Blockchain regularly appears on lists of new technologies that are disrupting established markets and business models. Initially proposed as an integral part of the Bitcoin cryptocurrency, it soon became clear that blockchain could be used to solve a much wider range of problems associated with online applications.
So what exactly is blockchain? In any financial transaction conducted over the internet, a trusted intermediary is required between the buyer and the seller. (That intermediary is often a bank or a credit card company, but it could be a lawyer or some other organisation that is trusted by both parties.) The intermediary’s role is to ensure that transactions can take place between complete strangers in a secure and transparent way. They provide a record of transactions that is accepted by both parties, and they help to ensure that both parties play by the rules. If such intermediaries did not exist, then we could not use the internet for business due to the high risk of fraud.
Blockchains are revolutionary because they do not need a trusted intermediary to support online transactions. Instead, a blockchain provides a distributed database that records transactions in a way that is widely-available, difficult-to-attack, permanent, tamper-resistant and highly resilient. The blockchain therefore provides a record of transactions that is shared and trusted by all users. Of course, similar claims might be made for a traditional distributed database, but the point about a blockchain is that it does not require any form of centralised control to maintain its integrity.
Today, blockchain technology is widely used in the financial sector and has found other applications ranging from logistics and asset management to smart contracts, ride sharing in cars and even the ownership of diamonds. In markets served by Mott MacDonald, blockchain could be used to improve the security of the Internet of Things (IoT). The profusion of applications and business models that can be enabled by blockchain technology will ensure that innovation will continue at a rapid pace.
The blockchain revolution has started but still has a long way to go, with three significant challenges to its widespread use:
1. Blockchain scalability
During 2017, the size of the Bitcoin blockchain grew from 96GB to 149GB. If every user of the Bitcoin network were to store a full version of the blockchain, this would raise some serious scalability issues – both in terms of the amount of memory required and the amount of network bandwidth required to keep all nodes synchronised. Although memory and bandwidth costs are falling fast, this is an issue that will become increasingly serious if not addressed.
Blockchain was originally devised to prevent any form of centralised control over the Bitcoin cryptocurrency, but the need to make the system scalable means that a degree of centralisation has become necessary to keep the system viable. However, there is a balance to be struck; if the number of full-node clients becomes too small, then it can affect the security of the system.
2. Blockchain security
Each user of the blockchain network holds their own local copy of the blockchain. However, if a fraudulent version of the blockchain were to be promoted by more than half the network users, then they would be able to impose their fraudulent version of the blockchain on the rest of the network. If they did this repeatedly, then they would effectively have control of the blockchain. This is known as a ‘51% attack’.
This form of attack used to be considered infeasible because of the large number of fraudulent network users required. However, it is now looking increasingly possible as Bitcoin ‘miners’ consolidate into pools.
3. Blockchain power consumption
Energy consumption is becoming a significant concern for public blockchains such as Bitcoin. The process of adding a new block to the blockchain requires a ‘mining’ operation in which different computers compete to find the solution to a complex mathematical problem, and this uses a great deal of computer power. The Bitcoin network was probably consuming about 350MW of electricity in November 2017. Projections for future energy consumption vary widely, but one researcher has calculated that Bitcoin could consume as much electricity as Denmark by 2020!
It might seem strange that Bitcoin requires nodes in its network to undertake a task that has deliberately been made computationally-intensive. The reason is that the nodes need to agree on which Bitcoin transactions are valid, and achieving consensus without resorting to centralised decision-making is not easy – particularly if some of the nodes may be faulty or controlled by criminals. However, it is likely that public blockchains will eventually migrate towards more environmentally-friendly ways of achieving distributed consensus.
Nobody is saying that these problems cannot be solved, but the features of public blockchains that were designed to prevent tampering or centralised control may make it more difficult to fix design problems once the blockchain is operational. New blockchain applications will need to avoid unnecessary complexity in order to manage the risk. However, this will require the kind of restraint that is not characteristic of rapidly-evolving technology markets.
Blockchain, a white paper by Dr Andrew Wheen which provides an introduction to the technology, how it will evolve and potential uses and challenges.
First published on Infrastructure Intelligence's Digital Transformation Hub, sponsored by Mott MacDonald.