Blockchain is a buzzword that promises a lot, but does it deliver? Can it deliver the digital disruption it promises, while avoiding energy costs?
This year has been a busy year for the cryptocurrency community, from soaring prices and an ever-growing economy to scams, hacks, and a massive crash. The future of a decentralized digital currency is very uncertain at this point. But even if it crashed and burned, the technology would still be there.
Blockchain services are one of those buzzwords that are part of the cryptocurrency craze and it is one of those technologies that promise massive digital disruption at some point. Companies like Samsung and Goldman Sachs have invested millions of dollars in blockchain-based ventures like Sky Mavis. This, in turn, has led to startups popping up left and right, trying to capitalize on the opportunity.
Of course, Blockchain also has its fair share of detractors. The energy costs of operating a blockchain are astronomical , and in a world where climate change is a real concern, the amount of energy wasted running a blockchain is nothing to scoff at. On the other hand, recent losses due to cyberattacks have demonstrated that the system is not as immune to hackers as people expected.
So what's so attractive about blockchain? Should we invest hundreds of millions of dollars in developing the technology? What does this have to offer beyond cryptocurrency and NFTs? Or is it just a trend that will die like many others in the past?
Understanding Blockchain
Although blockchain as we know it today is inexorably intertwined with the history of bitcoin, the underlying concepts have been around for around 40 years. In the simplest terms possible, a blockchain is a distributed digital ledger that is maintained by mutually suspicious groups. Let's unpack this definition.
It is a ledger in the traditional sense. In other words, it is a repository that keeps track of all transactions carried out. It is digital because it only exists in computerized systems. While you could, in theory, take a blockchain and print it, that would only be a snapshot – the real thing is on the internet.
It is distributed because it works based on the principles of peer-to-peer computer networks . In other words, there is no centralized device where the blockchain is contained. You cannot physically break into a data center and steal the entire ledger, because the ledger is managed and shared across a network of computers.
Finally, instead of having a single manager reviewing and validating each transaction, you have a community of managers, each very skeptical of the work of their fellow managers. When a sufficient number of managers agree that a transaction is legitimate, it is approved and recorded on the blockchain. That's why we call them suspicious groups – each group of computers does what it wants until all groups involved reach a consensus.
So what kind of transactions can be stored on a blockchain? It depends. The bitcoin blockchain, for example, only records transactions made between bitcoin wallets. Another blockchain like Ethereum can handle cryptocurrencies and other assets. You could write an application and use the Ethereum blockchain to track your transactions.
Take, for example, Axie Infinity, a game similar to Pokémon GO, where every trade is recorded on a blockchain. Other companies are making lofty promises to use blockchain technology for cloud storage, identity storage, and more.
So, a public ledger is open to anyone for review, is not controlled by anyone, and uses cryptography to connect each transaction, so it is nearly impossible for a human to create a fake block. It sounds too good to be true? Yes Yes it's true.
The price of Blockchain
As we mentioned before, blockchain requires a huge amount of energy to function. You need a method to reach consensus, the two most common being proof-of-work and proof-of-stake.
Proof of work is a competition: when a new block joins the chain, each validator (called a miner) begins solving an extremely difficult cryptographic puzzle that increases in complexity as the blockchain grows. When a miner finally solves the problem, he is rewarded with some type of token (for example, a bitcoin) and the transaction is validated.
Imagine having 200 math geniuses working on the same problem at the same time. When one of them finally solves the problem, the other 199 agree that it is the correct solution. Yes, you solved the problem, but what about the work of the other 199 geniuses? Well, that's just wasted energy and effort. And when bitcoin uses as much energy as all of Switzerland you can bet energy waste is a problem.
Of course, larger miners have more processing power and in turn, greater probabilities of solving the puzzle and winning the token. In other words, for a decentralized technology, proof-of-work encourages bigger fish to eat smaller fish. Enough of a non-centralized solution.
So what is the alternative? Ethereum has been trying to move to a more environmentally friendly method called proof of stake . Instead of having an open competition for everyone, you designate a few validators who are willing to stake their assets in a game of chance. Validators are rewarded when they attest to the validity of a new block. On the other hand, if a validator proposes a block with a fake transaction or fake data history, the validator's stacked resources are cut off by the protocol and are banned from validation thereafter.
Although proof of stake requires fewer resources than proof of work, it requires a huge initial investment. The more you stake, the more likely you are to become a validator, turning the entire process into an oligopoly.
What is it for?
The biggest problem with Blockchain is that right now the technology does not provide any solution worth the cost of infrastructure and energy. Proponents point to blockchain's security as one of its main advantages. But the aforementioned Axie Infinity lost $600 million to a hack in March 2022. And we lost track of how many bored monkey NFTs were stolen in a year.
Peer-to-peer technologies existed long before Bitcoin, and cloud services have long offered decentralized data storage. Now, the prospect of not having to rely on industry giants like Amazon and Microsoft may seem appealing to some. But this is where I must ask the question: have you considered the advantages of centralized services?
For example, responsibility. If something happens to your data, companies are contractually obligated to help you restore it or compensate you for the damage. Likewise, Azure and Amazon Web Services are more than helpful when your account has been hacked, reversing charges when incurred.
I could see a future where blockchain could be implemented for identity tracking and border control . But this would require a level of infrastructure, commitment and oversight that does not currently exist. Meanwhile, blockchain is an interesting experiment that doesn't seem to solve any of our current problems.
I'm not trying to disrespect the blockchain. Quite the opposite. I respect the idea – I think it's genius in a way. I just haven't seen a case where this actually offers something better than what we currently have without destroying the ecosystem at the same time.
If you liked this article, be sure to check out our other articles on Blockchain technology:
- Should your company adopt smart contracts?
- How to Create Cryptocurrency – 7 Easy Steps
- What is Blockchain as a Service and how can we use it?
- Why You Should Use Solidity for Blockchain Development
Source: BairesDev
