Advantages and Challenges of the Blockchain Technology (2/2)

In last week’s article, Future Citizen Institute showcased an example of an effective implementation of blockchain technology, which in terms of average costs per transaction absolutely outperforms conventional service providers for money transfers. This week sees a shift of focus, as the conditions a blockchain-based currency must meet in order to maximise efficiency and effectiveness of blockchain technology will be explored.

The cryptocurrencies’ origin lies in the development of the aforementioned blockchain technology which is a product of an anonymous group named Satoshi Nakamoto that gathered the fruits of many years of labour from the global software community and wrote a white paper on the creation of a purely peer-to-peer version of electronic cash. The main objective was to avoid third-party providers for financial transactions to reduce or abolish fees, shift the power and responsibilities from the banks and service providers back to a network of people, and generally, design a trustless system of code-based verification of transactions.

Opinions diverge on the question, which of the newly built block chains will indeed become the ledger that will provide the platform to register and process millions of transactions per second. Taking a step back, heated debates are held whether this technology is at all fit and necessary to provide such services. In order to contribute to a better understanding of these processes, essential features of a block chain and its service conditions are delineated.

Zero Fees

To win a substantial share of the market, block chains should have zero or close to zero fees to remain competitive. While this is not blockchain’s unique selling point, it would still be suboptimal to charge a non-negligible fee for transactions since even Bitcoin services are virtually free of charge, especially considering large transaction, since fees are not growing concomitant with transaction size.

Near Instant Transactions

Blockchain services must be able to process and verify transactions almost immediately. This means they have to compete with already existing services’ transaction speed, such as Visa’s, and confirm these within one to three seconds. Today’s speed in retail, the food industry, public transportation, tourist attractions, or trading is staggering and therefore payments need to be immediate.

No Permissions or Trust

These points present a more complex scenario as they include other conditions that will be described subsequently. In an ideal but possible and existing scenario, users are - whether consciously or not – included in the aforementioned verification process of transactions. One example of how this possibility is brought about is by designing the workings of the system in a way that takes the users’ positive activity into account. This means that there is a code – previously written by the developers – that rewards constructive activity with voting rights. By excluding third-party stakeholders with the ability or necessity to design rules for the entire community of users on how to vote, cartel formation, lobbyism, and other forms of power politics are avoided by design. This aspect is referred to as permissionlessness. Trustlessness describes that – again based on the design of the respective blockchain service – there is no need for mutual trust as regards the participating voters.

Low Energy Usage

As presented in our article on the energy consumption of bitcoin mining, some blockchain applications consume a huge amount of energy due to the way their process of confirming transactions are verified and recorded. Since the Bitcoin block chain is the oldest and most inefficient blockchain application, other developers have come up with new solutions to this problem. Several so-called consensus algorithms have been created in recent years, each with its advantages and disadvantages, but most with a far better energy-efficiency. To understand the dimensions of the energy consumption of block chains based on the Proof of Work-styled consensus algorithms, see the abovementioned article.

Scalability

Not only the speed of transactions is crucial, also the volume. In order to compete with Visa and other big providers, a blockchain-based money transfer service would have to handle hundreds of millions of transactions per second, a number not achievable with conventional technology as of today. Visa can handle some 150 million transactions per day which is about 1700 per second, while Bitcoin processes nine transactions per second. Here, a necessity for improvement became apparent which newer block chain developers have considered. Some providers, such as the people behind the IOTA coin, have designed a system with near infinite scalability.

Near Infinite Decentralisation

In the world of block chains, decentralisation plays a fundamental role. Decentralisation demands a large number of voters that grows proportionally to the increase of users. A sufficient number would be in the tens of thousands of voters, ideally more. This helps to factually shift the power from big corporations and governments back to the people as it was the initial thought of the team creating the first block chain and its corresponding token, the Bitcoin.

Seeing the growing trust of private and institutional investors in many blockchain-related matters, developments in this sector of global interaction pose new opportunities and naturally risks for the future citizen. To ascertain which blockchain-based product might be tomorrow’s market leader in the likes of Google or Amazon, the technology behind it will ideally comply with all of these conditions.

Author: Patrick Lehner