Blockchain: The Good, The Bad and The Ugly

“I went from having to borrow money from friends to pay the bills to making $4 million in a day.” — Trevor Jones, a painter from the UK.

Trevor was in his 50s when he shared his story with The Guardian. Trevor started making non-fungible tokens (NFTs), a blockchain-enabled technology, back in 2019 and quickly accumulated wealth. 

Blockchain use cases expand to different industries, and businesses can leverage this technology to replicate Jones’ success. And many are already doing this by turning to blockchain consultancy firms to build a suitable solution. MarketsandMarkets project the global blockchain market size to amount to $67.4 billion by 2026, jumping from $4.9 billion in 2021 at a CAGR of 68.4%. 

Are you interested in learning more about blockchain use cases to see if the technology is right for you? Then keep reading. The article also explains which blockchain advantages you can count on and which drawbacks you will need to address. We also offer a few tips on how to start with blockchain implementation.

What is Blockchain, and How Does it Work?

Technically speaking, blockchain is a decentralized distributed database where data is shared among different computers, and no single entity has full control. Blockchain keeps the entire history of the data it contains. So it can’t be faked or changed without all the other parties noticing. Blockchain first appeared in 2008 as the technology behind Bitcoin transactions. Currently, it has applications in different fields, including finances, healthcare, insurance, sports, and the public sector. 

Deloitte explains how blockchain works in a relatively simple way: 

Imagine if you are a node, and you have a file of transactions stored on your computer, representing a ledger. Several accountants (let’s call them miners), have this same file on their computers, so it’s distributed. When you make a transaction, your computer notifies the accountants, and they rush to verify whether you can afford it. The accountants get paid their salary in Bitcoins. The first accountant to validate your transaction will notify everyone else, attaching their verification logic. If everyone agrees, they all update their files. 

You can get more information from this short but informative video posted by the consultancy firm.

Blockchain has Five Characteristics:

1. Decentralized: there is no central authority
2. Secure: every entry is protected with a cryptographic function
3. Anonymous: every user has a unique alphabetic address that identifies them, and transactions occur between these blockchain addresses
4. Immutable: no one can tamper with the data without being noticed
5. Peer-to-peer: users communicate without any intermediaries

Types of Blockchain Technology

• Public blockchain (permissionless): users can join freely without requiring permission. This type is slow because consensus and data verification processes take a long time as the number of participants grows. Cryptocurrency is one of public blockchain’s use cases.
• Private blockchain (permissioned): it runs on a closed network and has a much smaller scale than the public one. Its size makes private blockchain faster than the previous type but also decreases trust as it’s easier for a certain number of users to dominate and control the transaction validation process. Moreover, the network owner has the power to decide what’s valid, thereby reducing trust.
• Hybrid blockchain: a network where some transactions are permissioned, while maintaining the connection to the public blockchain. This type is characterized by better security than private blockchains as it is harder for the owner to tamper with transactions.
• A Consortium blockchain is similar to private blockchains, but this type is controlled by a group of users instead of one entity.

4 Top Blockchain Use Cases

Cryptocurrency

Blockchain was originally presented to serve as the technology behind Bitcoin. Now, blockchain is not limited to the financial sector and can serve other purposes. But cryptocurrency remains one of the most prominent blockchain use cases. Some cryptocurrencies, such as Ethereum, are volatile, but there are attempts to bring more stability to the market. For example, Stablecoins’ price doesn’t fluctuate frequently as it is tied to a flat currency while maintaining cryptocurrency’s mobility. 

According to recent research, blockchain adoption can save large banks up to $12 billion per year. 

One cryptocurrency blockchain example comes from the New York-based Gemini. The company facilitates digital asset exchange, purchase, and storage. It allows participants to handle their assets as they see fit and even offers the Gemini Earn program enabling subscribers to receive up to 7.4% interest on their wallets.

Smart Contracts

Smart contracts are similar to regular contracts, but they are stored on a blockchain and automatically executed when certain conditions are satisfied. They are computer programs coded in an if/then manner to ensure every participant receives benefits and penalties stipulated by the contract. For instance, the insurance sector can leverage this blockchain use case to automate travel costs reimbursements. If a flight is cancelled, smart contracts automatically pay policyholders so that people don’t get stuck in the traditional lengthy claim approval process. 

There is no middleman with smart contracts, and every party is held accountable. This arrangement reduces costs and eliminates human errors, while it can still handle a large number of different rules. One of EY’s clients reported that deploying smart contracts helped them cut deal processing time from 45 days to less than a minute.

Non-fungible Tokens (NFT)

NFTs are different from Bitcoin and other cryptocurrency units. The technology represents a digital work of art and has various applications in the arts sector. It can manifest itself in photos, videos, and even memes and tweets. Every NFT is unique, like a limited-edition trading card. People purchase NFTs to support their favorite artists or to have the right to own the piece, such as playing the NFT audio in their commercials. 

NFTs can be sold/procured at rather high prices. For example, a Nyan cat meme was purchased for around $600,000, and Twitter’s founder Jack Dorsey sold his first tweet in the form of NFT for almost $2,900,000. Not long ago, NBA’s Golden State Warriors introduced their collection of NFT items that fans can procure.

Nyan cat meme sold for $600,000

Personal Identity Management and Verification

The statistics on identity theft are scary; 33% of Americans have been victims of identity theft at one point in their life, and it cost them $56 billion in 2020 alone. 

One of the blockchain use cases is personal identity protection. It enables users to store their information, including social security number, birth date, address, etc. in a blockchain, giving them more control over which pieces of information they want to share and with whom. For example, if you only need to reveal your age, you don’t have to show your driver’s license (which contains more than just the age). It will suffice to share the blockchain token that contains your birth date. 

In the governmental sector, for example, the state of Illinois experimented with distributed blockchain to store death and birth certificates, voter registration cards, and more.

Pros and Cons of Blockchain

Top advantages of blockchain technology

• Eliminating intermediaries: in blockchain, transactions occur directly between and are verified by users. So, there is no need to deal with a middleman for monitoring and coordination. A German tourism company, TUI Group, was one of the pioneers to integrate blockchain in the travel industry. They stored hotel bed records on a blockchain and offered it to consumers directly, without mediators who would manage information and set their own rates.

• Keeping track of previous actions: blockchain technology stores every change made to data fields together with a timestamp, enabling participants to view the latest updates and the complete log of changes. Blockchain entries are immutable and can’t be deleted. This will serve as evidence in the case of audits.

• Preventing counterfeit: both companies and individual consumers suffer from product falsification. The International Chamber of Commerce predicts counterfeit will cost the global economy $2.3 trillion in 2022 if no change is implemented. One of the advantages of blockchain is that it stores product ID, which allows users to trace items back to their owners and sources. As objects move through the supply chain, participants will upload more information on their status. All the data is time-stamped and can’t be tampered with.

One blockchain example comes from San Francisco-based jeweler, Brilliant Earth, who teamed up with the UK’s Everledger to create blockchain-powered records of 2.2 million diamonds. Every block contains a diamond’s ID, origins, carat weight, and videos depicting it. Everledger claims their platform increased the value consumers are willing to pay for diamonds and their purchase speed.

• Enhancing security: record encryption and the distributed nature of blockchains make them secure. There is no one centralized entity that hackers need to breach to gain access to the stored data. They will need to obtain different keys to penetrate many locations, resulting in an exponential growth of computing requirements. Moreover, companies can divide information and store it in different blocks. For example, travel agencies can slice flight information into several pieces and sort them in various nodes. 

The US military is turning to blockchain for its security. Engineers at the Defense Advanced Research Projects Agency (DARPA) are looking into a blockchain-powered messaging system for the army to share vital information in real-time while preventing hackers from listening in.

• Building transparency into supply chains: another blockchain advantage is that it helps to familiarize consumers with company’s products and practices. Transparency appeals to people’s sense of fairness, so they like to reward manufacturers for their ethical or sustainable efforts. While in conventional supply chains information exists in silos with very little visibility, blockchain enables product owners to add as much information as possible. 

Luxury fashion brand Fuchsia deployed blockchain to enrich its supply chain with information on the Pakistani workers who make the brand’s shoes by hand. After six months, the company witnessed a 31% boost in online conversion and a 45% increase in engagement.

• Enabling IoT technology: blockchain can be used to record measurements generated by IoT sensors at different locations. No particular entity would have the power to override the readings, making them secure and reliable. 

California-based Xage is the first blockchain-driven cybersecurity platform built for IoT companies. It can handle millions of devices simultaneously, perform self-diagnosis, and heal identified breaches.

Blockchain Issues to Consider

• Everyone in the ecosystem must switch to blockchain: if you intend to use blockchain, then your whole ecosystem will be required to invest in this technology and abandon its current processes. Unfortunately, at the moment, experts note that many organizations are unwilling to replace their existing systems with blockchain.
• Scalability: another blockchain issue is that it is relatively slow. For example, one of its most popular applications, Bitcoin, can handle only 4.6 transactions per second. In contrast, Visa can process 1,700 transactions within the same time frame. The more nodes join the network, the slower it becomes. However, it’s still possible to make transactions outside the blockchain and only use the technology to store and retrieve information.
• Implementation costs: implementing blockchain solutions is a pricey endeavor. Even though many blockchain tools are open source, you will still need to hire developers who understand different aspects of this technology. Additionally, you will need maintenance and support, and will pay licensing fees if you opt for a paid ready-made solution.
• Blockchain security issues: security is one of the main blockchain advantages, but it’s also a risk factor. Decentralized financial breaches amounted to 76% of all registered hacks in 2021. And they seem to be on the rise, as the third quarter of 2021 alone had 20% more blockchain hacks than the whole of 2020. Here are the most common blockchain security issues: 

- 51% attack: if one entity gains control over 51% of the nodes, it controls the whole network and can modify information.

- Phishing: this is a baiting technique where hackers pose as authoritative sources and send emails to wallet key owners to obtain their credentials. 

- Cryptographic key cracking: hackers can use quantum algorithms to break cryptographic keys that encrypt blockchain entries.

- Exploiting endpoint vulnerability: securing the blockchain itself is not enough if you are using external resources. For example, when trading Bitcoin, one can use a virtual savings account to store the currency temporarily. If this account is vulnerable, hackers can gain access to it without penetrating the blockchain.

How to Start With Implementing Blockchain

Choose your blockchain use case

Harvard Business Review advises companies that aren’t confident with their blockchain skills to start with single-use applications to minimize risks. For example, you can add Bitcoin as a payment method. And while you are experimenting with this simple blockchain use case, your different departments will start building blockchain capabilities that you can later extend to more complex applications. 

Another option would be using blockchain as a database for managing assets and recording transactions. This is especially useful for organizations that are trying to reconcile several databases. 

If you are rather ambitious and want to work with transformative applications, such as self-executing smart contracts, it makes sense to re-evaluate your current possibilities and work on acquiring talent and technology first. These applications are very powerful, but they work best when tied to an innovative business model. For example, if a law firm wants to deploy smart contracts, it will need blockchain programming expertise and will have to rethink its payment model and test it first.

Determine if blockchain technology is a good fit for solving your problem

EY proposes to answer five questions, and if you tick at least three of them, then blockchain is a viable solution to your problem:

• Are there multiple parties involved in your transactions?
• Is it crucial to have a tamper-proof record of transactions?
• Do you need to implement a shared business logic between all partners?
• Are you managing a finite resource?
• Does your ecosystem require transparency?

Select your Blockchain Platform Carefully

There are several blockchain platforms that you can choose from based on your requirements. For example, Ethereum provides a truly decentralized network and supports smart contracts, but it’s slow, and transaction processing costs are relatively high. EOSIO also deals with smart contracts and claims to provide faster transaction processing than Ethereum. Tezos allows you to work with novel financial instruments, such as NFTs. Hyperledger Fabric platform allows companies to create their own private blockchains.

On a Final Note

Despite all the hype behind this technology, it is important to understand that blockchain will not change the world today. It is not a disruptive technology in the sense that it can attack traditional business models with high-performance solutions. Blockchain has a foundational nature. It will create the basis for our systems and generate enormous value, but it will take a while as the adoption process will be gradual. Michela Menting, Research Director at ABI Research, describes the situation well by saying,

“It is important to understand that there’s been a lot of hype around blockchain, and while it’s revolutionary in theory, it’s not going to transform society today. Maybe it will be 10 to 20 years from now, but it’s not a short-term technology.” 

Even if we know that blockchain will only reach its full potential decades into the future, organizations can already start preparing for those days. One way to do that is to start small and reap blockchain benefits by incorporating it into your single-purpose blockchain use cases. And we will be happy to accompany you on your journey. Our team can help integrate your system with the right existing blockchain platform. We can also help with smart contract development.

Do you want to incorporate blockchain into your operations? Drop ITRex a line! Their team will be happy to help.

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