the realization that the backing of funds is needed to pursue bold blockchain solutions, it circles us back to the question - which type of commodity is most naturally tracked by the underlying blockchain? The answer to that is – it’s most native digital asset, cryptocurrency. Or at least, a digital asset. The synergy is so strong between blockchain technology and cryptocurrency that one must agree that crypto currency (the funding) was the main idea/force/value proposition that drove the idea and the implementation of blockchain into reality.
The next true application of blockchain technology, in the author’s opinion, will be smart contracts. Again, smart contracts are the closest digital entity to the blockchain’s native digital asset. In other words, smart contracts are a digital entity, which controls native digital assets of a blockchain.
What are the true threats imposed by blockchain?
What is money really these days? It is nothing more than a number in a database. Throughout history the value of money in banks were backed by the Gold Standard (Wikipedia, 2019c). During the last century the emphasis has moved from the Gold Standard to the ownership of the ledger, which holds the records of the distribution of money. Those ledgers are currently held by the banks and with that they hold the power over money. Blockchain challenges that status quo. Blockchain threatens the current world order with the possibility that centrally controlled ledgers of wealth distribution will be distributed amongst the general populace. The mere possibility of this shook banks to their cores. With that possibility banks started looking into blockchain technology not only as a way of holding onto the ledger but also as an active technology whereby information is processed.
Blockchain as a viable information processing technology
If blockchain technology is eventually going to be everything that it promises to be, then society should take its capability to process data seriously. In an age where speed, accuracy, security and cost is evermore demanded, blockchain seems to be an inconsistent fit on at least two of the latter mentioned aspects – speed and cost (iryna.pavlenko, 2018). In an era of big data, we have come to take for granted the sheer volume of data we generate daily. Every digital move we make generates data and it is estimated that we generate a jaw-dropping 2.5 quintillion bytes of data each day! (Marr, 2018). With every industry vying to break into blockchain technology, we must realise that soon a large portion of that 2.5 quintillion bytes will have to be processed through blockchains. The initial version of Satoshi’s blockchain had several plaguing problems in terms of processing speed and scalability. Although huge strides have been made in optimising blockchain technology on those two fronts, there unfortunately still lies a very long road ahead of us until blockchain would be capable of processing mega-amounts of data seamlessly (Harris, 2018). Satoshi, in his/her infinite wisdom (and probably being a prolific Sudoku puzzle solver and Go player), ordained that the fundamental mechanism with which to overcome the double-spending problem would be to computationally solve a very complex mathematical puzzle. To the author, it is herein (the same mechanism that unlocked this technological marvel), that lies its biggest impediment – processing power. Unfortunately, processing power does not stand alone in life. No, it has a friend, and it is called, “cost”. Processing power and cost goes together and serves a double whammy to blockchain. The more data a blockchain processes the higher its demand for computational power rises and the more computational power you throw at solving block hashes, the more energy is consumed and hence the cost rises. It is really an O(N2) problem, or at least an O(NlogN) problem. This latter notion should be really appalling to the environmentalists and the energy sector who is eager to exploit blockchain as an IoT data processing platform (Wildenberg, 2018). The only real winners in that instance would be the solar panel manufacturers.
Conclusion
Who knows what the future holds? Maybe humanity will eventually, in the far future, be able to build a Dyson Sphere whereby they can generate enough power to sustain a blockchain information driven world (Wikipedia, 2019b). Or, maybe, Satoshi’s grandchild - Satotti, will mysteriously post a blockchain 2.0 on the internet, which solves all these niggly little problems of speed, scalability and cost that pesters blockchain 1.0. Satoshi might have pointed the way to the promised land after he stepped down the mountain with blockchain safely tucked in under his arm. But, unfortunately, shortly after Satoshi’s decent from his cognitive Jnana, the children of techno-valley got distracted, bowed down and worshipped the golden calf called, BitCoin. Since then, the cryptonites have been wondering the barren desert of “proof-of-concept”, whilst feeding off MannaCoin.
Currently, blockchain promises a lot but delivers very little besides crypto currencies. Blockchain as a data processing technology has a long way to go. For instance, it cannot really support any ETL features. Any data derived from blockchain can be changed and re-interpreted and re-used, which renders its immutability aspect useless. In other word, how do we derive trustworthy analytical insight from blockchain without the need for re-validating derived data. As a future data scientist, the author takes note of blockchain and acknowledge that it currently and in the short-term future will have only a small impact on data science.
Other than that, with Satoshi2 still MIA, the immediate blockchain aspects we can bargain on currently are security and transparency. With those two entities humanity can tackle a larger problem at hand, corruption and as such instil a culture of due diligence. Who knows, we might still get to that promised land – I just hope it won’t take us forty years.
Bibliography
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