Blockchain will not save the world (at least not this year…)

Blockchain hype

Blockchain hype has spread like wildfire… “But it’s time for a reality check”, says Bertrand Maltaverne, Solutions Consultant, who helps organisations to digitally transform their procurement practices.

Don’t —
Don’t —
Don’t —
Don’t believe the hype

Don’t Believe the Hype is a song by Public Enemy that dates back to 1988 and (if loosely interpreted) carries an important message that can be applied to blockchain technology. Blockchain is almost everywhere, and,  let’s face it ,  it’s getting a lot of hype.

It is very surprising that such a new and relatively obscure technology has received so much exposure so fast, even in mainstream media. Blockchain hype has spread like wildfire and this is largely because blockchain is the underlying technology behind Bitcoin, a digital currency (aka cryptocurrency) that received a lot of coverage in the media. In the wake of the cryptocurrency craze, blockchain has continued to attract more and more attention.

Time for a reality check
The response to blockchain exemplifies many of the issues that are commonly associated with introducing new technologies. Firstly, the market’s inflated expectations do not match the reality of blockchain’s current applications and actual capabilities. Secondly, many consider blockchain as an end in itself when it is actually just a tool that serves an objective/purpose. These are probably the two factors that are doing the most damage to the credibility and future of this technology, despite the very promising applications thereof.

At its core, blockchain is a form of digital trust, which has a number of potential uses and applications in business because trust is a key component in this context. However, some of the characteristics of this technology that make it so valuable are also limiting the scope and possibilities of blockchain’s real-world applications beyond trials and prototypes. As with many other things, it is a matter of trade-offs. There is not a single, universal, magical solution to every problem. So, before blindly jumping on the blockchain bandwagon, it is crucial for procurement and supply chain professionals to know exactly what blockchain is, understand its value proposition and be aware of the challenges/issues that may be associated with using it.

Limitations and challenges of first-generation blockchains
You can trust data contained in a blockchain because of the way records (blocks) are added and managed. Unlike other methods of data management, a blockchain is a decentralised (peer-to-peer) network composed of nodes. There isn’t a single ‘party’ managing and owning the data, but rather a network of independent nodes that operate the network. This removes the risk and temptation of manipulating data. Even if someone was tempted to tamper with the data, they would need to find a way to change it at all ‘n’ nodes of the network simultaneously, which is more or less impossible, or, at the very least, extremely difficult.

A second aspect of blockchain that makes it such a secure data management option is its unique form of record keeping. ‘Miners’ verify every new record and they must reach consensus to allow a new record to be added to the chain. On top of this, each new record (‘block’) contains a link to the previous block, meaning that it is impossible to change or remove a record without editing the entire chain. This is why data in a blockchain is immutable, which is one of the key value propositions of blockchain (although immutability and the new General Data Protection Regulation (GDPR) do not really work well together…).

Looking at the process above, it is easy to imagine that adding a new record to a system such as blockchain takes more time than it would in centralised databases. This is because many actors (nodes) are involved and they have to perform tasks (mining) to verify the transactions (and that also serves as prevention against hacking and attacks). So, in its current form, blockchain is a somewhat slow technology when compared to what already exists. For example, Visa processes and verifies transactions more than 7 000 times faster than what happens on the Bitcoin network.

Another issue is that all of the network nodes store all of the data contained in the blockchain. This drastically increases the size of the blockchain, making it slower as it grows as well as more and more difficult to manage. In short, a blockchain network would explode and become unmanageable very quickly in a number of real-life scenarios, such as, for example, if blockchain was used to track the origin of materials and parts across all tiers of a company’s supply chain.

There are also other potential threats related to security. Blockchain technology relies heavily on cryptography and peer-to-peer networks that make it very robust and resilient. However, history has shown that almost nothing is unhackable. Blockchain may be incredibly difficult to hack but someone with the right motivation, tools, and probably a lot of time could, one day, hack it. And, as blockchain’s popularity grows, so does the potential pay-off for successful hackers! Also, even if we were to assume that the blockchain is totally unhackable, the systems around it are not. Systems and programmes connected to the blockchain may be vulnerable to attacks and/or to bugs.

All in all, blockchain technology is not a magic solution for every problem. Like any other technology, some trade-offs make it a more or less viable solution. For the blockchain, the trade-off is between three properties: scalability, decentralisation and security. Today, you cannot get all three!

New and future generations of blockchain could make it a viable option
A lack of scalability is probably the most serious limitation of blockchain and it will probably determine the life or death of the technology. The first generations of blockchain networks, like Bitcoin, do not scale at all and are even incredibly dangerous if you look at sustainability issues and energy consumption. Newer generations are addressing this issue by introducing new designs and concepts.

For example, they are moving away from the consensus/mining mechanism that older generations use, which is based on the ‘Proof of Work’ concept (‘miners’ must perform more and more complex calculations and need more and more computing power and energy to complete these). ‘Proof of Stake’ (PoS) is a newer and much more energy-conscious algorithm that will address the ‘cost’ of blockchain and make it a viable option.

Another example of how blockchain technology is being updated can be seen in the radical changes being made to blockchain’s design. In new conceptualisations of blockchain, the design is moving away from linear models, where one block is only linked to the block before and after it (like links in a chain), and are instead moving towards networks of blocks, where one block is connected to n other blocks. The benefit of this model is that operations on records can occur simultaneously on several branches of a network.

Too bad to be true?
It is true that there are essential trade-offs (scalability, decentralisation and security) to be aware of and to consider before adopting blockchain technology and moving towards a form of digital trust (which means trusting the software more than other parties). However, in many situations, the benefits offset the challenges and make blockchain the best alternative. A recent real-world example of this is the use of blockchain in a refugee camp as a means to address identity challenges and issues. As Houman Haddad, UN Executive behind the introduction of blockchain technology in a refugee camp in Jordan explains: “Of course we could do all of what we’re doing today without using blockchain. But my personal view is that the eventual end goal is digital ID and beneficiaries must own and control their data” (Inside the Jordan refugee camp that runs on blockchain, published in the MIT Technology Review, April 2018).

Another way to look at the trade-offs/dilemma is to consider what can be achieved with blockchain that was previously impossible. An interesting example in the procurement and supply chain sphere is Productivist, a service provider that wants to address the ‘manufacturing surplus’ by connecting manufacturing companies and their customers via blockchain.

Some say I’m negative,
but they’re not positive
But what I got to give,
(the media says this?)
So, don’t believe the hype…

Instead, proceed with caution and be aware of what blockchain can and cannot do. Blockchain is undoubtedly a powerful and exciting technology, but it is not yet fully mature and has several limitations, which explains why it is still far from being widely adopted, despite all the hype surrounding it. However, the newest (and future) generations of blockchain (that will probably part ways with ‘blocks’ and ‘chains’) will make blockchain a more viable application than what is readily available now. These new generations, just like the older ones, will not save the world, but they do represent a real and unique opportunity to create a platform/protocol which (new) businesses can build on and which can help them to grow.

Procurement Tidbits

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