For all its complexity, the potential of blockchain as a decentralized form of archiving is nearly limitless . Whether it’s better user privacy, increased security, lower processing fees, or fewer errors, blockchain technology has so many benefits . But there are also disadvantages.
Benefits of Blockchain
Transactions on the blockchain network are approved by a network of thousands of computers. This removes almost all human intervention from the verification process, helping to reduce human error and achieve an accurate record of information . Even if a computer on the network were to miscalculate, the error would only be made on a single copy of the blockchain. For this error to propagate to the rest of the blockchain, it would have to be made by at least 51% of the computers on the network, which is almost impossible for a network as large and growing as that of cryptocurrencies.
In general, consumers pay a bank to verify a transaction, a notary to sign a document or a priest to solemnize a marriage. Blockchain eliminates the need for third-party verification and, with it, the associated costs . Business owners must pay a small fee when accepting credit card payments, for example, because banks and payment processors must process these transactions. Bitcoin , for example, has no central authority and transaction fees are limited.
The blockchain does not store any of its information in a central location . Instead, the blockchain is copied and distributed over a network of computers. Each time a new block is added to the blockchain, each computer on the network updates its blockchain to reflect the change. By broadcasting this information over a network, rather than storing it in a central database, the blockchain becomes more difficult to tamper with. If a copy of the blockchain fell into the hands of a hacker, only a single copy of the information, not the entire network, would be compromised.
Transactions made through a central authority can take up to a few days to settle. If you attempt to deposit a check on Friday evening, for example, you may not see the funds in your account until Monday morning. While financial institutions operate during business hours, five days a week, blockchain operates 24 hours a day, seven days a week, 365 days a year .
Transactions can be completed in just ten minutes and can be considered safe after just a few hours. This is particularly useful for cross-border transactions, which typically take much longer due to time zone issues and the fact that all parties must confirm payment processing.
Many blockchain networks operate as public databases , which means anyone with an internet connection can view a list of the network’s transaction history. Although users can access transaction details, they cannot access the credentials of users who perform those transactions. Blockchain networks like bitcoin are often mistakenly thought to be anonymous, when in reality they are only confidential.
In other words, when a user performs public transactions, their unique code, called a public key, is recorded on the blockchain, not their personal information. If a person has purchased bitcoin on an exchange that requires identification, their identity is still tied to their address on the blockchain, but a transaction, even tied to a person’s name, does not reveal any personal information.
Once a transaction is recorded, its authenticity must be verified by the blockchain network. Thousands of computers on the blockchain rush to confirm that the purchase details are correct. Once a computer validates the transaction, it is added to the blockchain block. Each block in the blockchain contains its own unique coding , as well as the unique coding of the block that precedes it. When the information of a block is modified in any way, the coding code of this block changes, but not that of the following block. This difference makes it extremely difficult to change blockchain information without notice.
Most blockchains are completely free software . This means anyone can view their code. This gives auditors the opportunity to examine the security of cryptocurrencies like bitcoin. It also means that there is no real authority that controls the Bitcoin code or how it is edited. Because of this, anyone can suggest system changes or upgrades. If the majority of network users agree that the new version of the code with the upgrade is sound and valid, then Bitcoin can be upgraded.
The bank of non-banks
Perhaps the most profound facet of blockchain and bitcoin is the ability for anyone, regardless of ethnicity, gender, or cultural background, to use them. According to the World Bank, nearly 2 billion adults do not have a bank account or any way to store their money or wealth. Almost all of these people live in developing countries where the economy is in its infancy and entirely dependent on cash.
These people often earn little money and are paid in physical cash. They must then store this physical money in hidden places in their homes or where they live, which exposes them to unnecessary theft or violence. Keys to a cryptocurrency wallet. For most people, these options are likely to be easier to hide than a small pile of cash under a mattress.
The blockchains of the future are also looking for solutions to not only be a unit of account for storing wealth, but also to store medical records, property rights, and a variety of other legal contracts.
Disadvantages of Blockchain
While blockchain has tremendous benefits, its adoption also faces significant hurdles. The obstacles to the application of blockchain technology today are not only technical. The real challenges are political and regulatory, for the most part, not to mention the thousands of hours of custom software design and programming required to integrate blockchain into today’s commercial networks. Here are some of the challenges that stand in the way of widespread blockchain adoption.
Although blockchain can save users on transaction fees, the technology is far from free. The “proof-of-work” system bitcoin uses to validate transactions, for example, consumes huge amounts of computing power. In the real world, the energy supplied by the millions of computers in the bitcoin network is close to the annual consumption of Denmark. Assuming electricity costs of $0.03~0.05 per kw/h, mining costs excluding material expenses are approximately $5,000~7,000 per unit.
Despite the cost of bitcoin mining, users continue to drive up their electricity bills in order to validate transactions on the blockchain. Indeed, when miners add a block to the bitcoin blockchain, they are rewarded with enough bitcoins to make their time and energy worth it. In contrast, when it comes to blockchains that do not use cryptocurrency, miners must be paid or otherwise incentivized to complete transactions.
Bitcoin is a perfect case study for possible blockchain inefficiencies. Bitcoin’s “proof of work” system takes about ten minutes to add a new block to the blockchain. At this rate, it is estimated that the blockchain network can only handle around seven transactions per second (TPS). Although other cryptocurrencies, like Ethereum, perform better than bitcoin, they are still limited by the blockchain. The historic Visa brand, for example, can process 24,000 GST.
Solutions to this problem have been in development for years. There are currently blockchains that claim to process over 30,000 transactions per second.
While privacy on the blockchain network protects users from hacks and preserves privacy, it also enables illegal trading and activity on the blockchain network. Probably the most cited example of the use of blockchain for illicit transactions is that of Silk Road, an online drug market on the “dark web”, which operated from February 2011 to October 2013, when it was shut down by the FBI.
The site allowed users to browse untracked using the Tor browser and make illegal purchases in bitcoins or other cryptocurrencies. Current U.S. regulations require financial service providers to obtain information about their customers when they open an account, to verify the identity of each customer, and to confirm that customers are not on any list of known terrorist organizations or suspected.
This system can be considered both an advantage and a disadvantage. It allows anyone to access financial accounts, but it also makes it easier for criminals to transact. Many would argue that the good uses of cryptocurrency, like banking the unbanked world, outweigh the bad uses of cryptocurrency, especially when most illegal activity is still done through untraceable cash.
Many players in the crypto space are concerned about government regulation of cryptocurrencies. As it becomes increasingly difficult and nearly impossible to shut down something like bitcoin as its decentralized network grows, governments could theoretically make it illegal to own cryptocurrencies or participate in their networks.
Over time, this concern has eased as big companies like PayPal are beginning to allow the possession and use of cryptocurrencies on its platform.