Is a Blockchain Needed?

Blockchain

In October 2017 US biotech company Bioptix changed their name to Riot Blockchain, resulting in a doubling of their share price within days as well as an SEC subpoena in April 2018. Similarly, British company Online PLC and New York’s Long Island Iced Tea Corp rebranded as Online Blockchain and Long Blockchain respectively, resulting in their share prices also skyrocketing. 

“Blockchain technology” has been all the buzz in the financial world for the past several months, with banks, multinational institutions and even governments researching the technology with the view of implementing it into their operations.

However in most circumstances, Blockchains are not required, rather all that is needed is a standard database management system. When a corporation announces their interest in utilising blockchain, or an ICO promises to revolutionise an industry using Blockchain technology, a simple question must be asked:

Could you do that with a regular database?

A database is simply an organised collection of data which is stored and accessed electronically. Databases allow administrators to control and modify data which is stored on a centralised server.  

What is a Blockchain?

A blockchain is a continuously growing list of records which are linked and secured using cryptography. By design, a blockchain is resistant to modification of the data. It is an open, distributed ledger that can record transactions between two parties in a verifiable and permanent way. 

Centralised systems like databases are efficient, fast and relatively inexpensive to run. Blockchains on the other hand are slow, clunky and expensive. This is because centralised structures have a hierarchal decision making structure where all decisions and processes are handled centrally.

In comparison, decentralised systems involve multiple unrelated parties to make decisions independently to achieve an outcome. A blockchain is basically a slow, inefficient and expensive database which can be shared and used by a group of non-trusting parties without requiring a central administrator. 

Why use Blockchain?

So when is it suitable to use a Blockchain rather than a centralised database? Blockchains are incredibly useful in a small number of specific cases where a transaction requires transparency, censorship resistance and immutability. If the data being secured needs to be auditable and verifiable until the end of time, then the use of a Blockchain is warranted. However, if trust, censorship resistance and immutability aren’t an issue, there’s nothing a blockchain can do that a regular database cannot do faster and cheaper.   

The first use case of a blockchain was obviously money in the form of Bitcoin.

Bitcoin allows the transfer of value across a communications channel without censorship. All transactions are verifiable and immutable, making it the perfect example of how a blockchain can be used. But aside from censorship resistant value transfer, a blockchain can perhaps also be used to secure and verify data such as votes in an election or other instances where trust and transparency are required.    

The fact is most businesses and industries do not need to use a blockchain. The transfer and verification of dental records or titles to cars rarely, if ever, require censorship resistance and immutability. Despite this, the mania in the cryptocurrency ecosystem has created an environment where many corporations and industries are now developing ‘private blockchains‘ to reinvent what could otherwise be achieved with a better internal database.    

As an example, commenting on the use of blockchains by central banks, Erik Voorhees, CEO of digital asset exchange ShapeShift states:

The whole purpose of a blockchain is to remove control from a central party. So if a central bank uses a blockchain to create the Dollar Coin, if they still have full control over how much they can create and can control where it goes, then there’s no point in having a blockchain at all. You might as well have a centralised data base like a banking system. To use a blockchain in any meaningful way, it means that there’s no person in charge.”

The use of a blockchain removes the need for a central authority, a use case which rarely exists in society. So in assessing whether a blockchain is actually required for a particular situation, the question that must first be asked is “Can the same outcome be achieved using a database?” 

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