Wednesday, October 12, 2016

Blockchain for Change?

Blockchain has been tossed around as the next great disruption and THE tech revolution. It has been referred to as a public ledger, an open database, an unhackable consensus platform, and people have gone as far as to claim “all is possible” to change the world with blockchain.

But what exactly is it and why the hype?

Developed in 2008, blockchain started as a public ledger used to record Bitcoin transactions. In the last few years, folks are starting to understand blockchain’s applicability as consensus-based computing independent of Bitcoin. Today, blockchain is generating buzz and excitement outside the few crypto-anarchists. In fintech and amongst investors and entrepreneurs, everyone acknowledges the possibilities. It has even become the hot topic in industry sectors including healthcare, insurance, real estate building and construction, and even the legal industry. But to appreciate the extend of blockchain’s potentials, it is worthwhile to first understand some of the basics.

Blockchain is a distributed consensus-computing model. Unlike the traditional computing model where data are processed in a centralized machine (e.g., a mainframe or on a computer), blockchain spreads the processing and storing of data across its network of machines. Computing are done simultaneously and recorded on all machines (nodes) in the network. There is no mainframe and no particular machine executes alone. In a blockchain computing process, each transaction is validated by all the other nodes in the network. The validation is recorded as a “block” and added to the prior validated blocks stored on all the nodes. The linked blocks form a chain of recorded results and by design, a blockchain record cannot be reversed, altered, or deleted. This forms the basis of Bitcoin’s public ledger function using blockchain.

Image Source: Financial Times, Technology: Banks seek the key to blockchain (Nov 1, 2015)
Blockchain’s main feature is its decentralized consensus-based computing giving it a security advantage. Prior to blockchain, a single machine or access point is the key to data and software execution. From this single point of entry, a user can encrypt access validation against hackers using different types of crypto symmetric-keys. On blockchain, with data simultaneously stored and processed on all the nodes and each with its own unique encrypted access, hackers will have to confront not just one node but all of the nodes and their individual encryptions. This means an attack on a single access point is not enough even if such an attack is successful. The hacker will have to attack at least 51% of the nodes and deal with all of their different encryptions in order to change or corrupt the data record or software execution. A forced entry (by sheer computing the symmetric-key) therefore becomes impractical since the time and computing power required for such an attack on the ecosystem of a blockchain is not plausible. (Think of it as the difference between breaking one pencil versus breaking many pencils together.)

This security feature enables a peer-to-peer validation process giving blockchain its market advantage. In a typical transaction without blockchain, we use a bank or a broker, or an escrow agent, to validate the transaction. Trust is established using a third-party. Blockchain bypasses this third-party requirement since all data and program execution are validated by each participating node (by consensus), making an irreversible record. The trust is inherent to the system and there is no need to involve a middleman. In this kind of peer-to-peer consensus-based model, parties can simply agree upon a set of conditions and use coded “smart contracts” (if and then conditional commands) to execute a transaction. This eliminates the middlemen, the bank, the broker, and by definition, makes the transaction more efficient.

That’s all very nice but there are several disadvantages to the blockchain technology in its current state. First, the strength of blockchain’s inherent security depends on the number of nodes in play. If there are only three nodes, a hacker only need to compromise two to hack the data or software execution. While public blockchain like Bitcoin’s has achieved somewhat of a critical mass to avoid this issue, some companies are experimenting with a self-contained (private) blockchain that is permission based. This presents a different facet of the security problem: when a blockchain is private and limited to those with permission to play, there are weaknesses to explore in the deployment of that permission. While it may not be possible to attack 51% of the nodes on the private blockchain network, it may be possible to attack the deployment/permission protocols.

Another disadvantage is the time it takes to process and record each block of the chain. Blockchain is not the same as parallel or distributed computing. All of the machines/nodes do not divide and conquer the program execution; rather they all do exactly the same execution and validate one another’s data before the block can be added to the chain. This means the execution will be slow. In fact, the more nodes, the slower it gets. For example, a Bitcoin transaction can take up more than an hour to execute and on average is ten minutes to register each new transaction to the public ledger. No one wants to wait around for ten minutes to buy a cup of coffee in the morning using Bitcoin. We are all too cranky that early to wait for blockchain’s offering of a cup of coffee, I am sure of it.

A third disadvantage of blockchain is integration and adoption. Banks and insurance companies today make huge amount of profits by being the middlemen facilitating and brining trust to the ecosystem. If transactions suddenly became free of the need for them, where would they be? Although there are more and more banks and institutions getting in on the blockchain hype-train, but they are there probably to exert control and mitigate their exposure to the revolution. Whether they are open to driving meaningful change to the existing system and process remains to be seen but I suspect there will be resistance. Banks and institutions are already facing tech-fatigue. Each day a new app or tech pops on the market and with blockchain’s immense integration requirement, it will be difficult to transition the existing protocols and infrastructure onto blockchain type of consensus-based computing. I suspect institutions just won’t be rushing to fully utilize the model.

Where does that leave blockchain for change?

I am entirely an optimist and have been a crypto-anarchist for some time now. I have been on this open-source, consensus-based, share-information-economy train and I want change to happen. I think the planet can’t suffer much longer without any meaningful shift towards better and more sustainable way of doing things. But I don’t think the current fintech-hype around blockchain is the right direction. It does not get at the root of the problem: how we build decisions that make sense and distribute resources properly to achieve goals together as human beings. Other than these conceited observations and high hopes for the consensus-based computing model to bring humans together and solve our most pressing problems, I offer no better solutions.

Not yet anyway.

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