Blockchain fever is peaking at the moment.
No one wants to be left behind, and everyone is interested in how they can capitalize on this new technology. The thing is, not everyone needs to add blockchain solutions to their existing business processes.
There are plenty of situations where using a blockchain actually makes no sense.
Our team at Chronicled runs into a lot of these scenarios: People will reach out to us to implement our products that are based on blockchain technology, and we have to diplomatically tell them it’s probably not a good idea.
Most of it simply comes down to educating prospective customers about what a blockchain is actually used for, when it makes sense, and when it doesn’t.
Today, I’m going to focus on the last third of that education — when it isn’t necessary.
1. It’s a one-company solution.
Blockchain works best when being used between multiple parties who don’t completely trust each other.
If you need to have vendors, suppliers, competitors, value-added resellers, and regulators all working together on a single system, then blockchain is a great solution.
When you just need a single-company solution, blockchain really isn’t essential since there isn’t lack of trust.
A lot of companies see blockchain as a ledger where their transactions will be unmodifiable and will stay forever. But if these are all intra-company transactions, you can still use a traditional database and build a secure application on top of it. You don’t need a blockchain.
The same applies if you’re building an application that’s highly centralized. Take Gmail, for example. All my emails are held by Google, but the company doesn’t need a blockchain to store them. I am trusting Google to store my information.
A decentralized system such as a blockchain requires user participation in its operation — hosting a node on the blockchain and participating in the blockchain’s consensus mechanism that actually builds the chain of blocks of transactions. You now have a say in how the blockchain gets built.
It may help to think of how different online encyclopedias work.
On Wikipedia, changes are proposed by individuals in the community, and if the community accepts them, they’re published.
If your product is like Wikipedia, where you are one of multiple people who can contribute to it, then a blockchain makes sense. If your product is like the former Microsoft Encarta — a centrally controlled encyclopedia — you don’t need a blockchain. If one entity makes all the decisions, you only need to use a centralized database.
2. It’s a multi-company solution, but one company controls the blockchain or data.
Some companies want to use a blockchain to facilitate their work with other businesses, so it’s a multi-company solution.
But there’s a catch.
They want to control the consensus mechanism, effectively creating a blockchain as a service (BaaS) platform.
If one company controls the blockchain — and thus its consensus algorithm — it controls how transactions are packaged into blocks. No outside party has a say in this decision, which means they’re forced to trust that one company.
If the parties were already putting their trust in one company, by assuming they’re working in the best interest of the industry, then there’s no need to use a blockchain.
There is also a potential security risk with having a centralized service. If that vendor gets hacked, your business maybe at a serious risk. With a blockchain, on the other hand, you’re not trusting a single party but the integrity of the network as a whole.
There are many great enterprise SaaS services that manage a lot of data for their customers. But these services don’t need a blockchain because they manage the data and how its updated.
If one company controls everything and decides what goes on the blockchain, then the technology is really more of a marketing buzzword. It’s not something you need for its technical value.
3. The transactions don’t follow business rules.
Blockchain is very good at automating business rules when participants transacting with each other lack trust.
For example, when a house is bought, certain percentages of the sale are taken by different parties. The buyer’s agent, the seller’s agent, and the seller all take a percentage. Those are well-defined rules that everyone follows.
In that case, it’s very easy and smart to create automated transactions that are handled by smart contracts on the blockchain.
But if your transactions between two parties are custom and constantly changing in nature, then that would require a large number of specified smart contracts on the blockchain. Creating and executing those over and over is not the most efficient way to do business.
This holds true even if you have a decentralized network with multiple participants hosting nodes. If every transaction has to be extensively customized, and there’s no need of a common record of all transactions, then it’s probably better for all the participants to just communicate with each directly without using a blockchain.
As you consider using the technology, remember: while blockchain does have the power to vastly change an industry, that doesn’t necessarily mean it will be a perfect fit for your business.
Thanks for reading!
Want to learn more? Get in touch with the Chronicled team here.
3 Situations When Blockchain Is Completely Unnecessary was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.