Understanding Blockchain Technology : Advantages and Disadvantages

Written by Praveen Gundala | 27 Aug, 2024 11:35:26 AM

Explore the intricate world of blockchain technology, where groundbreaking innovation meets its inherent challenges. Join us on a transformative journey in blockchain development, as we redefine enterprise operations with our cutting-edge solutions that strengthen data and transaction security. From ideation to execution, FindErnest elevates your ecosystem with elevated transparency, robust security protocols, and optimized efficiency.

The Complexity of Blockchain Explained

Blockchain technology serves as a decentralized ledger, recording transactions across multiple computers to uphold data security and transparency. However, the intricate mechanics of blockchain, encompassing consensus algorithms, cryptographic hashing, and smart contracts, can prove daunting for individuals and businesses lacking technical expertise.

Comprehending the nuances of blockchain necessitates a substantial investment in education and training, presenting a challenge for widespread adoption. The steep learning curve may dissuade potential users and developers from fully harnessing the technology's capabilities.

In technical terms, blockchain functions as a decentralized distributed database where data is shared among various computers without any single entity maintaining full control. Its immutable nature ensures that any attempt at falsification or alteration would be promptly detected by all parties involved. Initially introduced in 2008 as the foundation of Bitcoin transactions, blockchain now finds applications in diverse sectors such as finance, healthcare, insurance, sports, and public services.

Deloitte simplifies the concept of blockchain through an analogy:

Picture yourself as a node with a file of transactions stored on your computer, akin to a ledger. Multiple accountants (referred to as miners) possess the same file on their computers, creating a distributed system. Upon initiating a transaction, your computer notifies the accountants, prompting them to verify your financial capacity. The accountants receive compensation in Bitcoins for their services. The first accountant to validate your transaction notifies the rest, sharing their verification process. Upon unanimous agreement, all records are updated accordingly.

Now, we are seeing blockchain being increasingly adopted across various industries outside of crypto, including:

Financial Services: Facilitating secure and transparent transactions, reducing fraud, and improving cross-border payments.
Supply Chain Management: Tracking the provenance of goods, ensuring transparency, and reducing the risk of counterfeit products.
Healthcare: Securely manage and share patient data, ensuring data integrity and privacy.
Real Estate: Streamlining property transactions, reducing fraud, and ensuring transparent property ownership records.
Identity Management: Providing secure and decentralised identity solutions.

Blockchain technology fulfils practical requirements across various sectors, and it’s just a matter of time before one of these sectors captures public attention, leading to the widespread adoption of blockchains.

Scalability Challenges in Blockchain Systems

One of the most significant hurdles facing blockchain technology is scalability. As the number of transactions on a blockchain network increases, the system can become slow and less efficient. This is particularly evident in popular blockchain networks like Bitcoin and Ethereum, where transaction times and fees can increase dramatically during periods of high demand.

Solving scalability issues is crucial for blockchain to be viable for large-scale applications. Various solutions, such as sharding and off-chain transactions, are being explored, but each comes with its own set of trade-offs and challenges.

Blockchain has five characteristics:

Decentralized: there is no central authority
Secure: every entry is protected with a cryptographic function
Anonymous: every user has a unique alphabetic address that identifies them, and transactions occur between these blockchain addresses
Immutable: no one can tamper with the data without being noticed
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.
Consortium blockchain is similar to private blockchains, but this type is controlled by a group of users instead of one entity.

Top Use Cases for Blockchain Technology

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 cost 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 favourite artists or to have the rights 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, the NBA’s Golden State Warriors introduced their collection of NFT items that fans can procure.

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 them to consumers directly, without mediators who would manage information and set their 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 IDs, 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 into 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 the 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 endeavour. 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. 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, they will need blockchain programming expertise and will have to rethink their 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 private blockchains.

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 lives, 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.

High Energy Consumption of Blockchain Operations

The energy consumption of blockchain operations, especially those utilizing proof-of-work (PoW) consensus mechanisms, is widely known to be high. The process of mining requires significant computational power, resulting in substantial electricity usage that has sparked environmental concerns.

Although there are more energy-efficient alternatives like proof-of-stake (PoS) consensus mechanisms available, their widespread adoption is still in progress, bringing about their own set of complexities and challenges.

Consider transitioning to PoS: Moving away from the energy-intensive PoW model towards PoS or other energy-efficient consensus mechanisms.

Embrace Green Initiatives: Embrace environmentally friendly practices and advocate for the use of renewable energy sources in mining activities.

Security Concerns Despite Decentralization

While blockchain is celebrated for its robust security features, it is important to acknowledge that vulnerabilities can still exist. Take, for instance, the 51% attack, a scenario where a single entity gains control of the majority of the network's computational power, posing a threat to the integrity of the blockchain.

Moreover, smart contracts, which are contracts with self-executing terms encoded directly into the code, may harbour bugs or vulnerabilities that malicious actors can exploit. Safeguarding the security of blockchain systems demands constant vigilance and advancements in cryptographic techniques.

In the realm of standardization efforts, active participation and promotion within the blockchain industry are crucial for developing standardized protocols that enhance interoperability. Additionally, implementing cross-chain solutions can facilitate the seamless exchange of assets and data across various blockchain networks.

Scalability Issues for Blockchain Adoption

Implementing layer 2 scaling solutions, like state channels and sidechains, can effectively reduce congestion on the primary blockchain network. Additionally, exploring alternative consensus mechanisms can further optimize the overall performance and efficiency of the blockchain ecosystem.

Regulatory and Legal Hurdles for Blockchain Adoption

The ever-evolving regulatory and legal terrain surrounding blockchain technology introduces a realm of uncertainty for businesses and developers. Diverse jurisdictions impose varying regulations on the use of blockchain and cryptocurrencies, leading to complexities in cross-border transactions and compliance.

Mastering these regulatory hurdles is imperative for the widespread adoption of blockchain technology. Clear and uniform legal frameworks are crucial to instilling confidence in users and fostering innovation while safeguarding against illicit activities.

Advocacy and Collaboration: Proactively engaging with regulatory entities to champion transparent and equitable regulations that spur innovation while addressing security and compliance concerns.

Industry Standards: Collaborating across the industry to establish and adhere to standards that can serve as a roadmap for regulatory frameworks.

Conclusion

While the excitement around blockchain technology is undeniable, it's crucial to recognize that its transformative impact won't be immediate. Unlike technologies that swiftly disrupt traditional business models with high-speed solutions, blockchain operates on a foundational level. It lays the groundwork for our systems, promising immense value, but the journey towards widespread adoption will be gradual. Michela Menting, Research Director at ABI Research, aptly notes, "Despite the buzz surrounding blockchain, it's not an overnight game-changer. While its theoretical potential is revolutionary, its societal transformation won't happen today. Perhaps in 10 to 20 years, but it's certainly not a quick fix." Even though the full realization of blockchain's potential lies decades ahead, organizations can begin laying the groundwork today. Starting small and harnessing blockchain's benefits through targeted use cases is a strategic approach. We are here to support you on this journey, assisting in integrating your system with the appropriate blockchain platform and offering expertise in smart contract development.

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