8 most common misunderstandings in blockchain discussion (part 1/2)

Blockchain has the potential to be a powerful technology. Utilized in the right places it can save costs, streamline processes, and erase human errors. However, if misused the technology can also become an efficiency killer, a useless technology that contributes nothing beyond being a gimmick. At Kepler Lab, we design practical use cases for blockchain. However, even more frequently our job becomes to point out why our client’s solution doesn’t need blockchain technology. I am going to list the 8 most common misunderstandings in blockchain application, and then offer a glimpse into how blockchain can work in practical use cases.

When we talk about blockchain, we often hear two extreme responses, either that blockchain is everything or blockchain is nothing (e.g., Nouriel Roubini). People have these extreme conclusions because we fail to understand the appropriate application of the technology. Below are eight misunderstandings that commonly arise in blockchain discussions.

1. “Blockchain achieves data authenticity”

“A blockchain is an immutable database. Therefore all information on a blockchain must be correct.”
The first sentence of this statement is partly correct, while the second sentence is simply incorrect. While data stored on a blockchain is typically immutable, we cannot guarantee the authenticity of this typically immutable data. To prove my point, I just stored a piece of false information (“The Earth is flat”) on a blockchain. You can check this information yourself, it is immutable on the blockchain, but that does not mean that the information is correct.

This misunderstanding seems simple, but it is important because it often causes people to mix up transactional information and general information. By its nature, every piece of transactional information stored on blockchain should be self-evident. All stored transactional information (e.g., a token being sent and received) is verified before being recorded on blockchain. After storing this piece of information on blockchain, it can neither be modified nor erased. Hence we can be assured that the information (transactional) being accessed or read has neither been tampered with nor been altered. And, most importantly, the information has been verified to be authentic. But not every piece of data stored on blockchain is transactional data. Moreover, blockchain technology itself cannot make general data self-evident (e.g., the information “the coffee is from Ethiopia”).

Hence it doesn’t make much sense to build a source tracking system on blockchain and claim that it can make general data suddenly become trustworthy. Regardless of the question of achieving data immutability (which again is largely possible using blockchain technology), the key behind a source tracking system is figuring out to ensure the recorded data is authentic. Preventing the stored data from being altered is a less significant question.

2. “Blockchain erases all middlemen”

Blockchain can remove middlemen who facilitate transactions; in fact, it is more accurate to say that a group of miners replace the centralized middleman who traditionally verifies transactions. This is the foundation for creating a monetary system that is beyond regulations, and with potentially lower transaction costs. Thus, it is not inaccurate to state that blockchain can replace middlemen in the verification process of transactions. However, it is inaccurate to state that blockchain can replace EVERY type of middleman. It should also be noted that some intermediaries who added value to the overall system should not be replaced.

Plenty of people mistakenly assume that since blockchain can replace middlemen in transactions, therefore the technology should also be used to replace all middlemen. Blockchain is not well positioned to replace middlemen such as Spotify, Facebook, or Google. This because these middle men are not (or not only) the middlemen for handling transaction; but they also provide value-added services.

3. “The acceptance of blockchain applications prove that cryptocurrency is the future”

JP Morgan coin, Facebook coin, etc. These announcements from giants excite crypto communities. People often claimed that this is the giant step we have been awaiting towards the adoption of cryptocurrency.

We should not get confused by the word “coin”. JP Morgan coin and Facebook coin are not even close to the Bitcoin and Ethereum types of cryptocurrency. Rather, these “coins” are existing settlement systems employing some blockchain features. From a user’s point of view, there is no difference in using these systems from using Swift or WeChat Pay. Blockchain is utilized in the internal system, but the result is far from Bitcoin like cryptocurrency.

Cryptocurrency is still new to the general public, and therefore plenty of vague definitions make the rounds. Here I am trying to summarize a reasonable definition of cryptocurrency:

definition 1: It is issued using Distributed Ledger Technology
definition 2: It is not controlled by any single company or government `(e.g., no one can stop/wipe a transaction as long as it is signed correctly)

While few people would argue against definition 1, definition 2 is definitely not a universally accepted definition. However, definition 2 is the essence of cryptocurrency. Blockchain serves to ensure the validity of a transaction without involving any regulatory body or authority. To achieve this benefit, we pay extra decentralization costs (time cost, electricity, etc.) Using cryptocurrency does not lower the transaction cost if we apply traditional regulations to it. If we regulate cryptocurrency in the traditional manner (what regulators are trying to do now), there are only two possible outcomes: Either there won’t be a future for decentralized blockchain infrastructure (only permissioned blockchains), or blockchain becomes a less efficient, obsolete, technology.

4. “All things are better if they are decentralized”

This has for a long time been a common misunderstanding with regards to blockchain. We have to understand that decentralization is a cost we pay to allow blockchains to operate without trusted parties; decentralization is not the goal in itself. It makes no sense to make things decentralized unless you want to create something that cannot be controlled by an individual, an organization, or an alliance. Decentralization is an expensive cost, and it is very fragile. In return, you can theoretically build a system that cannot be manipulated or governed by anyone. But why pay this cost and make a system slower, more expensive and less stable if we are not trying to make it uncontrollable?

In the next article, I will continue listing out another 4 mistakes together with the examples practical use cases.

Kepler Lab is a Hong Kong-based company that focuses on building real blockchain solutions for enterprises. We believe in the core technological utility of blockchain, and we refuse to implement unreasonable blockchain applications.

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