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Blockchain Series 2: Pros and Cons

Updated: Jul 23, 2023




In the previous article, we presented at great length about blockchain, its underlying concept, and how it is different from the current mainstream technology. Blockchain’s limitless potential as a record-keeping ledger for all exchanges and transactions makes it a buzzword on the tongue of every digitally literate individual in the nation. As blockchain technologies are built on top of the concept of decentralisation, most of its advantages and disadvantages are tied to this concept. In this article, we aim to furnish everyone with an unbiased evaluation of the current blockchain technology, delivering both advantages and current limitations of blockchain.


ADVANTAGES


Enhanced Efficiency

Traditional verification and record-keeping processes are paper-heavy, time-consuming, and often require third-party mediation. Because of these reasons, transactions placed through a financial institution can take up to a few days to settle. For cross-border trades, it can take even longer due to time zone issues and payment confirmation required from all parties.


In a blockchain, smart contracts are used to automate the execution of an agreement or to trigger the next action in a workflow when predetermined conditions are met. Any changes made on one chain will be automatically verified and simultaneously updated on the other chain. As a result, verification of contract terms can be completed via automation without any intermediary’s or third party's involvement. As there is no need for general ledger reconciliation, clearing and settlement processes can be done much faster. This reduces time loss and hence, enhances efficiency.

Furthermore, while bank operations are limited to regular business hours, blockchain operates 24/7 across the entire year. Transactions can be completed at any time in a few minutes and can be secured after just a few hours.


Reduced Documentation Cost

Third-party ledger verification typically requires a cost. When a contract is certified, signatories are charged a fee by notaries. When a credit card payment is processed, business owners are charged a fee by banks and payment-processing companies.


Thanks to blockchain’s decentralised nature and smart contracts, the contract and documentation cost plummet to zero as the process of verifying a transaction by a bank, signing a document by a notary, or even performing a marriage by a minister is no longer needed. Users only need to pay for the low transaction fees determined by miners, or in some cases, users themselves, which can be significantly lower than the payment-processing companies.


Increased Accuracy

As many traditional verification and record-keeping processes require human involvement, they are prone to human error. In contrast, updates on the blockchain are automated and approved by more than thousands of other computers on the network, resulting in little to no human error.


A typical blockchain uses proof-of-work consensus to examine and verify new blocks to be added. This means that for a computational error to be reflected in the output, more than 50% of the nodes on the blockchain network have to obtain the same error. To date, both Bitcoin and Ethereum networks have more than 10,000 working nodes. For 10,000 computers, 5,001 of them have to get the same erroneous result. Given the performance stability of the current computers, this is statistically unlikely to happen.


Strengthened security

Conventional databases used among industries utilise CRUD (create, read, update and delete) at the primary level to ease data updates and replacement. CRUD model does not, however, exhibit immutability, and is prone to manipulation by rogue administrators. Moreover, conventional databases are located in a single storage, providing a single point of failure. Data could be lost or corrupted if there is a power outage, natural disaster, human error, or any other destructible situation in the location. Moreover, current databases can be easily altered by having the access password to them. If the database of an organisation, such as a bank, is hacked, the client’s private information is at risk.


In a blockchain, multiple copies of data are made across the network. Hypothetically, no single destructible situation or authority, including the government and the blockchain network provider itself, can interrupt the operation of the network of a public blockchain.


Consider a situation where a hacker attempts to alter the data in one of the blocks in the chain. When the data in the block is modified, the hash of the block changes. This hash is now inconsistent with the previous hash of the next block, making this change invalid. The structure of blockchain where blocks of data are chained chronologically and cryptographically makes it immutable and incorruptible. Modification becomes transparent as new changes to data do not replace the initial data, but are added to the end of the chain. Every new data added has to be verified by the blockchain network, adding a security layer to the data.


Increased Transparency

All transactions managed by centralised authorities such as banks can be accepted or denied based on the criteria they set up, and users might not know the details.


On the other hand, transaction ledgers on the blockchain are made public, allowing everyone on the network to inspect the activity logs and transaction history on every product. Such information plays a crucial role in ensuring your analysis is reliable and accurate, and can be examined or verified effortlessly in case of a dispute. This also adds an unprecedented layer of accountability, holding every business sector to act with integrity towards its stakeholders and customers, which contributes towards a sustainable market.


Moreover, most blockchain technology is open-source. This means that users can fully review the code that they used, and know what they are getting. Users can expect no hidden or unknown functions in an open-source blockchain application.


Improved Traceability

In the current digital era, traceability is more of a demand rather than a request among many companies and consumers, especially in the supply chain. Supply chain traceability is essential to any successful business as it allows organisations to obtain precise and real-time information about the origin, practices, processes, and past & present locations of a product. Organisations that can achieve supply chain traceability will be able to recognise strategic opportunities and respond efficiently to changes in demand while keeping cost low.



There is a common lack of traceability in the traditional supply chain, generally caused by outdated software, disjointed data systems, or inefficient manual tracking and inspections. This ultimately weakens consumers’ trust in the brand. With blockchain, an audit trail that records the provenance of a product at every stage of its journey is created. This audit trail is immutable after creation, allowing both vendors and suppliers to trace the product with full confidence that it is not being replaced or misused during the supply chain process. Security is improved in exchange-related businesses, and the authenticity of the traded products can be easily verified.



DISADVANTAGES


Increased Energy Cost

Compared to a traditional database, a blockchain network is undeniably costlier. Blockchain requires an enormous amount of computational power to fuel its entire system. In the Bitcoin network, the bulk of the total electricity consumption is driven by the proof-of-work consensus mechanism, which is used to mine Bitcoins and validate transactions. As the Bitcoin network grows larger (which means more users are present in the network to validate transactions), more electricity is consumed by the entire network. The Digiconomist Bitcoin Energy Consumption Index estimated that one Bitcoin transaction takes 1,449 kWh to complete, or the equivalent of approximately 130 days of power for the average Malaysian household. To put that into context, the average cost per kWh in Malaysia is approximately 22 cents. That means a Bitcoin transaction would generate approximately RM319 in electric bills.


Limited Scalability

Due to the complex cryptographic hash function implemented to increase its security, blockchain has a relatively low throughput compared to the traditional transaction network. In this context, throughput refers to how fast a blockchain processes transactions, commonly expressed in transactions per second (TPS). Most popular crypto payment networks are slow: Bitcoin and Ethereum can only process 7 TPS and 20 TPS respectively. Even the fastest blockchain - the Solana blockchain - can only hold up to 3000 TPS. This number is considerably low when compared with a centralised payment system such as Visa which can process 65,000 TPS, and Alipay which can deliver up to 200,000 TPS. A generally low TPS causes blockchain to be inefficient when the network scales up (which also means the transaction volume now increases), since the network is congested and requires more time to process transactions.


Risk of Illegal Activity

While the blockchain network is fully equipped with features that can protect users’ privacy and security, there is always a risk that this technology will be exploited and abused for evil causes. During the early stage of the blockchain wave in 2013, there was an incident that took blockchain enthusiasts off guard. An online dark web illegal drug and money laundering marketplace named Silk Road was caught abusing the protective nature of blockchain to operate illicit transactions securely. With the unlawful transaction data kept out of reach from non-users of the blockchain network, they successfully managed to keep their business running for 2 years and 8 months long (from February 2022 to October 2013). Silk Road was only shut down after it was tracked and closed by the FBI.


Risk of Manipulation

Blockchain is a distributed network that requires the nodes i.e. computers to participate in the proof-of-work consensus process as part of the security element. Although the intention is noble to prevent monopoly control over the blockchain network, it does not entirely deter the users from achieving that. This is especially true for small blockchain networks since 51% of node ownership is relatively easier to achieve due to the small number of participants. With at least 51% ownership over the network, the group is now able to tamper with the proof-of-work consensus for their interest. Although it might be impossible for them to amend the historical blocks that are already published in the network, they can at least control the upcoming transactions - whether to block or introduce altered transaction data.


Lack of Incentives

The nodes in blockchain networks play an extremely, if not the most crucial role in keeping the network rolling. They are the backbone of the decentralised feature that blockchain is introducing to the world. However, given the fact that it takes a relatively huge amount of money and time to participate in the network as a node, there is a concern among blockchain network owners that there might not be sufficient nodes who want to join the network, especially for public networks. To make the investment made by the nodes worth it, there needs to be some sort of incentives and rewards that can overtake the costs. Although it sounds easy, surprisingly, only a small amount of blockchain networks offer such incentives. For example, in the Bitcoin network, a miner receives up to 6.25 Bitcoins for each successful transaction (each block is successfully added to the blockchain network). For non-incentive blockchain networks, it might be hard even to attract nodes to join in the first place.



Increased Storage Capacity Requirements

There is also a heated debate among the blockchain community when it comes to data storage. Since the ledger is immutable and limitless, the data storage required to store a blockchain ledger can easily exceed hundreds of GB. For instance, the minimum SSD storage needed to run Ethereum 2.0 full nodes starts at 1TB, which is significantly high for a new retail node. This issue also boils down to the distributive nature of blockchain, which requires all participating nodes to bear the exact same ledger as the rest. Each node, including the retail node, is required to act as the central authority of the network, holding on to the full, complete ledger. Not only will this issue deter interested users from joining the nodes in the first place, but will also frustrate current users in the nodes from continuing their role for a longer period. A glance at Etherscan, an Ethereum node tracker, shows that as of December 8, 2022, less than 10,000 nodes are running on the Ethereum network, far fewer than in July 2017, with approximately 22,000 nodes.


Conclusion

Despite having several limitations, organisations can tackle specific problems in transactions and documentation effectively using blockchain. As technological advancement continues, we believe all drawbacks of blockchain will be solved in the foreseeable future. Until then, blockchain stands as a disruptive technology to make organisation and business operations more accurate, efficient, secure, and cheap.


Our next article will be discussing what are the applications of blockchain, and how it will change what we are using now.



Written By: Jie Sing Yoo and Zabir Azreen



References


  1. Blockchain Facts: What Is It, How It Works, and How It Can Be Used: https://www.investopedia.com/terms/b/blockchain.asp

  2. The Benefits Of Applying Blockchain Technology In Any Industry https://www.forbes.com/sites/ilkerkoksal/2019/10/23/the-benefits-of-applying-blockchain-technology-in-any-industry/?sh=7be31ccf49a5

  3. The Truth About Blockchain https://hbr.org/2017/01/the-truth-about-blockchain

  4. Blockchain for Supply Chain: Track and Trace https://aws.amazon.com/blockchain/blockchain-for-supply-chain-track-and-trace/#:~:text=With%20blockchain%2C%20supply%20chain%20companies,at%20any%20point%20in%20time

  5. Building Resilience and Managing Risk in the Global Supply Chain https://www.supplychainbrain.com/blogs/1-think-tank/post/35554-what-supply-chain-traceability-really-means-and-how-to-achieve-it#:~:text=Traceability%20in%20the%20supply%20chain,process%20and%20to%20the%20retailer

  6. What Is Transactions Per Second (TPS): A Comparative Look At Networks https://phemex.com/blogs/what-is-transactions-per-second-tps

  7. Understanding The Risk of Immutable Blockchain Applications https://www.aferm.org/erm_feed/understanding-the-risk-of-immutable-blockchain-applications/

  8. Storage Needs for Blockchain Technology - Point of View https://www.ibm.com/downloads/cas/LA8XBQGR

  9. Blockchain’s Storage Problem Is Growing. Are There Any Solutions? https://halborn.com/blockchains-storage-problem-is-growing-are-there-any-solutions/

  10. Bitcoin Energy Consumption Index https://digiconomist.net/Bitcoin-energy-consumption




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