Blockchain – far more than just a database replacement

Blockchain – far more than just a database replacement

Blockchain continues to generate significant interest in the market, driven to some extent by the recent buzz around the extraordinary increase in the value of Bitcoin – the digital currency where transactions are recorded on a public ledger as a chain of blocks. But the increase in awareness of the name hasn’t necessarily increased the overall level of understanding of the technology and its potential uses. This means that confusion prevails and as a result, many Blockchain projects remain stuck in the proof of concept stage.

One mistake that many people make is to consider Blockchain as a replacement for current databases, where it is in fact a completely different approach to managing records. Assuming they have the appropriate permissions, a database user can change records on a database stored on a central server and managed by administrators. This is essentially the ‘master copy’ which ensures that all other users receive the updated record. That’s different in a Blockchain. It is still a ledger, essentially a digital file, which keeps track of all transactions – but rather than being held in a single place, it is distributed across multiple locations and computers, called “nodes.”

There is no central authority or administrator for Blockchain, as all nodes work together to ensure they are all coming to the same conclusions, providing in-built security for the network. This misunderstanding over the true nature of Blockchain means that, according to research firm Gartner, 90% of projects using Blockchain do not actually need the technology, especially when it comes to permissioned Blockchains (those where users need permission to interact with the information on the Blockchain, as opposed to permission less models, such as bitcoin).

So, while considering Blockchain to be a database is a mistake, we recommend that businesses should focus on its main features, such as decentralization, consensus, reliability and transparency. These create many possibilities above and beyond a database’s capabilities. In fact, Blockchain will change all industry sectors where stakeholders can create new business models to solve problems that could not be solved with current available technology. The primary question driving Blockchain technology is: Do I trust that the data I am using is good, and can I rely on it to assess my risk?

Until now, Blockchain technologies have not gained sufficient transaction speed purely because of the nature of the decentralized model, and the bad news is that we expect this to increase. This performance issue is very apparent in the financial sector, where Blockchain adoption is currently focused on post-settlement, not front-end applications. The question is not only will Blockchain become faster and different to replace classic databases, but also whether the economic and business fabric will sufficiently adopt and adjust its mode of operation, so the introduction of a Blockchain-based application makes sense. If so, then the previous relational database model underpinning that mode of operation will no longer be effective. At this stage, the use of Blockchain must be carefully validated on a case-by-case basis, while considering the total cost of a distributed ledger compared to a single ledger, and the more immediate benefits of such classic models.

In fact, the financial services industry is ahead of the game – it has already reached the stage where organizations that have yet to assess how they can leverage Blockchain and Digital Ledger technology as part of their strategy, are already running the risk of being left behind. For other industries, analysts predict that it will be another five to 10 years before the technology reaches its full potential. While there are still many unsolved problems to address, it is obvious that there is significant merit in decentralizing information and transactions, and at the same time ensuring transparency and trust. We can expect Blockchain deployments to bring real value to critical transfers of information (between business, consumer and machines, in all combinations). Managing digital documents that demonstrate proof of ownership which can be transferred is an obvious application. But there are also infinite possibilities when you consider the potential of the many connected entities that make up the Internet of things: you could give these the permission to conduct transactions.

Blockchain technology is definitely gaining traction. We’ve seen an incredible growth in the variety of projects started in 2017, from different sectors, solving issues or creating different business models. This has contributed not only to an advance in the maturity of the solutions but has also raised many questions, for example regarding legal matters such as liability and standards. Should this trend continue, with investors and stakeholders from all sectors working with Blockchain and institutions starting to align best practices, then the technology will be more and more reliable and better understood in a shorter time than forecasted, as widespread market attention forces acceleration.

It can’t be denied that Blockchain does add additional layers of complexity, not only due to the distributed nature of the ‘code’ but also by the rise of smart contracts and autonomous actions on Blockchains. However, the potential for its implementation are far in excess of database replacement. For all businesses implementing projects currently or that are considering a future endeavor, the keys to success are to be very clear about the problem you are trying to solve, to keep close track of what is being launched (‘code is law’) and above all, to maintain a common sense approach.

Written by Elinice Macedo and Frederik De Breuck

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