What is blockchain?
The blockchain best known for being the technology behind cryptocurrencies like Bitcoin is the communication network technology called “decentralized network”. The transaction information between users are directly written in the database while ensuring data accuracy and integrity without passing through a central authority. These records are kept in “blocks” and all the blocks need to stay properly chained together. The data is replicated across multiple ledgers and managed by computers worldwide, therefore, even if one node was tampered, all other nodes still contain the correct data and the wrong data will be invalid. Thus, it virtually impossible to tamper data. Another advantage is fast transactions at low fees as no existence of central authority.
The blockchain is expected to be applied to a wide variety of fields other than cryptocurrencies. It is already introduced to logistic, healthcare and financial service systems and finding solutions for the challenges they are facing.
One of the examples is the blockchain platform “TradeLens” developed by the computer giant IBM and the logistic giant Maersk. The purpose of this platform is to enable each company to trace the products with digital formats when they ship products cross borders. By making the international trade digitalized and applying the blockchain character such as tamper proof and sharing data, everyone involved in including shippers, shipping lines and customs can access information such as the shipment data and cargo documents in real time. It is designed to promote more efficient trade. It is confirmed that TradeLens requires only one step and one person instead of involving 10 steps and 5 people to respond for the basic questions such as “Where is my container?”.
Moreover, positive reports about blockchain such as the news that “HSBC” the one of the largest bank in the world has processed more than 3 million transactions (equivalent to US $25 million) by using blockchain technology(decentralized ledger DLT) in the foreign exchange transaction has been receiving extensive coverage from the media. However, in order to build a blockchain system which offers the infinite possibility, it requires enormous work and costs.
To prevent making mistakes after you rush headlong into blockchain innovation without the specific challenge in the business or clear purpose, it is important to understand the possibilities and the weak point of blockchain.
System architecture is difficult and takes time
The blockchain is immutable, which is excellent in the security aspect, but that is only one side of coin. There are some facts that is not practical.
Although work is performed by computer, the human errors could occur as people enter the data. Nevertheless, blockchain is immutable and the data cannot be edited once it is entered in the block. If there is any mistake in the record, you have to explain the situation to the other party and request them to entre the new data to compensate the last transaction. On the other hand, the errors can be changed quite easily with the conventional centralized system.
The data replication is necessary for the integrity in decentralized system and the replica must always be kept in sync with data for its consistency. The bug could destroy data and might not be able to keep consistency. If the bug attacks, the system needs to be improved, however, as soon as making the improvement, the blockchain become worthless as it loses consistency. If there are any problems in the centralized system, the management body can make a decision to change and execute, but the decentralized system requires all users’ consensus for any changes, therefore, it is not as simple as editing on just the incorrect data.
Designing incentive mechanism is a very difficult task
In simple terms, the incentive is financial rewards in blockchain. While the central authorities receive incentives in centralized system, the reward structure in blockchain provides the incentives to miners. It is important to design the structure to give appropriate incentives so that miners can receive justified rewards according to the amount of effort put into creating new blocks.
The blockchain is a transaction ledger which is programed to record virtually all the transaction in blocks, that is linked while the data maintaining integrity. If someone decided to tamper a block, they have to recalculate additional blocks which contains all other transactions.
To extend the malicious chain and record the tampered data in blockchain, a large amount of computing power for calculation is required. Besides, the tamper free blockchain constantly extends while a malicious miner calculates, thus they cannot catch up with the end of chain. Realistically speaking, the majority of miners are honest, so it is extremely difficult to tamper the data as it is almost impossible to catch up with the speed of calculation for approving.
This mechanism enables to prevent from miners commit fraudulent acts and incentives helps miners to maintain trust within the network. It is crucial to give valid incentive from the initial stage.
Control over fraudulent act
Generally, miners do not tamper the data, because they gain more profit when they perform good deeds rather than bad deeds based on the design of incentive mechanism. However, if the fraud was found under the circumstance of operation that individual person has equal responsibility, it is impossible to eliminate the dishonest user as there is no single authority, such as a company who can make a decision. Thus, it is important to meticulously design the incentive which prevents frauds from the initial setting.
Unlike the centralized system, the blockchain cannot abolish the old system after the specific date even if the users do not update the system. The developers have to apply non-backwards-compatible upgrade and expect users to embrace it.
Since new functions are added, the confirm test process, whether the old version works correctly, is important and additional time is required to perform the test as the function increases.
Issues losing password
In the case of losing your password for the service operated by centralized system, the new password can be set if you request password reset or make an enquiry to its customer service even it is time consuming.
However, you will lose everything if you lose the password for blockchain wallet as there is no function to recover.
One of the biggest challenges in bockchain is scalability. All the nodes in the network perform same process for verification in blockchain. If one transaction is heavy, the transaction process will be delayed even the number of node is increased, because the record capacity in a block is already determined. That is, the data cannot be processed due to the exceed amount of data.
There are significant differences in transaction speed between blockchain and the centralized system. It is believed that VISA can process average of 2000 transactions per second whereas Bitcoin processes maximum of 7 transactions.
Taking into account these issues of blockchain, it is not practical to be improved the system little by little like the centralized system. Thus, it is absolutely essential to build a defect free system from the early stage of development which means it costs considerable amount of time and money.
You now understand that the system runs without any central authority is hard to handle, incurs a large amount of costs and difficult to update and expand, and the database controlled by central authority is faster and easier to update.
In order to lead the blockchain project to success, it is important to introduce blockchain on the basis of determination of its necessity after exhaustive consideration of its suitability. If blockchain is implemented just for “updating the existing system”, it may bring the friction to the smooth process.