Blockchain technology first shot to fame in 2008, when Satoshi Nakamoto described a unique “peer-to-peer version of electronic cash”, named Bitcoin, in his whitepaper Bitcoin: A Peer-to-Peer Electronic Cash System. As the concept of blockchain was based on decentralisation and transparency, with time-stamped records that could not be tampered with, it had the potential to provide the trust that digital transactions had hitherto been missing. However, it was not until a few years later, that people began to realise the true implications of blockchain technology, and the potential for applications across diverse operations and industries, such as supply chain, healthcare and finance, among many others.
As a system that records every transaction in an open, decentralised and tamper-proof ledger, it offers a trustworthy and permanent data repository with quick access. However, to use it to our advantage, we must understand both its benefits and drawbacks. This will allow organisations and industries to capitalise on its benefits while ensuring that the pitfalls are avoided.
Blockchain offers multiple benefits that come from its decentralised and transparent structure.
Tamper-proof record keeping: Even the safest data repository can trip up with the partial or full loss of data. Digital data storage banks can face malicious attacks that can extend to back-ups. Blockchain replicates this data across multiple node servers making it difficult to hack. In an end-to-end encrypted structure, it also prevents malicious access.
Greater transparency: Blockchain works as a publicly distributed ledger that records every new addition in ‘block’ that is immediately visible to every participant. If an error occurs, a new block must be added to correct the error. Consequently, it creates an immutable ledger format that can be critical for important documents like land records, patient files and contracts.
Trust-based network: With a consensus network, blockchain removes middlemen, eliminating the possibility of corruption of data by any external source. In addition, it establishes the origin of any given information, assigning data ownership to the members. This transparent structure creates a trust-based network with a single view of the information flow that does not allow for any distortions. Blockchain-based smart contracts are, hence, ideal for recording transactions, such as escrow-based payments, to create a transparent payment structure.
Quick access to data: In a centralised data storage system, information is stored in silos which can create difficulties in accessing strategic information. Such structures may also involve multiple permissions, further constraining access, which may lead to delays in analytics, creating inefficiencies in the decision-making process. These inefficiencies can be eliminated through the decentralised structure of the blockchain, which is very useful in areas like healthcare, where quick access to data can save lives.
Complete traceability: The ledger system inherent in blockchain creates an automatic audit trail of information as it is recorded, allowing members to view information as it is added and fixing the provenance of each block of data. Traceability can also help in determining the flow of information, thereby helping us in mapping out its course. This is critical in pinpointing flaws, such as repetitive functions in a supply chain.
Like any technology, blockchain can also come with certain drawbacks. Understanding these flaws helps us ensure the timely implementation of corrective measures.
Not distributed computing: It is important to understand that while blockchain is a distributed ledger, it is not distributed computing. Its efficiency depends on each of its nodes replicating the same blocks. A higher number of participants does not result in faster transactions.
Immutable data: While this is an advantage in areas like healthcare, supply chain, or financial services where recorded data is critical to track progress, it can also turn into a disadvantage when we do want the information to be amended.
Loss of key: In both public or private Blockchain, for write operations private keys are required, however on public blockchains for viewing the encrypted transactional data there is no authorization required. To ensure protection from unauthorized access, logging in with the correct key is imperative. Access cannot be restored if the member forgets or loses the key.
For example, a New York Times report estimated that about $140 billion in Bitcoin has not been claimed by owners who forgot their keysand earlier this year, an UK man petitioned his local city council to allow him to search a landfill to recover a hard drive he discarded accidentally in 2014, which contained the private key to his trove of 7,500 bitcoins that would be worth over $280 million at the current prices.
Control of blockchain: While blockchain is essentially a democratic system, it can be vulnerable to control risks if someone gains access to 51% or more nodes. They can then even modify the ledger.
Businesses today depend heavily on data for various functions, from supply chain management to marketing analytics. The immutable and decentralised structure of the blockchain gives us an accurate and indisputable view of the data as it is recorded. Not only does it ensure transparency, but it also allows us to improve efficiency. At the same time, we must be cognizant of its drawbacks in order to create proper fail-safes. This will allow organisations to derive the optimum benefits out of blockchain technology while also steering clear of the risks involved.
The author is Shrikant Bhalerao, Founder & CEO, Seracle Software