Blockchain Misconceptions
A common misconception is that blockchain technology and the cryptocurrency Bitcoin are the same thing. When Satoshi Nakamoto launched Bitcoin in 2009, it was the first real-world application of blockchain. But the concept was actually conceptualized by two researchers in 1991.
While blockchain is a database of transactions stored in distributed across a large network of computers, Bitcoin is a decentralized digital currency that can be bought, sold, and exchanged directly without the need for any intermediary. It uses blockchain technology to underpin its payment rails, however, the two are not the same. Nodes verify transactions on the Bitcoin network, while miners compete in a race to secure the network and add new blocks to the blockchains by solving mathematical problems. Miners are rewarded for their efforts in new bitcoins, known as a 'block reward'.
Following the success of Bitcoin, hundreds of other cryptocurrencies have been created. The most popular of these are Ethereum, XRP, Tether, Cardano and Polkadot. They are not blockchains themselves, but use blockchains to facilitate their respective networks.
The problem with many traditional transactions today is that a ledger can be tampered with to reflect incorrect information, including adding and removing records. This impacts trust in the veracity of the information. One of the fundamentals of blockchain technology is the distributed database, which ensures all parties on the blockchain can access all records in the chain. As it’s decentralized, no single person has complete control over the blockchain, which makes it difficult to tamper with.
Another key element is that blockchains are secured using cryptographic hashing. A hash is a string of unique characters that can be created from any piece of information. Each block is encoded with its own hash and the hash of the block that came before. If someone wanted to change the information in a given block, they’d have to change that block and every other one that came after it in the chain, on the majority of the nodes in the network. This requires, in the case of a huge network like Bitcoin, for example, an astronomical amount of computing power, and thus money.
Confidentiality in blockchain is not a given; it depends on whether the blockchain in question is public (permissionless) or private (permissioned). In a public blockchain, anyone can join the network, view the transaction history, and become a node. However, transactions are identified using a public key (derived from a privately held key), rather than their information. Thus, transactions are pseudo-anonymous by design.
On a private blockchain –– such as that operated by a bank, for example –– users need authorization to read, access, and write information. Thus, access to private blockchains can be restricted and the information therein can be kept confidential.
Blockchain is viewed in some circles as a disruptive technology, while others argue that it is, rather, a foundational, general-purpose or institutional technology. It’s been heralded as being revolutionary, but whether or not it actually has a radical effect on the status quo will depend on who adopts it, and how they implement it in their models and organizations.
With the massive hype around its possibilities, there is a common misconception that all applications for blockchain technology have been explored. However, if you consider that PwC envisages blockchain technology as having a $1.76 trillion impact on global GDP over the next decade, it’s clear that it has anything but reached its full potential.
While blockchain is most closely associated with Bitcoin, it’s not restricted to the world of finance. The technology’s ability to create, store and share sensitive information, for one, is applicable to a vast range of industries in a world increasingly dominated by data.
Members of the Forbes Technology Council listed a number of supply chain operations, online voting, digital vaccine passports, loyalty programs, source verification, repeatable business processes and identity theft protection, among others, as some areas where blockchain could dramatically improve efficiency.
One of the biggest problems with blockchain usage as a transaction platform is the time it takes to complete blockchain transactions. High-volume cryptocurrencies are the perfect example of this shortcoming. While Visa, for example, can process 24,000 transactions per second, Ethereum and Bitcoin can only manage around 30 and seven respectively.
For this reason, scaling up blockchains can present some challenges, such as:
Limitations – Increasingly lengthy blockchain transaction histories could cause a blockchain to fail. There’s also the issue of the hardware required to operate nodes.
Transaction fees – As growing blockchains require more computing power, so too do they attract greater fees.
Block size – There is debate in blockchain circles about increasing block sizes to accommodate more transactions. A number of projects have been attempted in this regard.
Response time – The more popular a network, the longer the validation process. Bitcoin, for example, needs around 10 minutes to build one new block.
There are concerns among regulators and governments that blockchain technology, in particular as it is applied to cryptocurrency, has the potential to facilitate illicit activity. Cryptocurrency organizations and blockchain forensics companies dispute this, pointing to research such as that conducted by Chainalysis, which found in its second annual Crypto Crime Report that 0.34 percent of all cryptocurrency activity in 2020 was linked to illegal activity, amounting to $10 billion in transaction volume.
Such research does not necessarily include all forms of crime, though, and that it only accounts for crime that is understood or known about, meaning the real figures may be higher. Also, given the nascent nature of cryptocurrencies, the number of law enforcement officers and agencies specializing in this sort of crime is still quite small.