Advantages of Blockchain: 8 worth considering
Since its 2008 debut, blockchain has evolved quite a bit. The benefits of the distributed digital database, including transparency, speed, cost-effectiveness and scalability, have become apparent. What has also become clear is that blockchain still has a long way to go, and that some of the benefits can also present challenges.
8 benefits of Blockchain
Which we dive into eight distinct benefits of blockchain, two points are worth bearing in mind. First, while all blockchains are based on the same technology, not all perform equally. Smaller blockchains with fewer users can be more agile and efficient, while larger ones can be relatively slow and expensive.
Second, blockchain is an evolving technology. Whatever advantages it sports now are sure to become even sharper in the future. “The most important improvements to blockchain will be in smart contracts and consensus,” said Sean O’Brien, founder of Privacy Lab at Yale Law School. Layer 2 technologies will continue to revolutionize what is meant by blockchain and bring more and more of what is done on and offline into the realm of Web3, he said.
Blockchain is decentralized
No bank or entity controls the blockchain, which some highlight as its biggest advantage. Why? “A decentralized business model is one where there is a greatly reduced opportunity for a single entity, or coordination of entities, to secretly manipulate the rules in their favor,” said Dan Burnett, CEO of the Enterprise Ethereum Alliance, an organization focused on on developing open blockchain specifications, according to its website.
He gave as an example, Uniswap, a decentralized exchange that uses a fully automated algorithm, running on Ethereum, to perform cryptocurrency exchanges. No Securities and Exchange Commission or other regulatory body is involved because there doesn’t need to be, Burnett said. “No parties are necessary for enforcement because it is enforced by computer code that just doesn’t allow anything other than what was programmed.”
Blockchain enables tokenization
Blockchain technology offers opportunities to build wealth to people who currently do not have access to it in the form of fractional ownership, said Fairlane Raymundo, a NFT artist and Web3 marketer.
Take, for example, a real estate developer building a $2 billion apartment building. “In the old days, you had to approach investors personally and ask them to invest in the whole thing at once,” she said. “Now you can tokenize that property and allow 100,000 people from around the world to invest small increments, each with full security and encryption, giving each of those small investors an opportunity to make capital gains in the real estate market they are currently excluded from.” Cars, real estate, artwork, record albums, businesses — virtually anything can be tokenized and shared ownership, Raymundo said.
Blockchain is democratizing
The ability to tokenize is one example of the blockchain’s ability to democratize – that is, to include people who, due to lack of finance or access, have been excluded from certain streams of business and industry.
“As long as the basic rules of transactions are followed, [blockchain] is open to participation by anyone, at any time,” said Alex Wykoff, director of product and Web3 at the tech consulting firm Sausage. “For example, if someone wanted to compete with a regional grocer, they could create a whole new market for produce and give farmers a better means of pushing prices in their favor,” Wykoff said.
“We know with transparency where the funds will go, and we can process more transactions at scale and speed … This frees up capital flow for all markets.”
Because the blockchain is a public arena where individuals and businesses can redefine their relationships, “this is a monopoly-breaking power rarely seen in our traditional markets,” he said.
This democratization could also allow millions of people to participate in the banking system. “Today, we have several emerging countries involved in the global banking network, and many questions surrounding it payments across national borders create friction,” said Devon Drew, founder and CEO of DFD partnersa data-driven distribution platform.
Blockchain, he said, addresses accounting, payment speed, know-your-customer (KYC) and anti-money laundering (AML) protocols, security, traceability and automation factors. “We know with transparency where the funds will go, and we can process more transactions at scale and speed,” he said. “This frees up capital flow for all markets.”
Blockchain is fast
Just as the internet accelerated written communication (compare sending a letter to sending an email), the blockchain is accelerating financial transactions. Transactions that take hours or even days in the traditional centralized system take minutes or even seconds in the blockchain.
Burnett predicts that speed will remain a giant blockchain advantage in the future. “While we’re not there yet, imagine closing a home purchase or sale in less than an hour, including money transfer,” Burnett said.
Blockchain is cost-effective
High gas fees, or usage fees, for blockchains like Ethereum have gotten a lot of ink. “This is temporary,” Burnett said, predicting that costs will come down as blockchain technology matures. “We will see transaction costs measured in fractions of a dollar, if not fractions of a cent.”
Blockchain is energy efficient
Huh? What about all the fuss about the environmental impact of mining and the accompanying use of computing power? This too will change and is changing even before Ethereum’s transition to Proof of Stake from Proof of Work. Burnett points out all the energy and labor required for a traditional financial transaction: Driving to the bank to fill out paperwork, assuming the consumer has a bank account. Fill out the paperwork, have someone double check it and go into the bank’s system, then wait days for the transaction to complete.
“If you add up the human energy costs, plus building heating, cooling, electricity, et cetera for all those people, it will easily exceed the electricity cost of the comparable automated blockchain transaction,” Burnett said.
Blockchain Enders Trust
An important example of this is smart contracts — agreements to buy something, sell something, or execute almost any kind of agreement (prenups, anyone?) that exists on the blockchain. With a smart contract, the parties agree on terms and conditions, which are entered into the blockchain ledger. The transaction is carried out automatically when all conditions in the agreement have been met.
Once the smart contract is in the ledger, it is immutable, or immutable. This means that a buyer cannot back out or a seller cannot increase the price of an item. Immutability, it turns out, can also be a blockchain challenge, which will be addressed later in this piece.
Blockchain is transparent
Anyone with access to a blockchain can see what is written on it. The transactions may be anonymous or pseudonymous, but the terms are there. This openness offers great potential for public service, said technologist and bloggers JB Larson, a digital marketer at data recovery company Gillware.
“I am extremely optimistic about the benefits that society would recognize if large corporations and public entities adopted a publicly available distributed ledger for transparent accounting that is in the public interest,” Larson said. “We pay taxes, but do any of us know where our tax money is spent?”
Should a government entity adopt a public blockchain system, people can see what happens to the money they give to the U.S. government, Larson said. Nonprofits can also use blockchain as a way to prove to patrons that their donations are being used effectively, he added.
5 disadvantages and challenges of blockchain
Pseudonymity
However, blockchain transparency has its limitations, because pseudonymity is entirely possible. “The vast majority of cryptocurrencies are pseudonymous,” Larson said. When cryptocurrencies are transferred, the sender knows the recipient’s wallet address and can verify that a transaction has taken place, but the sender has no idea who they sent the currency to. This pseudonymity allows blockchain to be a kind of tax haven: “The IRS is almost certainly working on a system to connect the dots,” he said.
Also, almost all exchanges that Americans use to buy or sell crypto must follow AML and KYC protocols, which “all but assure that they know who’s going to trade with that account,” Larson said.
Anonymity
Larson also pointed out that some cryptocurrencies are anonymous and offer little transparency and traceability. Zcash, for example, promises users that their transactions will be completely confidential. Another symbol gets a reputation as go-to coin for Dark Web transactions. The two “allow anonymous transactions far more akin to cash transactions,” Larson said.
Rely on “old” technology
“Blockchain projects currently rely on the same centralized components and infrastructure that emerged from cloud computing and Web 2.0 topology,” said O’Brien of the Yale Law School’s Privacy Lab. “Likewise, assets and marketplaces are too closely tied to traditional monetary structures – the big ones exchange of crypto coins is a potent example of what not to do if we want a truly decentralized Web3 space,” he said.
Immutability
What is put on the blockchain stays there, forever, warts and all. That can be a good thing, but in the event of a failure on, say, a smart contract, it can wreak havoc and prove very expensive.
Slow adoption
“Some institutions are already using blockchain, but many are not,” said Fairlane Raymundo NFT artist. “Until blockchain technology is normalized, we will remain in the status quo,” Raymundo said.
That normalization is inevitable, she said, pointing to the growth and subsequent power (to divide and unite) of Facebook and other social media. “Blockchain can be used to make this world better in every way that matters globally,” said Raymundo. “It’s up to us where this technology goes, but the only thing we can’t do is ignore it.”
