TO BLOCKCHAIN OR NOT TO BLOCKCHAIN: IT'S A VALID QUESTION
Chris Haley And Dr. Michael ‘Whit’ Whitaker
Another day, another article extolling blockchain’s untapped potential. It will give rise to the new internet era and transform the financial system. It is the disruptor of every industry and could change the world. Its touted benefits may include lower cost, risk, and capital requirements, faster transactions, more transparency and reliability, improved privacy, and unparalleled security, to name a few. In fact, my colleagues recently laid out their thoughts on unlocking the blockchain’s potential value for the public sector. Not bad for an idea that’s only eight years old.
By way of definition, blockchains are distributed, immutable ledgers of economic transactions. Each blockchain platform (e.g., Bitcoin, Ethereum, Hyperledger) has a so-called scheme for verifying and recording transactions (e.g., Proof of Work, Proof of Stake, Proof of Time and Space, etc.). These schemes help to ensure the security and immutability of every entry. Blockchains can be public, permissioned, or private, each of which has distinct advantages and constraints.)
For comparison, the traditional method of managing data (and the primary alternative to blockchain) is the centralized database. These can be relational (e.g., Oracle, SQL Server) or unstructured (e.g., Hadoop, MongoDB). Both types are capable, robust, and scalable, and in the near-term should be the default choice for many enterprise data management use cases.
To be sure, blockchain may indeed impact all manner of industries. Many of the benefits ascribed to it may be realized, but those benefits bring important limitations that cannot be ignored. It is crucial to recognize that blockchain is not the ideal solution to every data problem; it is a differentrather than a better way to address data or transaction management. Under the right circumstances, blockchain could be transformative, but without careful planning it could also become a costly misadventure.
As with most technology decisions, the blockchain question introduces a series of trade-offs. As to whether blockchain is needed at all, a number of journalists, academics, and platform providershave begun to address the issue, and we will avoid retreading this ground. Instead, we evaluate the criteria that matter for enterprise data or transaction management, as they are key factors when weighing blockchain against other alternatives. These are the key trade-offs organizations should pay attention to when evaluating Blockchain against centralized databases:
No Guarantees on Better Enterprise Security
Blockchain’s structural security and immutability have been discussed at length, and appear to offer real advantages over traditional datastores. High-profile hacks of blockchain systems have been attributed to the applications running on the blockchain rather than the architecture itself. Hybrid architectures, utilizing blockchain in combination with robust relational databases, appear even more promising, such as the keyless signature infrastructure used by the Estonian government.
However, vulnerabilities at the application and user levels can diminish blockchain’s security improvements. In many organizations, the biggest vulnerabilities may be poorly-designed applications, phishing attacks against untrained users, or unpatched firmware on edge devices (picture medical devices in hospitals or smart sensors on an electrical grid). In these cases, blockchain may provide advantages without improving the security of the system as a whole. After all, the strongest lock does nothing if a window is left open or a thief is handed the key.
Advantage: Blockchain has structural security advantages, but may or may not improve overall security.
Improved Transaction Speed is Not a Given
Blockchain has been proposed for many use cases with real-time transaction requirements, from IoT applications to battlefield communications. Yet many of today’s public blockchains running Proof of Work (PoW) or Proof of Stake (PoS) consensus schemes, such as Bitcoin or Ethereum, support far fewer transactions per second than legacy financial systems. Permissioned / private blockchains may be faster than public options, but often slower than what enterprise databases can achieve.
On the other hand, digital contracts in blockchain could offer order-of-magnitude improvements in the speed of complex, multi-stakeholder transactions. Faster transactions would not be enabled by the technology per se, but by new processes that make use of blockchain’s architecture and features (e.g., transparency, immutability, traceability, etc.). Prime examples are real estate and intellectual property transfers and some financial transactions, where changes must be verified by numerous parties across siloed systems, thus taking a long time to execute. But digital contracts will depend on trusted, online proof of assets changing hands, and on the ability to support claims through the legal system. This requires that assets be identifiable (for instance, a house on a plot of land or a patent number for intellectual property).
Smart contracts could further improve transaction speeds for programmable, rules-based interactions. In addition to the caveats above, however, the inputs for the rules must be trusted by all parties and accessible online. This could be a source of time, weather information, or sensor data (showing a certain amount of electricity being delivered to a house, or a car arriving at a particular location). This introduces another third-party source of data that must be trusted by all parties, and adds another vulnerability to the system. Nonetheless, if these caveats can be addressed, smart contracts could be a significant opportunity in the future.
Advantage: Centralized databases are faster from a technical perspective, but new frameworks and processes that leverage blockchain’s features could offer improvements for certain types of transactions.
Stewardship and Governance Still Matter
One important question an enterprise must ask before implementing blockchain is who will steward the solution over time. The nascent blockchain industry remains fragmented, with a wide array of platforms and vendors. Even early leaders such as Bitcoin and Ethereum remain in flux, with bitter disagreements over design decisions and the direction of the platform. This creates inherent risks that must be taken into account.
Governance is another critical issue, particularly if control over the platform and its underlying data are held by a broader set of stakeholders or the general public. The flowcharts provided by the IEEE, IACR, and others are helpful for determining whether a blockchain is needed at all based on trust and access requirements. But even if one is needed, many questions remain: Who will fund and own the platform as well as the data? Who will ensure that it continues to meet evolving requirements? Who will be responsible for upgrades and maintenance? It is not a given that the parties responsible for writing to the blockchain and validating transactions will also ensure its continued relevance.
Advantage: Stewardship and governance remain important even if responsibilities will be transitioned to trusted third-parties or the general public. In many cases relational databases will be the safer choice
Maintenance and Supportability Cannot Be Ignored
Related to the question of stewardship, organizations must consider maintenance as they evaluate the viability of any technology. For blockchain, the fragmented platform landscape means there is limited support for any particular platform, and no guarantee that the provider will exist in the future. There has also been less time for the support landscape to develop, including strategic advisors, systems integrators, and managed service providers. In-house talent will be hard to find, and all the more important given blockchain’s inherent complexity. Contrast this with the decades of experience of traditional database vendors such as Oracle and Microsoft, and the dichotomy becomes apparent.
Advantage: Centralized databases, both structured and unstructured, appear to hold far lower maintenance risk than even the most mature blockchain solutions.
Scalability is a Crucial Challenge to Address
Today’s centralized databases can scale almost limitlessly as cloud computing and virtualization become commonplace. For many blockchain platforms, scaling remains a daunting challenge. Much has been written about the tremendous energy requirements of Bitcoin, and even Proof of Stake schemes may be problematic at scale, as blockchains grow larger with every subsequent transaction. This would be exacerbated if new data types such as images were added, which might necessitate much greater block sizes than those that are predominant today. Storage, networking, and computing limitations would be amplified as block sizes and transaction volumes increase.
Permissioned blockchains with alternate consensus mechanisms and lower computing requirements may address this problem in part, though this will have implications for trust and transparency and may diminish some of blockchain’s most compelling features. The Hyperledger Performance and Scalability Working Group announced in June shows that the scalability challenge has yet to be solved.
The solutions being proposed to scale blockchains are exceedingly complex, and well beyond the scope of this article. Suffice to say, enterprises should be cautious about building a data management infrastructure on a blockchain without a clear path to growth in the future.
Advantage: Blockchain’s energy costs and storage requirements, as well as the uncertainty that accompanies any nascent technology, make it a far less scalable solution than existing databases.
Cost is a Question Mark
The cost of blockchain relative to centralized databases appears to be contentious and ultimately unproven. Some industry-watchers believe blockchain can lower costs when compared with the hefty licensing and support fees charged by database giants such as Oracle. One notable example is the Depository Trust and Clearing Corporation (DTCC) moving its credit default swap platform to a permissioned blockchain, which is expected to save 20-30% over the existing architecture.
On the other hand, a business case for blockchain must account for a host of potential costs beyond hosting, licensing, and implementation. Hiring or outsourcing for talent to maintain the system could be significant. Energy costs may rise tremendously as the transaction volume increases. On top of all this, a buffer for unknown-unknowns and perhaps a “complexity premium” should be added. Small-scale prototypes or proof of concepts should be conducted wherever possible to validate expected cost savings relative to existing systems.
Advantage: The full cost to an enterprise of sustaining a blockchain remains an unknown.
Blockchain Bottom Line
What does this mean for decision-makers considering the future of their data or transaction architecture? Blockchain’s potential requires that leaders make an investment in understanding the technology and necessary outcomes, with a focus on evaluating the trade-offs and characteristics of their specific use case. Simply put, a clear picture of the risks and the rewards should be drawn before critical systems are moved to a blockchain. But, at the same time, new opportunities made possible by blockchain should not be dismissed.
If budgets and expertise allow for it, experimentation is an appealing way to avoid a sense of falling behind without betting the farm. Prototypes and duplicative, in-place systems may be a valuable tool in measuring trade-offs without putting critical data at risk. Participating in consortia or other partnerships may be another way to test the water. Those incremental steps may allow delay of significant investments until the technology and business environment has reached greater maturity and the potential gains become clear.
Chris Haley is a Corporate Strategy Director at ICF, a global consulting firm. Dr. Michael “Whit” Whitaker is the Vice President of Emerging Solutions at ICF. Whit is also a member of the ACT-IAC Institute for Innovation.