We used to say “there is an app for that” — but nowadays it seems there is a blockchain for everything. So, what is blockchain and what is it good for? Besides the hype around Bitcoin and the people it made rich, what are the real applications?
The price of cryptocurrencies are volatile, and investing in them is like gambling. Some of them turn out to be scams, while some others are affected by scheduled pumps and dumps. On the other hand, the gigantic profit produced by Bitcoin is very tempting to get early into ICOs, hoping to buy the tokens at discounts and while it’s still low cost.
So, what should we do?
Fortunately, this is an investment that can be examined, if we have access to all the info we need. Unfortunately, it’s mostly for techies.
In this piece, we are trying to examine what Blockchain really is, what it is good for and what it’s not. Hopefully it will help you to better evaluate if a hyped ICO really solves a problem or not.
We never trust strangers, and to some degrees not even friends. In any human collaboration, there needs to be a set of rules everyone adheres to for things to go right.
We used to rely on a third party who would watch over the rules; the referee, the manager, or the middle man. We would all trust that third party to make sure the game is played fair.
In Blockchain, you are putting that trust into cryptography and transparency. Transparency allows everyone to see and verify the rules, while cryptography ensures it does not get tampered (it’s a bit more complex than that but I’m trying to keep things simple). To verify something, a large number of nodes must all agree, which means they will outnumber any potential hacker. Thus, Blockchain is very hard to hack.
A lot of what we hear about the Blockchain is not what it is doing, but what it can do. In many ways, you can do with centralized systems what Blockchain promises to do — with one core difference; trust.
Essentially the middle man is another human, and humans are the most unpredictable kind of beings. We tend to trust machines and technology a lot more, and rightfully so.
Takeaway: In Blockchain, an asset is yours and no one can take that away. Your ownership is protected by the thousands network nodes as opposed to a centralized system that can be hacked, manipulated, bought or simply have it’s policies changed.
Blockchain offers protection.
Blockchain does have it’s problems. For instance, everyone need to have a copy of the blockchain database which is getting larger and slower over time. That being said, the community is actively coming up with innovative ideas to address this issue.
The Blockchain network is run by miners, who expect an award for their efforts. While there are efforts to lower the huge power waste and enormous calculations involved in the process, no one mines for the love of the tech. That’s why blockchain made perfect sense for financial transactions — starting with Bitcoin — and will always be tied to some kind of financial reward.
Developing for Blockchain is also harder by nature. It’s not like updating a webpage and every visitor would instantly see it, nor like updating an app which can then be automatically downloaded by everyone — for Blockchains, a majority of the nodes must agree with the update.
Immutability is one of the strengths of Blockchain, but it is not without it’s cost — it is what makes the data storage so large, and everyone must have a copy. Transactions are becoming slower too as the requests are growing, and think about it — you have to update thousands of locations vs only a centralized point.
Finally, there is still a lot of centralization in the existing Blockchains — from crypto exchanges to whims of owners, there are still points that impose central authority. Just google for how many exchanges got hacked — were cryptocurrencies not meant to be safe?
Blockchain is speculated, but it has great potential. The tech is getting better and better, and there are solutions evolving for many of the problems we mentioned above. For instance, Atomic Swaps were presented to lower our dependency on crypto exchanges, and Bitcoin Atom is a project to make it mainstream. IOTA has presented a replacement for Blockchain (called Tangle) while NEM has rebuilt it from the ground up.
What is imperative is to see if a proposed Blockchain project is really a solution for the mentioned problems (i.e. it cannot be accomplished without using Blockchain), or is just trying to take advantage of the hype.