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Blockchain for blockheads - Distributed Ledger for Dummies in five minutes

Food for thought for those in a hurry: why doesn't a card payment terminal need to check with all other terminals worldwide that your card is genuine?..

Bitcoin hype seems to be superseded by its blockchain flavour. Bitcoin start-ups still raise money, so do blockchain ones - it's tempting to chase unicorns in the "rocket science" area few truly comprehend.

Here's a quick layman summary of what that fuss is all about so that you can form your own (biased) opinion.

First things first: blockchain is an ever-growing public sort-of-secure database. Let's focus on those two highlighted words (I'll deal with the question of security later).

"Ever-growing" (aka scaleability problem)
Real-world analogy: if an address book were based on blockchain technology, every time any user changes any entry in such an address book, ALL other users would have to wipe out their copies of that address book and replace it with an updated version - which would still have all the amended/deleted records for audit purposes. Naturally, it takes time for all the changes to propagate through the system - anyone familiar with DNS update knows the pain. And, naturally, the address book would keep growing in size. Exponentially. Just like that email chain everyone hates.

"Public"
Simply put, you are on your own. There is no helpline, no customer service, no SLA, no nothing. If shit happens - tough. That's why most financial institutions that consider BC are looking at its private "closed loop" version.

From the architecture point of view, "public" means millions of (distributed) copies of the same dataset instead of one (or, say, ten) central repository.

Which brings us to the next point: what are the true benefits of a distributed ledger compared to a well-implemented central (or de-centralised) one? For every "pro" there are several (strong) "cons". If we disregard the "privacy" and "Big Brother" paranoia (and negative side-effects of full anonymity which can impact life of anyone of us), there is nothing bad about a centralised architecture per se: that's how airline, telecom and financial industries (to name a few) function today - with an adequate degree of reliability, on a global scale. 

There are also arguments related to costs: if you think that the mere use of a distributed ledger makes it cheaper to operate a global business - again, with the corresponding level of reliability, customer service, legal responsibility, etc. - you are dreaming or kidding yourself. There could be some edge case exceptions, but I am talking about the mainstream markets here.

Security
Last, but not least. There is nothing new about blockchain when it comes to security. It's all about encryption. True, the distributed nature of BC makes it hard to compromise data integrity, but then there is the other side of that proverbial (bit)coin - a complete exposure to all sorts of vulnerabilities related to the need to store your "ownership rights" locally.

A two-factor combination of Secure Element (SE, aka "chip") and SE-based biometrics represents a more practical alternative to a distributed ledger: you can validate authenticity of both the data and the counterparty locally, to complete a transaction. You either trust the encryption process or you don't, blockchain or not - that's the point I started this post with.

So, is BC BS? You decide. My view? If the tool of the month is a hammer, everything around you looks like a nail.

Comments: (2)

Tapan Agarwal
Tapan Agarwal - Intellect Design Arena Ltd - London 08 February, 2016, 13:23Be the first to give this comment the thumbs up 0 likes

Interesting and logical viewpoint. Everyone sees a hammer and hence everything looks like a nail....but hey...someone had said way back in the 60s that there is a world market for possibly 2 computers.... 

Lets see....time may unshackle the chains of blockchain...

Mikhail Myznikov
Mikhail Myznikov - Central Bank of Russia - Moscow 30 March, 2016, 19:13Be the first to give this comment the thumbs up 0 likes

I partially agree, but imho blockchain (or decentralized ledgers) has at least one unique advantage: regular "clients" or "participants" usually have more computational power then they really need and use, so blockchain can use their resource (still not very effectively).

Alexander Peschkoff

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This post is from a series of posts in the group:

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.


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