I frequently receive the question, “should I use blockchain for [fill in the use-case]?” In many cases, the answer is no. Below is a reference to five reasons blockchain may NOT make sense for your business and a simple framework for understanding when blockchain does make sense. I’ve included a definition of blockchain from IBM below for those who are new to the space.*
The value of disintermediation should exceed the costs of maintaining the network’s integrity. Here are five reasons why the costs of using blockchain may exceed the benefits1:
- Redundancy- having every network member (node) record every transaction is costly. If removing intermediaries isn’t necessary, central record keeping could be vastly more efficient.
- Scaling- a distributed network where all nodes record all transactions will have its common transaction ledger grow exponentially faster than network members. The burden for maintaining this ledger may be impractically large and result in centralization.
- Regulation- blockchains exist orthogonally to the law and can’t be easily overturned. In heavily regulated industries that require interpretation, blockchain could be difficult to effectively apply. It’s difficult to comply with all rules and often can’t be easily tailored to existing regulatory infrastructure.
- Irreversibility- in many cases, reversibility is desirable. The DAO hack resulting in a fork of Ethereum demonstrates the downside of irreversibility.
- Security- incentives must be properly aligned to ensure members of the network have a common stake in the longevity and integrity of the network.
To determine whether blockchain makes sense for your use case, ask yourself the following questions2:
1. Is a business network involved?
2. Is consensus used to validate transactions?
3. Do you need an audit trail?
4. Must the record of transactions be immutable or tamper proof?
5. Should dispute resolution be final?
A network must be involved for blockchain to be the right technology (question 1), whether it be between organizations or within an organization. If you answered yes to at least one other question above, blockchain could help your business save time and costs while reducing risks.
Sources:
- Ammous, S. (2018). The Bitcoin Standard. Newark: John Wiley & Sons, Incorporated.
- IBM Developer. (2019). Blockchain Basics: Introduction to Distributed Ledgers. [online] Available at: https://developer.ibm.com/tutorials/cl-blockchain-basics-intro-bluemix-trs/ [Accessed 24 May 2019].
*Blockchain definition (IBM): “A blockchain is a tamper-evident, shared digital ledger that records transactions in a public or private peer-to-peer network. Distributed to all member nodes in the network, the ledger permanently records, in a sequential chain of cryptographic hash-linked blocks, the history of asset exchanges that take place between the peers in the network.”
