One of blockchain’s most salient features is decentralization. What does that mean and why is it important? Think of it this way. If someone keeps cash, bullion, or gems under their mattress, one robber can reduce that nest egg to zero in a single night. If most of one’s assets are stored in a financial institution, a failure within a that institution can potentially wipe out everything. While it won’t help secure a mattress, the inherent decentralization of blockchain addresses this institutional problem by creating a fault-tolerant, widely-distributed repository for its assets that eliminates any single point of failure.
The Distributed Model
Instead of storing an account on a single corporate server, copies of each asset transaction are distributed to every node (computer) on the blockchain network. For example, the bitcoin network averages nearly ten thousand nodes on its network at all times. That means there are literally ten thousand copies of each investor’s wealth distributed around the world. If one copy is lost or damaged, it is essentially meaningless. Each and every block on each and every computer on the entire network would have to be tampered with at the same moment for the blockchain to be compromised.
This fundamental change in the way financial assets are stored adds an entirely new dimension to the security of cryptocurrency assets (more on this in a minute). Perhaps just as importantly, though, it serves as a proof-of-concept for the longer-term implications of blockchain and decentralization across numerous industries and government functions. Though some critics point out the potential obstacles to scaling up a blockchain network, these nay-sayers generally represent long-established enterprises who would be the most recalcitrant advocates for the status quo. Forward thinkers and visionaries, however, see the blockchain paradigm as representing the future of global information technology. In fact, in a 2015 paper, Marcella Atzori intriguingly described blockchain as “a disruptive innovation with a wide range of applications, potentially able to redesign our interactions in business, politics and society at large.”
Eliminating the Middleman
One “disruptive” feature, and one of the most obvious benefits of blockchain decentralization, is the elimination of middlemen as the brokers of critical data, who tend to slow or even obstruct the business processes they are intended to support. No longer is a bank, a financial institution, a government, or other institution the “owner” and “arbiter” of all transactions. Decentralization leads to the democratization of information, and obviates the need for, and costs associated with, the ubiquitous centralization model. The lack of dependency on these third-party actors streamlines business while reducing costs.
Redundancy and Security Across the Network
The protection of assets, though, may be more important to investors in the near-term. The blockchain model, by its very nature, provides tremendous security to the marketplace of both products and information. Blockchain ledgers, which keep track of each and every transaction, fully and highly encrypt these entries while, at the same time, distributing them across the entire network. The complete history of all transactions ever executed on the network resides on each and every node. This history is irreversible and tamper-proof. Because of this, blockchain transactions are essentially immune from cyber-attacks, fraud, corruption, bias, and manipulation. Even when a node is unreliable, or even malicious, the entire network immediately repudiates and rectifies the integrity of the overall data.
The public key/private key architecture of blockchain technology automatically manages trust across the network, so there is no need for middlemen to handle this responsibility. The application for this sea-change in architecture should be obvious across numerous enterprises, both private and public. The massive data needs and complex privacy requirements of the healthcare industry come quickly to mind, as does the massively entangled information requirements of most government entities. Disintermediation should dramatically increase the efficiency and accuracy of both these sectors.
Blockchain utilizes “consensus protocols” to verify transactions. When enough nodes agree that a transaction is valid, it is recorded. The verification process is based on a cryptographic algorithm that is essentially incorruptible, and once the transaction is recorded on the block, it is permanent and unalterable. If a single computer or even many computers on the network are destroyed, an identical copy of those computer’s blockchain record can be found on thousands of other computers. Decentralization clearly provides the most effective protection for your data assets.
Blockchain Application in Commerce
The first successful implementation of blockchain was with Bitcoin, and most of the subsequent blockchain applications have involved competing cryptocurrencies. However, the immergence of this new and innovative payment processing model has also demonstrated many other potential uses for blockchain’s distributed architecture. For example, cross-border commerce. Free from tariffs, duty fees, governmental regulations, and all the other rules that complicate and stifle the movement of goods and services from one country to another, blockchain is essentially borderless. This not only simplifies and secures such commerce, it also dramatically reduces the cost and time that these transactions customarily take.
However, the distributed blockchain architecture is not without its downsides, and its critics are quick to point these out. For example, the energy costs of the vast computing resources necessary to validate and maintain the blockchain network are enormous. “Mining”, the process of validating blockchain transactions, is highly energy-intensive. The Bitcoin network can consume as much energy as some entire countries. The “proof of work” model used by most cryptocurrencies was specifically designed to be difficult, cumbersome, time-consuming, and energy-guzzling, However, it is not the only method available, and alternative approaches, such as “proof of stake”, which require much less energy, are being developed and adopted.
Another criticism has to do with the wild valuation swings seen in most cryptocurrencies because of the inherent lack of centralized control. Yes, this is a valid criticism, yet the history of centralized control of currencies throughout the world doesn’t have the best track record either. Runaway inflation, dramatic currency devaluations, and international defaults are all a testament to the problems encountered by our current model. Only time will tell whether that model can be supplanted.
Blockchain’s slow pace of adoption is another criticism that is often voiced. The technology was invented ten years ago and has yet to make its way into common acceptance. In fact, cryptocurrency implementations are, at this point, the only widely-available applications based on blockchain architecture. This may be, in large part, because of blockchain’s technological limitations: it is slow, computation-heavy, complex, and in many ways difficult to use. However, as these obstacles are overcome (and many, many people are working to solve these problems right now!), such criticisms will eventually lose their validity.
Another fear about blockchain financial transactions derives from their inherent irreversibility. What if a large financial transaction is executed by mistake? Given the immutability of blockchain transactions, this could potentially lead to costly, even devastating consequences. However, this does not have to be a fatal flaw, with appropriate policies and safeguards put in place to deal with such mistakes.
The size of a blockchain network also determines, to some extent, the security of that network’s data. For example, a very small network can be susceptible to what is known as a “51% attack”. This can occur when more than 50% of the nodes of the given network are under the control of one individual or entity. This is not a problem in huge blockchain networks such as the one supporting Bitcoin and many of the better-known cryptocurrencies, but could be a problem in some applications, and must be recognized and dealt with appropriately.
While these criticisms are valid, none of them are deal-breakers. As the technology matures, as it gains wider acceptance, and as it is adopted by more and more institutions, each and every one of these vulnerabilities will be addressed. It is clear that the distributed nature of blockchain architecture optimizes the security and safety of your assets, and it wouldn’t be a reach to assume that the approach of a decentralized economy is inevitable.
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A Decentralised Economy Is Inevitable was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.