Blockchain is not a panacea, but when it is needed it is salvation

Blockchain technologies and the related market have gained enormous momentum in the past year. The colossal developments and aggressive funding of ideas in this emerging industry have sparked serious debates about the true value of blockchain. Before implementing blockchain technology, managers, builders, and developers should ask themselves one question: “Why blockchain?“”

What does a decentralized system need?

To understand how best to use blockchain technology, you first need to define the trust assumptions in the system in question. Often, blockchain use cases bypass this question from third parties without ever considering whether this use case could be better served with a distributed or centralized alternative.

Criteria for a decentralized system:

  • A single, uniformly accepted source of truth.
  • The system must receive input from two or more parties.
  • The parties cannot trust each other and therefore their interactions must be authenticated by a third party.
Blockchain is not a panacea, but when it is needed it is salvation
Blockchain is not a panacea, but when it is needed it is salvation

Next we need to determine whether a central or distributed third party can serve in place of a blockchain. Centralized third parties manage more than just transactions for their customers. They offer usability services and handle disputes. They update the logs and make sure they remain efficient and usable. Distributed brokers offer all of the above benefits, but are also more efficient. A hierarchical structure prevents the central supervisor from being overwhelmed.

Choosing a distributed or centralized third party can therefore avoid the myriad of token distribution and management questions that plague today’s blockchains. You can avoid scalability problems and regulatory hurdles and use a reliable and productive third party.

This does not mean that decentralized third parties are irrelevant. In some situations it is simply impossible to trust a centralized third party. This is key to understanding the usefulness of the blockchain. If we can create a framework to understand when (and why) centralized or distributed third parties should be avoided, we can predict exactly when and why blockchain should be adopted. Additionally, we can avoid creating decentralized networks that naturally migrate towards centralization as they may have been better served by distributed third parties.

Three criteria why you cannot trust a central third party

The first criterion. A single source of truth is required. Because of a conflict of interest, the third party cannot rely on impartial mediation between customers or parties.

Sometimes third parties cannot be impartial. This third party’s intentions may not even be malicious. Your interests only come first in the event of a conflict. We’ve seen it over and over again on Facebook and other tech giants.

With the right incentives, decentralized governance can shift stakeholder interaction from a short-term zero-sum game to a more long-term, more collaborative and prudent game, rewarding those who act in the best interests of all stakeholders, rather than an individual or preferred group.

The second criterion. There is a monopoly that prevents competition from protecting users’ interests. Interactions in a network require refinement and abstraction.

Whenever there is competition, the selfish or irresponsible behavior of a third party is greatly discouraged by market forces. However, if there is no alternative because a company has a monopoly in the sector or because resources are limited, competitiveness collapses and the third party has essentially no restriction on its behavior. Apple’s control of the App Store makes a strong case for why the supposedly good intentions of centralized gatekeepers can plot against the good of the ecosystem they claim to support.

The third criterion. Anti-fragility is a must. Much is at stake and the consequences of malicious conduct by third parties would be disastrous.

Even if the effects of competition can punish malicious behavior, the cost of a single failure cannot be too high. Competition is a reactive force that only takes effect after a mistake. If under no circumstances should the fault occur, preventive measures must be taken.

We see this reality in regulation. Governments are more satisfied with the free market running the plumbing industry than the nuclear power industry. A sloppy plumbing job only annoys a few customers, while a single meltdown is disastrous.

As the world and all aspects of our lives move online, there is a growing understanding that over-optimization can lead to fragility and that we need to build a more robust infrastructure for critical digital services that, ideally, can be anti-fragile. Blockchains have the potential to form the backbone of fragile systems that not only survive harsh environments, but also get stronger block by block with every challenge.

The above criteria Help us identify promising blockchain use cases.

Which blockchain use cases are available?

Banks, markets, and other elements of the financial industry often require third-party management to protect against counterparty risk. This situation requires an impartial third party who is able to manage and assess financial risks. Decentralization mitigates this counterparty risk by acting as a third party, aligning incentives between market makers and users, spreading the risk across the platform and significantly reducing the possibility of a system failure. The extraordinary growth of DeFi ecosystems is a strong example of the disruptive properties of blockchain and the successful implementation of decentralization in high value systems.

Some use cases offer promising opportunities for decentralization, but require a range of technologies to really benefit a given value chain. Supply chains are a good example of a mega-industry that is ripe to be disrupted by blockchain-based products and solutions. They are highly collaborative environments with a low level of fault tolerance. Proper transportation and monitoring of the supply chain are critical, especially for high-risk products such as pharmaceuticals or even fresh meat. The same is true for high quality supply chains like diamonds and art, where the validity of entries makes a big difference for different parts of the value chain.

When creating solutions for these value chains, blockchain cannot be the end of everything. It needs to be part of a wider and more holistic solution that extends the reach and real value of the supply chain itself. Blockchain won’t instantly decentralize the private entities that make up the supply chains, but it can have a huge impact by providing these various entities with a completely immutable and semi-centralized environment in which they can interact more efficiently and freely.

The blockchain and you

The first step in driving disruptive innovations through blockchain and other transformative technologies is to understand which blockchain properties have the greatest value for the value proposition and business model of a participant or incumbent operator.

Quantifying the cost of trust and understanding how the properties of the blockchain can make (or improve) your business is the first step in actually using these technologies to really affect and disrupt the entire industry.

The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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