4 Facts About Blockchain’s advantages and disadvantages

blockchain text written using scrabble bars

There has been a lot of buzz around blockchain technology in the past decade. Many blockchain enthusiasts are glorifying blockchain technology as the next big thing after the internet. Blockchain technology has proved key in providing a decentralized database that takes out intermediaries in most industries.

However, with every disruptive technology, there is always an upside and a downside. Therefore It’s crucial that those looking to adopt blockchain understand blockchain’s advantages and disadvantages. So, as enterprises try to figure out how their organizations can benefit from blockchain, it is crucial to also look at the technology’s downside.

In order to understand the advantages and disadvantages of blockchain, it is essential first to understand what blockchain is and how it works.

What is Blockchain Technology?

Let’s start with the basics. As the name indicates, a blockchain is a chain of blocks that contains information. This technique was initially described in 1991 by a group of researchers. Its original intention was to timestamp digital documents so that it’s not possible to backdate them or tamper with them, almost like a notary.

However, it wasn’t until 2009 that it was adapted by an as yet unmasked person (or people) named Satoshi Nakamoto to create the digital currency Bitcoin. According to Euromoney, a blockchain is a distributed ledger that is entirely open to anyone willing to participate in the network. Blockchain has an interesting property that makes it unique: once the blockchain ledger records the data, it cannot be altered without the consensus of other network nodes.

Each block in the chain contains data, a hash value, and a previous hash record. Like a fingerprint, the hash value is unique to each block and identifies the data in the block. It is through these hash values that the blocks are linked to form a chain.

The data stored inside the blockchain depends on the type of blockchain. The Bitcoin blockchain, for example, stores the details of Bitcoin transactions. In contrast, other blockchains like Ethereum allow users to store various types of data from transactions, stocks, and property deeds to contracts.

Altogether, the blocks form a series of unbreakable chains hence the name blockchain.

Different Types of Blockchain Technology

Due to its adaptability and ease of use, different industries have started incorporating blockchain in their operations and systems. As each industry operates in its unique way, different types of blockchains have evolved.

For instance, the Bitcoin blockchain requires a decentralized ecosystem that incorporates all willing participating nodes. On the other hand, the Hyperledger Fabric blockchain prefers a more centralized ecosystem restricted to a few entities. The need to match these dynamic needs led to the development of the four main types of blockchain; public blockchain, private blockchain, consortium blockchain, and hybrid blockchain.

Public Blockchain

bitcoin node distribution

A public blockchain is a fully decentralized, non-restrictive, permissionless, and distributed ledger system. Anyone who has access to an internet connection can join the network. All that is required is for the node to download records of the ledger.

Participants in a public blockchain are authorized to verify transactions, mine cryptocurrencies, or append blocks to the chain through various cryptographic consensus mechanisms. The most common types of public blockchains are Bitcoin, Ethereum, and Litecoin.

Private Blockchain

icons of users and computres

On the other hand, a private blockchain is a centralized, restrictive, and permission blockchain operative only in a closed network. In most cases, organizations and enterprises use private blockchains when only a selected number of members participate in the network.

The control of the network, membership, and decision-making process is restricted only to its central authority. Private blockchains are mostly deployed in voting systems, digital identity, and asset ownership, among many others. The most common types of private blockchains are; Hyperledger Fabric, Multichain, and Corda.

Consortium Blockchain

image of interconnected computer nodes

A consortium blockchain is a semi-decentralized blockchain where different companies come together to create a network. In this type of blockchain, various companies control the network instead of a single entity like in a private blockchain. A key thing to note is that the consortium blockchain has all the advantages of a private blockchain, and it can be considered a sub-category of the private blockchain.

Consortium blockchains are typically used by banks, governments, and collaborative factories. The best examples are R3 and Energy Web Foundation.

Hybrid Blockchain

A hybrid blockchain is an integration of a private and public blockchain. It provides both permissioned and permissionless systems to the network. With such a network, the leader nodes can configure the read-write access of the network. The hybrid blockchain is flexible enough to allow users to join a private network within various public networks. A good example is Dragonchain.

Blockchain’s Advantages and Disadvantages

Advantages

Blockchain's advantages and disadvantages

For most people, blockchain is mostly associated with Bitcoin and Ethereum or other cryptocurrencies. However, using this cutting-edge technology that underpins cryptocurrencies, there are a plethora of advantages and benefits. Cryptocurrencies were just the tip of the iceberg.

1. Blockchain is a Trustworthy Distributed System

Blockchain’s most remarkable characteristic stems from the fact that it is distributed and open to all participating nodes. The transaction state is distributed to all nodes instead of every individual node having a separate copy. The shared data can only be altered through a consensus mechanism that requires more than 50 per cent of the nodes to agree to it. This ensures that the data is consistent, accurate, and transparent.

In cases where organizations use private blockchain or consortium blockchain, the data records are available to entities with permission access.

2. There is no need for a Central Authority

Blockchain technology was developed in a manner that it can control major systems without the need for a central authority. It can create, store and proceed with system operations on every single transaction at all times.

The best example is the decentralized autonomous organizations (DAO) built on blockchain. According to Universal Blockchain, a DAO is a business whose decisions are made electronically or through its members’ votes. However, the organization is fully autonomous and performs its daily business operations automatically.

Bitcoin represents the first real-world implementation of a DAO. The government or financial institutions have zero control of the Bitcoin blockchain.

3. Blockchain increases efficiency and speed

Due to its decentralized nature, blockchain eliminated the need for intermediaries by providing a single ledger. In comparison to the blockchain, the traditional systems are paper-heavy processes, time-consuming, and prone to human error—blockchain streamlines this process by automating most of the operations. What’s more, since record-keeping is done on a single ledger, users do not have to reconcile multiple records.

4. Blockchain improves security

Blockchain consists of digital blocks that store information about every transaction ever made on the system. If, in any case, any data on the chain is hacked, compromised, or a node behaves maliciously, the system rejects the tampered information due to the change in the block’s hash value.

Additionally, each block’s data is encrypted using cryptographic hash functions that require very high computational power to alter. This ensures that attacking the network is unprofitable, deterring hackers from any malicious actions.

5. Blockchain reduces the transaction cost (and time)

For most businesses, the transaction cost is a priority in any transaction. With blockchain technology, there is no need to have many third parties to guarantee the integrity of transacting parties. Instead, blockchain provides a record of the previous transaction data. Moreover, you will not have to go through a lot of verification since the transaction data is consistent and up to date across the network.

Disadvantages

Blockchain technology is set to change how organizations operate on a global scale. However, to understand what it offers, organizations need also to understand its disadvantages as well.

1. Scalability is a significant issue with blockchain

Scalability is one of the significant drawbacks of blockchain. It is nowhere near the scalability of centralized systems. If you have interacted with the Bitcoin or Ethereum network, you know that transaction (financial and other data) speed depends on network congestion.

In Ethereum, if the network is congested, the transaction time and fees will both increase significantly. In simple terms, the more nodes there are on a network, the less efficient it becomes.

However, over the years, several innovations have been developed to solve this problem. For instance, according to Consensys, the Ethereum 2.0 released in December 2020 plans to shift its consensus mechanism to Proof-of-work, which will enhance scalability. Moreover, most organizations prefer to use hybrid or permission blockchains such as Corda as it is highly scalable compared to public blockchains.

Despite all these solutions, blockchain is still not at par with centralized systems. It’s not yet well equipped to handle real-world problems that need high efficiency.

2. Difficulty in modifying the data –  Data immutability

Data immutability has been one of the critical advantages of blockchain. However, this feature can be a double-edged sword. It is crucial to consider that once data has been appended onto the blockchain, it may cause problems further down the line. To modify the data the process is computationally intensive and requires changes to the initial code. This presents an additional security problem to the network.

In most cases, changing the code may require nodes to go through hard forks that radically change the network’s initial protocols.

3. Blockchain is not entirely secure

Blockchain technology is more secure than traditional centralized systems. However, this does not mean that blockchain is entirely secure. The security of the blockchain network largely depends on the distribution of nodes and if they are acting according to the rules and protocols set in the network.

If the nodes are unevenly distributed, a malicious node can control 51 per cent of the network. By doing so, the node can alter the data on the ledger and also double spending on the network.

With the rapid development in computing, cryptographic encryptions are also at risk. Quantum computing is more than capable of breaking cryptographic cracking. However, various blockchain platforms are implementing quantum-proof cryptographic algorithms.

4. Interoperability between blockchains and traditional systems

There are various blockchain platforms, each trying to solve Distributed ledger problems in their unique ways. Each blockchain uses different network protocols, which leads to interoperability issues where the chains cannot communicate effectively.

Additionally, integrating blockchain technology with the traditional system is challenging since both systems use entirely different system architectures.

When taking the above considerations to look into blockchain for an organization, organizations need to keep in mind their values, overall plans, and the problems they wish to solve.

Final Thoughts

With the advantages of blockchain technology, such as decentralization, transparency, trust, and enhanced security, blockchain has proved to be reliable. It is also useful and versatile as it can facilitate systems across various industries.

Despite all the mentioned advantages, the drawback of blockchain cannot be ignored. These drawbacks make it a questionable affair for many organizations. Though, there are newer blockchain solutions that offer better solutions than the first generation of blockchain.

For example, platforms like Ethereum, Hyperledger projects, and Corda are constantly improving their architecture to improve how enterprises adopt blockchain technology in the future.

It is because of these new blockchain platforms that the potential advantages of blockchain outweigh its disadvantages.

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