Continuing on from their article on solving real world problems with blockchain, PwC’s Ben Crofts, David Lam and James Kosmatos tackle some of the pervading myths that surround the technology.
As 2018 races by, the interest in blockchain, as well as the number of related headlines, continues to grow. After what has been a volatile year in the cryptocurrency markets, questions remain regarding the technology and its value to society.
It’s a good time then to take a closer look at some of its heavily-reported characteristics and sort the fact from fiction. It’s time to bust some blockchain myths.
1. ‘Blockchain technology
One of the popular labels for blockchain is that it is ‘overhyped’. Blockchain and cryptocurrencies have infiltrated the public psyche and have found a wide array of applications – many of which are unwarranted.
Blatant money-grabs and unrealistic use cases of blockchain are rife in the market, damaging the reputation and legitimacy of the technology.
The blockchain market bears many unfortunate parallels with the ‘dot-com boom’ of the late 1990s. During that time, the popularity of the internet was exploding, and businesses were looking for any excuse to align themselves with the new technology as a means of effective marketing.
Blockchain has been used in a similar manner by many firms that have consequently enjoyed a short term spike in share price. Just like the dot-com boom however, the market has grown wary of these tactics and the businesses that use them, which in turn has tarnished public perception of the technology and distracted from its genuine use cases.
Reforms being implemented by firms including Google, Facebook, LinkedIn, Twitter, Snapchat and Mailchimp which limit advertisement of ICOs, the blockchain-world equivalent of an IPO, and cryptocurrencies (similar to rules relating to marketing of IPOs and stocks) aim to curtail behaviour of firms cashing in on the hype.1
Discerning between legitimate applications versus unrealistic money grabs is necessary to overcome the ‘overhyped’ label. The advantages of blockchain are apparent in a number of sectors, including peer-to-peer renewable energy trading which aims to reduce power costs and monetise private renewable energy generation. Other initiatives where the benefits of the technology are plain to see include streamlined election voting systems like the one being trialed in Indonesia that helps to ensure every voter is accounted for in a timely fashion and that votes are immutable thereby tackling corruption at polling time.
With time and further implementation, the market’s ability to observe the tangible benefits will improve, as will the public’s ability to identify the many other applications of blockchain capable of solving real world problems.
2. ‘Blockchain networks are more prone to cyberattacks
than conventional systems’
Cyber security is a hot topic at the moment, and therefore so is the security of blockchain. In 2017, the number of cyberattacks in Australia increased by 26%, costing businesses an average of approximately $AU7 million each. Meanwhile, strict new mandatory data breach reporting laws took effect in February, prompting businesses and consumers alike to question the reliability of blockchain networks and consider how they stack up against conventional systems.
Blockchain networks are certainly not free of security limitations and have suffered a number of well-publicised breaches in the past year alone. Yet their decentralised nature does grant them a number of benefits. Because they are supported by an often large number of independent systems (nodes), they sidestep many of the threats faced by networks run from centralised servers.
In theory it means hackers are faced with the more difficult task of penetrating and compromising a number of separate systems rather than a single centralised server. For this reason, common conventional forms of cyber-attack such as DDOS and ransomware are also far less effective at impeding the operation of a network.
Yet despite this, the notion of a multi-node attack is feasible, with one of the first instances of a successful 51% attack occurring just over a month ago hitting a popular blockchain network that finds its primary use case in anonymous transactions.*
More vulnerable however are the centralised cryptocurrency exchanges that many use to trade the tokens of different blockchain networks. These exchanges expose traders to potential currency and data theft by re-opening the door to threats that conventional networks suffer from. Famous examples such as the $460m theft arising from the hacking of Mt Gox exchange in June 20112 and the more recent hacking of Coincheck which saw the theft of more than $650m, have drawn significant attention to this vulnerability.3
This particular issue is being addressed with the adoption of decentralised cryptocurrency exchanges. On these exchanges, users trade directly (peer-to-peer), instead of relying on a centralised and vulnerable third party to hold their tokens.
Blockchain technology is still in its infancy, and naturally bears a number of its own security vulnerabilities while it seeks to address some of the most pressing cyber threats plaguing current technologies. With development, spurred by market demand, the reliability and security of the technology will continue to improve, enabling broader adoption of blockchain and a much-needed revolution of cybersecurity across industries.
3. ‘Blockchain technology
is expensive and slow’
This myth is perpetuated by the fact that the Bitcoin network for instance, which had transfer costs as high as $US55 per Bitcoin in late 2017,4 can only process an average of 4 transactions per second (TPS),5 which pales in comparison to Visa’s daily TPS averaging 1,800** with peak capacity at approximately 65,000TPS.6
It should be noted that transaction fees for Bitcoin rose as high as $US55 per transaction,meaning that, on a percentage basis, transfers of $US11,000 or less at that time would incur fees greater than 0.5% ($US55/$US11,000), the average direct debit transaction fee.7
Development for Bitcoin is underway to shrink this TPS margin. The Lightning Network is a proposed enhancement to the Bitcoin Network, aiming to achieve millions of TPS with reduced fees.8
In a ‘transaction processing setting’ like the one that Bitcoin exists in, scaling blockchain technology to exceed competition like Visa, is relevant and necessary. As explored in our previous article, many tokens belonging to different blockchain networks have utility outside of financial services industries. In the event the token is designed for one of the countless other useful and effective public and private applications of blockchain technology, in the area of real estate, or health care for instance where transfers might be less frequent, speed is of lesser importance.
As blockchain finds more and more application within society, education is necessary and important to empower the community to see through the hype.
The true potential of the technology will only be realised when value is attached only to the initiatives that carry real benefits for the community. Vigilance is also necessary in relation to the potential cyber security risks, as is an awareness of the current limitations of the technology.
Given these considerations, and a fair-minded approach by the community, blockchain has the opportunity to address some of our most pressing real world problems.
* A ‘51% attack’ refers to the hacking of over 50% of the nodes supporting the Blockchain network thereby compromising the network’s security.
** This number was inferred by dividing the 150,000,000 average transactions per day reported by Visa by the number of seconds in a 24 hour day.