Blockchain is a distributed database that stores information about all transactions of system participants in the form of a "block chain". All blockchain users have access to the registry, acting as a collective notary who confirms the truth of the information in the database. Blockchain can be used for financial transactions, user identification, the creation of cybersecurity technologies, etc. The promptly growing technology has become a large part of modern and innovative tech for businesses by offering different enterprise blockchain solutions.
Nevertheless, blockchain remains an experimental technology - many of the problems of its use have not yet been resolved. Interest in blockchain continues to grow: back in 2016, many banks, stock exchanges, and fintech companies announced the launch of their technology development projects. Blockchain remains one of the hottest topics in financial services and stock markets, and there is every reason to expect its speed to grow. Several large financial institutions have formed teams to explore the possibilities of the technology, and some market participants have joined in consortia to develop standards for its use. According to a report presented at the World Economic Forum in 2016, over $ 1.4 billion has been invested in the study of blockchain and its applications in the financial services industry over the past three years.
Technology is truly capable of protecting the data we have to work with while making it more accessible and transparent. In addition, blockchain can significantly reduce costs and minimize the time it takes to solve emerging problems and eliminate errors. Blockchain emerged as a technology to launch bitcoin and was initially used exclusively to manage cryptocurrencies. However, since its introduction in 2009, the scope has expanded significantly. And now, in a variety of articles, forums, and conferences, new use cases of technology are discussed, including in trade reporting; for non-cash payments, checks and payments; in accounting; monitoring; risk management; audit; management and financial accounting; compliance (including the prevention of financial crimes, although, of course, the blockchain's capabilities in this area are not limited by the fight against fraud).
The fact is that the information stored using the blockchain can be recorded in the general ledger, available in real-time, or very close to it. This means that all stakeholders can be directly involved in the process - even those of them who previously could only rely on a standard report at the end of the transaction. Blockchain implementation is by definition a complex process, but the main idea of the technology is simple: a distributed ledger or database running simultaneously on many (sometimes millions) nodes distributed around the world between various users and organizations. The uniqueness of the blockchain lies in the immutability or irreversibility, which is guaranteed by the cryptographic security system.
For example, when transactions from the ledger are grouped into blocks and written to the database, the record is preceded by cryptographic verification, as a result of which it is almost impossible to change the state of the ledger by any shenanigans. Confidence in the blockchain is also supported by the fact that any data changes in the blockchain are possible only if the network participants confirm the legitimacy of the transaction by general rules and protocols. But what are the threats and risks of blockchain?
In 2017, cryptocurrency transactions were thought to be secure and public key encryption schemes were nearly impossible to break. However, this does not mean that there are no vulnerabilities associated with unsafe key storage or social engineering theft. The presence of weaknesses may also be due to the blockchain platform, which may turn out to be insecure due to the development environment used or the presence of vulnerabilities in the IT architecture of the system.
Another threat is the emergence of quantum computers that can theoretically crack all public-key encryption algorithms. There is a dangerous "51 attack" associated with the unification of a critical number of participants for the network to branch chains in a direction convenient for attackers. Also, blockchain is not always suitable for trading physical goods. On August 16, 2018, the Boston Consulting Group (BCG), a management consulting company, presented a study that examined the problems of blockchain implementation in the retail network. Even though companies and banks have been actively using blockchain since 2016, the authors of the report believe that the new technology is not suitable for trading physical goods.
Initially used as a platform for cryptocurrency, for instance, cryptocurrency mobile wallet, blockchain is believed to increase the transparency of transactions and reduce the risk of fraud. However, by August 2018, the turnover using blockchain is still too small to be confident when its volume reaches critical mass, the Reuters news agency reports. According to the co-author of the BCG Antti Belt report, the main problem with blockchain use is that cryptocurrency is not intended for physical transactions -it is impossible to track a physical object in the virtual world. In addition, the introduction of new technologies must be accompanied by an agreement on terminology, and it is not yet clear whether the transition to a blockchain platform is economically justified.
The researchers also note that it is unclear to what extent merchants are willing to accept blockchain, which could reduce an already negligible share of profits. The BCG report emphasizes that as platforms evolve, the pricing inefficiencies and uneven distribution of information that underpinned brokering fees will disappear, and sellers' profits will dissolve with them. At the same time, according to analysts, the use of blockchain can increase the transparency of operations, create a more efficient and liquid market. Trade deals will no longer be limited to bilateral agreements and will move to more flexible transactions based on electronic platforms between multiple buyers and sellers. The more widely new technologies are introduced, the less the role of intermediaries will be, and it is not yet clear whether they will want to actively use the blockchain.
Co-author of the BCG report, Steven Kok, notes that blockchain will be most beneficial in those areas of trade where the origin of goods plays an important role. For example, this concerns the diamond trade. For example, De Beers has been using distributed ledger technology since May 2018 to track the most expensive diamonds from the place where they are mined to the sales representative, to rid the supply chain from fraudsters and illegal mine exploitation. Natixis, IBM, and Trafigura are developing a blockchain-based commodity financial transactions solution that will be used in transactions in the US crude oil market. Since the buyer, the seller, and the banks that serve them are in a single register, all parties can simultaneously view and share the status of the transaction. They can follow the transaction from the confirmation and validation of a new deal to the process of checking the quality of crude oil, its final delivery, and cancellation of the letter of credit. The blockchain will become an effective tool in the commodity market only if it is used by everyone. Occasional transactions in the distributed ledger do not affect the big picture, BCG concluded.
There is also the problem of slow performance due to cryptography. Speed is often cited as a major obstacle to the widespread adoption of blockchain. In terms of performance, blockchains are significantly inferior to traditional databases, and for good reason: the cryptographic component, which, gives the blockchain such important advantages, implies complex calculations. For example, the throughput of the Bitcoin system is only seven transactions per second. Of course, this indicator cannot be compared with two thousand transactions per second, on average, passing through the VISA payment system, the maximum performance of which even reaches 56 thousand transactions per second (however, this reserve is never used by more than a third, even in periods of the most active purchases). Of course, they are actively working to improve the performance of blockchains. In particular, for the BitShares crypto platform, the ability to process up to 100 thousand transactions per second is declared, which, of course, sounds quite good. However, it should be taken into account that the methods of determining the performance that is used in BitShares differ from the generally accepted ones.
The distributed nature of the blockchain, in principle, complicates any comparisons, but so far, the difference in performance remains huge and the score is not in favor of the new technology. Also, the problem of configuring and managing the infrastructure. Setting up and managing infrastructure to support blockchain solutions is another challenge for organizations experimenting with the technology. Teams that deal with information security, transactions, cloud computing, and many other processes are starting to implement blockchain, positioning the technology in their companies as a new solution for working with data and/or code. At the same time, the mentioned process can be very destructive -in particular, because so far there are no established methods for its successful implementation.
In 2017, the first attempts are made to improve the situation (for example, a Microsoft project called Bletchley or a blockchain project Hyperledger), but such systems are not yet ready for full launch. When talking about a fashionable trend, businessmen often miss the main thing: blockchain is a new technology for working with data and not a new product that can be resold at a profit. Of course, blockchain technologies will help reduce costs when working with documents, but first, you need to pay a third-party contractor to develop the corresponding product.
One of the main problems is the lack of a legal framework. The use of blockchain technologies is outside the legal framework. This can be illustrated by the example of ICO (Initial Coin Offering, that is, the initial placement of coins). Startup creators issue their digital coins (tokens) using blockchain technologies and exchange them for cryptocurrencies or fiat currencies to attract the necessary funding. The legal status of ICOs today is not defined in any country in the world, and therefore such investments have no guarantees of return. Fundamentally new technological solutions are being developed; however, their mass implementation should not be expected until the moment when blockchain technologies receive a specific legal status.
The blockchain is an information system, the algorithm of which is designed to reliably store information about events and transactions and provide integrity and immutability of operations. The distributed database of this technology, consisting of blocks that include transactions (not necessarily financial), allows you to save all information about the operations performed, as well as protect the data from unauthorized changes or hacking. This solution looks more reliable than the traditional implementation: the database - the central server - the system administrator responsible for security. At the same time, the essence of the blockchain is not that it allows you to reliably store document, but in the fact that it is primarily a temporal event database of facts that are an integral part of the rights and obligations in the real world, which means that it is necessary to store information about events in it, and not the documents themselves.
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