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Blockchain: The Illusion of Value

Some Background information

(You can skip this part and go straight to ‘Blockchain models in comparison’)

Generally, we can differentiate between private, public and consortium blockchains. The main differentiating points are membership access and consensus. Membership access defines who and based on what grounds, is allowed to use the blockchain. Consensus outlines the processes and rules that determine how various parties cooperate and agree on the state of the blockchain. This may include governance.

Private blockchains

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Private blockchains are only accessible to a few particular groups or individuals. They are centralised. Imagine it to be like a nightclub, whereby the doorman and security decide who gets to have fun tonight and who does not. Furthermore, the ones with the most influence (either through money or their social ranking) get to make the decisions. A private blockchain is not much different. It can only be used by those who have been provided access. The consensus process is usually led by a few individuals, e.g. the nightclub owner, or everyone who has access to the blockchain, either everyone that made it into the nightclub or a selected group of owners. Note that in many cases, private blockchains are not much different from databases. If only a few individuals are in charge, then there is no need for a trustless system because users are expected to trust those who run the blockchain.

Consortium blockchains

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In contrast, consortium blockchains have a selected group of ‘leaders’, who are in charge of consensus and often the governance processes, but everyone is allowed to enter and use the blockchain. Therefore, consortium blockchains are usually semi-centralised. This is similar to a music festival, as long as you can purchase the ticket, you are allowed to take part. However, the decisions on whom will perform, the price of the tickets, the location etc., are all taken by a group of event organisers. Similarly, in a consortium blockchain, the consensus and governance will be restricted to few ‘trusted’ individuals. Therefore, the blockchain cannot be trustless. While users don’t have to trust each other, they have to trust that the event organisers are treating everyone equally and are acting fairly.

Public blockchains

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Lastly, public blockchains allow everyone to join and to be participating in the decision making, consensus and governance (depending on the blockchain, governance might be off-chain and lead by a community of developers). Public blockchains are based on the premise: The more resources a user provides to the system, the more trustworthy the user is since he or she has more to lose. For example in Ethereum’s Proof of Stake consensus, everyone will be allowed to participate in consensus, as long as they can provide 32 ETH as collateral. This can be compared to street art. You are free to watch (stay or leave). If you give the artist a tip, you can probably request a song, or you can set up your area and make music, outperforming everyone else in that area.

While the examples provided (nightclub, festival, street art) depend on a specific location, blockchains are often accessible independent of the geographic area of its users.

TLDR: Blockchains differ between membership control and consensus. While private blockchains only allow a certain group of individuals to use the blockchain, consortium blockchains allow everyone to use its services but only a few agree on what those services are. Public blockchains allow everyone to join and to participate in consensus. They are the only ones that are potentially trustless and tamper-proof.

Blockchain models in comparison

The fewer users a blockchain has, the more engagement is required by individual users. If a blockchain is only accessible by a few, it is neither trustless nor tamper-proof. The parties, who run a private or consortium blockchain have the majority of hash power in the system. Resulting, they can tamper the state of the blockchain and users will not be able to do much about it, i.e. the club owner can change the furniture of the club and decide on their clientele. Of course, they might take the suggestions of their customers into consideration, but if an individual customer does not agree with the decisions, they will not be able to do anything about it.

Think twice before you propose a blockchain

For the sake of argumentation in this story, blockchains are not about the technology, they are not about their applications, and it does not matter which company uses them and which does not. Ultimately, most blockchain applications existed before. People were able to transfer money to each other securely, vote, track goods or verify papers, all without the use of blockchains. There is nothing new in the type of applications that blockchains allow.

Besides, using blockchains to store information over the long-term is quite hideous. The transaction throughput is low and the latency of individual transactions is often a few minutes. Additionally, to make a blockchain trustless, players have to store the entire version of the blockchain. Lastly, most blockchain applications have a horrible user interface. In the case of centralised service providers, like banks, the centralised entity is able to abstract the information and have their customers only deal with the most relevant aspects. In contrast, in decentralised applications, the user is their own bank and therefore, has to handle all the information. This requires a lot of user education and a user interface that is stupid-proof. Otherwise, users might not know how to handle the complexity of data, which can result in the loss of funds.

Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver. — Ayn Rand

These are just some of the disadvantages of blockchains, which can vary depending on the use cases. It is worth mentioning that the tech has enough advantages which allow for proper use cases, too. However, this is not the focus of this story.

Summarising, there are very few use cases in which it makes sense to run a private blockchain (e.g. if multiple businesses have to interact with each other). However, many current use cases do not make sense to run on either of the blockchains described above. These are mainly use cases which require an oracle to work. (Further information are provided in my previous post.) So why use blockchain at all for these use cases?

Beyond the word ‘blockchain’

Bitcoin, the first well-known blockchain application to allow for the purchase and exchange of digital assets without the need for a middle-man. Instead of trusting one single entity, the responsibility of holding and transferring coins is in the hands of the users, whereby the process of mining and validating transactions makes the blockchain immutable, trustless and transparent.

Overall, people are tired of having to pay high transaction fees, trusting entities, whom they have no reason to trust, and not knowing where information is taken from, for what it is used, who uses them and for what purpose. Who knows what shady business is going on behind the curtains? The creation of web3 aims to eliminate that. You want to live in a world in which you have full control over the information that exists of you, your funds and your decisions. Nobody should be able to hide information that might be crucial to your actions. This empowers individuals and might help to improve how individuals interact with each other. While it is important that individuals can be held responsible for their actions, it is not necessary to know the details of transactions (zero-knowledge proofs play a big role to achieve this).

Blockchain provides society more than different processes, data storage and tracking, instead, it symbolises the aspirations of a different society, in which cooperations do not own me nor my data.

We can all agree that most businesses and applications are nowhere close to go decentralised and to resemble the benefits described above. First of all, the technology is not ready to allow for a wide range of decentralised use cases. Secondly, we would not know how to make use of these services effectively. Society has to go through an educational process in which the need for transparent and trustless operations rises, as well as develop a different understanding of taking responsibility.

“maybe bitcoin isn’t that decentralized yet and maybe that doesn’t matter yet, but in the future, when a new generation that doesn’t share our values takes over, it will matter” — Matt Corallo

Even if private or centralised blockchains do not align with the original idea and values of decentralised systems, it makes a difference in people’s minds whether or not a business uses blockchain. The technology might not have any positive effect on the business structure and processes, but the company will automatically seem more ‘friendly’, ‘fair’ and ‘open’. Arguably, this can be seen as misleading and a misuse of the values blockchains aim to resemble.

Conclusion

The use of blockchain technology is often misleading and not deployed for the right purpose. Depending on the type of blockchain, its use cases and implementation makes more or less sense. While public blockchains tend to be the most decentralised and trustless, they are limited in the type of use cases that are currently possible. In contrast, consortium and private blockchains often do not align with the benefits of blockchains. Resulting, when businesses state their processes run on the blockchain, it will not make any difference in their behaviour, processes or interaction with customers. Instead, it exploits the vulnerabilities of unaware users.

Connecting basic processes with the word ‘blockchain’ present a false image of the actual use cases. Please don’t confuse the benefits and drawbacks of different blockchain applications and be aware of the usage of certain terminology. Every technology is as good as its use cases.

Solely implementing blockchain to provide the illusion of a more transparent and trust-worthy environment is wrong.

About Anais Urlichs

Anais has been involved as researcher and technical writer, analysing projects for a crypto VC during 2018. Since 2019, she is conducting her own research on the sociological implications of distributed systems, while finishing her computer science degree and working as front-end developer.

Her previous work include introductory writings on blockchain architecture, analysing distributed governance models and user behaviour, as well as project reviews. For more information, please refer to her website http://anais.urlichs.de 

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