- Blockchain technology needs a groundbreaking application to justify its hype.
- A blockchain should only be used if it solves particular problems.
- Smart contracts may be the blockchain’s holy grail.
By Philippa Ryan.
It’s not technology or regulation that’s holding back the blockchain, software that stores and transfers value or data across the internet. We just haven’t figured out the next big use-case for the technology.
Two reports released in early June 2017 by Data61, the data innovation group at Australia’s Commonwealth Scientific and Industrial Research Organisation (CSIRO), not only inject some informed gravitas into the conversation but also provide insight into why some major blockchain projects have stalled.
Since 2015 banks, regulators, tech giants and start-ups all over the world have raised billions of dollars to explore the blockchain. But the only really successful, scalable use of the blockchain remains in cryptocurrencies such as Bitcoin.
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Bitcoins currently trade at almost A$4,000, with a total market equivalent to 30 times the GDP of Australia.
Blockchain's missing link
The blockchain is a type of transparent spreadsheet or public ledger. When someone transfers a bitcoin the transaction is verified by miners, encrypted and a block is added to the spreadsheet. Mining takes a lot of computing power and miners are incentivised to participate in the system with a reward of bitcoin.
It’s finding a way to put all of these pieces together for purposes other than cryptocurrencies that has yet to be figured out.
Because of all the computing power required to verify and encrypt new blocks, running a blockchain network is expensive and consumes a lot of electricity. For this reason a blockchain should only be used if it solves particular problems.
For example, a blockchain could allow users to see each other’s ledgers and transactions, negating the need for a trusted third party to manage risk. Through sophisticated cryptography the blockchain itself would provide privacy and trust.
Conversely, if there is already a central third party managing trust between users and verifying transactions (something banks already do for consumers), then a blockchain is not needed. Failing that, a sophisticated database or expert system would be a cheaper and simpler alternative.
Opportunities and risks
The Data61 reports describe some of the possible opportunities for the blockchain in Australia. These include monitoring the outbreak of pests or animal and plant diseases, border surveillance, tracking intellectual property, and identity systems that provide greater certainty over entitlements, benefits and tax obligations.
The reports also identify some blockchain risks, including both business and technical risks. For example, public ledgers do not afford privacy and blockchains generally are not suitable for storing large volumes of high speed data. Bitcoin’s blockchain has been suffering from this very problem for more than a year. Finding a solution is a priority for any developers wanting to attract the number of users needed to make running a network profitable.
These shortcomings may explain why a number of high profile blockchain projects have recently stalled.
The use of blockchain in financial transactions also poses problems for compliance with anti-money laundering (AML) legislation. AML legislation requires that anyone providing financial services must satisfy themselves as to the identity of their client or customer.
These shortcomings may explain why a number of high profile blockchain projects have recently stalled. For example, the Bank of Canada recently announced that its Jasper blockchain project is not yet fit to handle settlements. Citing transparency and privacy issues, the Bank of Canada found that the benefits of using blockchain did not outweigh the risks.
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But risk is not the only reason that blockchain projects are stalling. In February 2017, the R3CEV consortium of banks and technologists announced after more than 18 months of investment, innovation and testing that they would not be using blockchain for their project because they did not need it.
In a speech delivered to the Africa Blockchain Conference in March 2017, information security expert Andreas Antonopoulos warned that many recent blockchain projects are fraudulent attempts to raise capital under the guise of innovation and disruptive technologies.
Blockchain’s holy grail
While Bitcoin has proven what the blockchain can do, the technology still needs a groundbreaking application to justify the hype. The most likely contender is currently a smart contract.
Smart contracts are programmable transactions with complex internal logic that can interact with internet-enabled devices and other smart contracts.
Currently the problem with smart contracts is that they are susceptible to manipulation. What is needed to test the capacity of the blockchain is a small scale, low stakes and low risk smart contract that regulates energy consumption, manages permissions, or ensures payment on supply.
The technology still needs a groundbreaking application to justify the hype.
Data61’s Risks and opportunities for systems using blockchain and smart contracts report lists some contenders, but first we need to manage the risk of fraud, breach of privacy, and blockchain bloat. Once these risks have been reduced the real work can resume.
Philippa Ryan is a lecturer in commercial equity and disruptive technologies and the law at the University of Technology Sydney. This piece was first published by The Conversation.