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Notes - Revision of 29 September 2016
Roger Clarke **
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The blockchain bandwagon has been rolling for some time. An assessment of the propositions made about it, and of the mostly-ignored challenges that it faces, suggests that the emperor may be very skimpily clad.
The Bitcoin phenomenon uses an underlying mechanism that has interesting properties. That mechanism has been extracted and generalised, and is referred to as 'blockchain'. Venture capitalists have been joined by many large corporations in pumping the idea as an antidote to a host of business ills. This note explains why I am highly sceptical about the blockchain movement.
Identifying a reliable definition of 'blockchain' is challenging. Academic publications are routinely repeating marketing hype, and failing in their obligation to define clearly, and examine critically.
A blockchain is a string of transactions that can be cryptographically protected and replicated widely, in order to achieve accessibility and tamper-resistance, and hence provide a basis for confidence in the integrity of the data that the string contains.
(The term 'replication' is appropriate, whereas the terms 'distributed' and 'decentralised' are not, because the multiple copies in multiple physical and organisations locations are full copies, not partial copies).
For centuries, transactions have been aggregated into summaries of the 'flows' that have occurred during phases or periods of time (such as profit and loss statements and inventory flows), and snapshots have been extracted of the 'stocks' at particular points in time (such as balance sheets and stock-holdings). There is nothing new in the idea of (a) keeping the records of transactions, and (b) maintaining linkages between the transactions and the flow and stock summaries that they gave rise to.
The differences in blockchain relate primarily to:
Other characteristics appear to be derivatives of those foundation ideas.
Here's a collation of propositions made about blockchain:
... and hence ...
Every one of these propositions demands careful scrutiny. Most melt away once they are subjected to reality checks, and many of those that are of real interest derive their effectiveness from some other aspect of the design, rather than from characteristics of blockchains. Some, for example, would result from re-engineering of legacy processes - whether blockchain or some alternative data model were applied.
Legacy mechanisms were by definition conceived, designed, implemented and successively fiddled with, in economic, structural and technological contexts very different from those that currently prevail. Many (including the settlement of financial transactions and share-trades) are ripe for rationalisation. The benefits will be attributable to investment in the design as a whole, of which blockchain may or may not be a part. It may be a good thing to harness enthusiasm for blockchain in order to get projects moving that may otherwise have lain dormant; but it appears to me to be likely that blockchain itself will be largely irrelevant to the designs that are implemented.
Another example is the many claims about the capacity of blockchain to support agreements of various kinds. Electronic representations of contracts have existed for many years; but adoption has been limited. Association with the blockchain concept might give electronic representation of contracts a new lease of life; but there is nothing about blockchain that is functionally necessary, or even particularly beneficial, for the implementation of electronic contracts.
A key weakness in some of the claims is the assumption that access to reliable digital data will solve related real-world problems. It may be feasible to effectively evidence ownership of a digital asset such as electronic cash through digital records. It is far more challenging to achieve the same outcome in respect of physical assets such as real estate and chattels, and even in respect of share-holdings. These require reliable links between the digital world on the one hand, and, on the other, the real world of things and people and the semi-real world of organisations. Blockchain does nothing to address these key challenges.
Another concern is that there are inconsistencies in the propositions. For example, transparency is incompatible with some aspects of security, particularly those relating to non-accessibility of data by those not authorised to acquire it. Open access is necessary in order to satisfy the needs of distributed integrity audit. But open access is variously problematical, undesirable, counter-productive and illegal in respect of various kinds of data. Consider, for example, personal identities and locations, merger and acquisition negotiations not yet disclosed to the market, and personal health data. Reconciling the twin objectives, and achieving both transparency and information -hiding, is an enormous design challenge.
Another major challenge faced by blockchain is scalability. Potentially very long chains need to be routinely transmitted and processed. This involves cryptographic processes and hence is non-trivial in terms of processor-power and elapsed time, and the amount of processing rises linearly with chain-length.
Integrity depends on the 'many-eyes' principle. For the transparency proposition to be fulfilled, there must be a requisite number of replications, and each organisation must perform the audits. Incentives are needed for these organisations, their actions must in turn be controlled and audited, and those controls and audits must also be transparent.
At a higher level, disintermediation of organisations is against the interests of those organisations. There's a high probability that very large organisations such as financial institutions and stock exchanges understand this. So the removal of their intermediary role is an unlikely purpose for their investments. One rational reason for them to invest in blockchain projects would be to understand the nature of the model and the technology, in order to be able to respond to competitive threats. Another sensible purpose is to investigate whether alternative approaches to business process design might reduce costs and delays that are unhelpful. (Note that, from the perspective of, in particular, a banker, some delays within business processes are sources of a great deal of revenue, so reducing those would be against the organisation's interests).
The blockchain movement has all the hallmarks of a short bubble. It is mystical. It is promoted by means of invocation of ideas in good standing that have very tenuous connections with the notion and the technology. The interests of many of the organisations that are supporting it would appear to be served by the movement (if it is what it says it is) being still-born.
As with all movements that are driven by marketing hype and attract investment, there will be spin-offs of value. So watch the spin-offs, and ignore the fluff projected about blockchain.
Guadamuz A. & Marsden C. (2015) 'Blockchains and Bitcoin: Regulatory responses to cryptocurrencies' First Monday 20, 12 (7 December 2015), at http://firstmonday.org/ojs/index.php/fm/article/view/6198/5163#p5
Wilson S. (2016) 'Blockchain really only does one thing well' The Conversation, 20 July 2016, at http://theconversation.com/blockchain-really-only-does-one-thing-well-62668. See also Steve's succession of blog-entries at http://lockstep.com.au/blog/blockchain, and his commercial report at http://www.constellationr.com/research/beyond-hype-understanding-weak-links-blockchain
Roger Clarke is Principal of Xamax Consultancy Pty Ltd, Canberra. He is also a Visiting Professor in Cyberspace Law & Policy at the University of N.S.W., and a Visiting Professor in the Computer Science at the Australian National University.
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