8 most common misconceptions about blockchain

Blockchain definitely has the potential to change the world. Proper use of it saves costs, simplifies processes, and eliminates human error. However, if the technology is used improperly, it can also become an efficiency killer, or even a useless technology, and cannot make any contribution other than being a gimmick. At the Kepler blockchain laboratory, we designed and developed practical use cases for blockchains. However, our work is more about why customers do not need blockchain technology. Below I will list the 8 most common misconceptions in the blockchain application, and then introduce what the blockchain can do in real-world applications.

When we talk about blockchains, we often hear two extreme reactions, either blockchain or everything, or blockchains. People have these extreme conclusions because we often use this technology in places that are not suitable, solve non-existent problems, and even create problems for use (for example, there are blockchain companies that allow users to purchase dollars with credit cards to stabilize Coin, and then use the stable currency for daily consumption. Isn't it just good to use a credit card at the beginning?). The following are eight common misconceptions in blockchain discussions.

Blockchain ensures information authenticity”

“The blockchain is a database that cannot be tampered with. Therefore, all the information on the blockchain is necessarily correct.”

The first sentence of this statement is correct in most cases, while the second sentence is not correct at all. Although the information stored on the blockchain is usually not tamperable, we cannot guarantee the authenticity of this typical non-tamperable data. To prove my point, I just stored a piece of false information on a blockchain ("Earth is flat"). You can check this information yourself, it is immutable on the blockchain, but that doesn't mean the information is correct.

This misunderstanding seems simple, but important because it often leads people to confuse transaction information with general information. By its nature, every piece of transaction information stored on the blockchain should be self-evident. All stored transaction information (eg, sent and received tokens) is verified before it is on the blockchain. This information is recorded in the blockchain and cannot be modified or removed. Therefore, we can rest assured that the transactional information that is accessed or read has not been tampered with or changed. And, most importantly, this information has been verified as authentic. But not every piece of information stored on the blockchain is transaction information. Blockchain technology alone does not make the general information self-evident (for example, "coffee comes from Ethiopia").

Therefore, it does not make much sense to establish a resource tracking system on the blockchain. The blockchain cannot make the general information suddenly become credible. Blockchain technology can make information difficult to tamper with, but the key to the source tracking system is to ensure that the information recorded is true. Preventing changes to stored information is a relatively minor issue.

"The blockchain removes all intermediaries "

This blockchain removes the intermediary responsible for executing the transaction. In fact, it is more accurate to say that a group of miners has replaced the middlemen who have traditionally verified transactions. The blockchain is a basic technology facility designed to create a monetary system that goes beyond regulation and reduces transaction costs. Therefore, in the verification process of the transaction, the blockchain can indeed replace the middleman. However, it is inaccurate to say that a blockchain can replace each type of intermediary. We should also point out that some middlemen who add value to the entire system should not be replaced at all.

Many people mistakenly believe that this technology can also replace all middlemen because the blockchain can replace the middlemen in the transaction. In fact, blockchain is not a good replacement for middlemen like Spotify, Facebook or Google. This is because these intermediaries are not (or are not just) the middlemen who handle transactions, and they also provide value-added services. Under current technology, it is a more efficient middleman to replace them, rather than a blockchain or other decentralized technology agreement.

"More and more blockchain applications prove that cryptocurrency is the future trend"

JP Morgan, Facebook has launched its own blockchain products

Announcements by commercial giants such as JP Morgan Coin and Facebook Coin have excited the cryptocurrency community. People often claim that this is a long-awaited news that the traditional giants have finally adopted cryptocurrencies.

We should not be confused by the word "Coin". JP Morgan Coin and Facebook Coin are not at all like cryptocurrencies such as Bitcoin and Ethereum. Instead, these “Coin” are technical upgrades to existing settlement systems, using some blockchain features during the upgrade process. From the user's point of view, there is no difference between using these systems and using SWIFT (Global Interbank Financial Telecommunication Association) or WeChat payment. Blockchains are used in internal systems, but the results are far from Bitcoin (and other cryptocurrencies).

The cryptocurrency is still a new thing that has never been seen before in the general public, so many definitions are ambiguous. Here, I am trying to summarize a reasonable definition of a cryptocurrency:

Definition 1: It is released using decentralized ledger technology

Definition 2: It is not controlled by any company or government (for example: as long as the transaction signature is correct, no one can block or erase the transaction)

I believe that few people will oppose definition 1, and definition 2 is not a generally accepted definition. However, Definition 2 is the most important feature of cryptocurrency. The role of the blockchain is to ensure the validity of the transaction without involving any regulatory body. In order to achieve this feature, we pay for additional decentralization costs (time cost, electricity bill, etc.). If we add traditional regulatory rules on top of the cryptocurrency, using cryptocurrency does not reduce transaction costs. Regulating cryptocurrencies in a traditional way (the regulator is now trying to do) will only lead to two possible outcomes: either the decentralized blockchain architecture is completely replaced by a licensed blockchain, or the blockchain will Become an inefficient, outdated technology.

"The decentralized world is better"

For a long time, this has been a common misunderstanding of the blockchain by the public (and even blockchain practitioners). We must understand that decentralization is the price we pay to make the blockchain operate without trusted parties; decentralization is not an end in itself. Unless you want to create a system that cannot be controlled by individuals, organizations, or alliances, there is no point in forcing decentralization of centralized applications. Decentralization is expensive and very fragile. In return, in theory you can build a system that cannot be manipulated by anyone, including the creators of the system. However, if we want to make the system uncontrollable, why pay this unnecessary fee to make the system slower, more expensive, and more unstable?

"Using blockchains can increase system security"

I don't know where this misunderstanding came from, but we often hear our customers say that they want to improve the security of the system by putting everything on the blockchain. Please keep in mind that blockchain is not the same as absolute security. In fact, only a few blockchains are safe, and many blockchains are inherently unsafe.

Before discussing whether using a blockchain can improve system security, we need to understand how the blockchain protects its security and its limitations.

Blockchain protects your information in two ways: First, it maintains information integrity by ensuring that information recorded on the blockchain cannot be changed or deleted. Second, it protects your account ownership through public/private key encryption. This means that your account will be secure as long as your private key is not made public (normal password protection is easier to crack than public/private key encryption).

In the case of smart contracts, the above features of the blockchain enable you to achieve another level of security: you can't change or delete programs that are deployed on the blockchain, which means that hackers can't change your code. Make your program go wrong. Does this sound like an absolutely safe program? Be aware that there are limitations to doing this. For example, if there is an error in the code being deployed, the blockchain will not allow you to fix these errors because the code cannot be changed once it is started. In addition, public/private encryption adds user-unfriendly elements to your system because users cannot select or change their private keys, and private keys can be long, hard to remember, and once they are leaked, there is no Remedy.

Back in the discussion, does the blockchain help improve your system security? That depends on the situation.

If you just want to ensure information integrity: yes, the blockchain can work. Putting information on the public chain can make your information almost immutable.

If you want to make your program safe: in most cases the blockchain can't make the program safer, unless your program has no loopholes, and most of the programs are not perfect, and more or less will contain errors.

If you want to hide your information from hackers: Blockchain is useless, you have a better way to hide information safely. It is not possible to put information on the blockchain and protect the information without reducing the availability of information.

If you want your users to be able to store their encrypted information securely and make sure they only have to decrypt it: yes, you can do this with a blockchain, but make sure you really need this level Security and willing to sacrifice a large portion of usability.

"Using blockchain to protect user privacy"

“We use the blockchain to protect user privacy!”

Indeed, Bitcoin can protect your privacy, just as many other cryptocurrencies can protect your privacy. But there is a very common misunderstanding here. This misunderstanding is popular among startups, venture capitalists, many laymen, and even insiders. Be aware that the blockchain protects privacy because it can verify transactions without the need for personal information. However, it does not prevent others from abusing your information without your permission, and this is where most users really care.

Here is a common blockchain privacy solution:

As to usersigns up for the first time, a new shared (user, service) identity is generated and sent, along with the associated permissions, Data collected on the phone (eg, sensor data such as location) is encrypted using a shared encryption key and sent to the blockchain in aTdata transaction, which subsequently routes it to an off-blockchain key-valuestore, While retaining only a pointer to the data on the public ledger (thepointer is the SHA-256 hash of the data). Both the service and the user can nowquery the data using a Tdata transaction with the pointer (key) associated toit. The blockchain Then verifies that the digital signature belongs to either the user or the service. For the service, its permissions to access the data are checked as well. Finally, the user can change the permissions granted to a service at Any time by issuing a Taccess transaction with a new set of permissions, including revoking access to previously stored data. Developing aweb-based (or mobile) dashboard that allows an overview of one's data and theability to change permissions is fairly trivial and is similar to developingcentralized -wallets, such as Coinbase for Bitcoin."—by enigma

These plans suggest that all user information is uploaded and stored on the blockchain platform, and the service (application) can only access this information with the user's permission. Most importantly, you can revoke an authorized license at any time. Doesn't this sound like Facebook/WeChat login? The application can only access your information with your consent, and you can revoke access at any time. So, can these applications "steal" your information? of course can! All they have to do is create a copy of your information.

The above suggestions are obviously not feasible, because once the application gains user permission, it can simply copy your information. The information you generate in the app can only be uploaded to the blockchain by the app, so they can also steal this information during the upload process, even without uploading or uploading it in other names. The only way to protect privacy is by creating a mechanism like TouchID: Collect your fingerprints from the iPhone, the application can't directly touch the fingerprint information, they can only ask the iPhone to check if your fingerprint is correct. All information is collected, processed, and stored in a closed loop. This is how Apple protects your privacy from being abused by anyone other than themselves.

In short, cryptocurrencies protect privacy because they don't require your personal information to verify transactions, nor do they need to have the department that owns your personal information to verify the transaction. The blockchain can encrypt and securely store your information, and no one can use it, but once you authorize other applications to use it, the blockchain will not protect your information from abuse or leakage.

“The blockchain increases the liquidity of assets

Although this may be true, the principles behind it are not so straightforward. We need to understand why cryptocurrencies can have good liquidity, and why the same liquidity may not apply to other assets—that is, we are tokenizing assets. There are two very important concepts here: transaction costs and liquidity .

Transaction costs are composed of different components such as regulatory costs, verification costs, execution and implementation costs.

Search and information costs: This is the cost of matching buyers and sellers, verifying the identity of the parties, verifying the authenticity and ownership of the goods.

Negotiation costs: The cost of reaching a consensus on price and delivery methods.

Execution costs: Ensure that the parties comply with the agreed costs.

Liquidity depends on severability, transaction costs, and most importantly, whether the supply and demand of assets is sufficient.

Bitcoin is highly severable, it has lower transaction costs because it has almost no verification costs, and you don't need to check the authenticity of Bitcoin; as long as Bitcoin continues to be unregulated (for example, sending from North Korea to the US) There is no difference between a BTC and a BTC sent from Hong Kong to Hong Kong. Then there is no cost to verify the identity of the party. Bitcoin has good liquidity with sufficient demand and supply. If a token does not represent any actual assets (no need to verify the quality, authenticity, and cost of ownership), and they are unregulated (no need to verify the cost of ownership and regulatory costs), we can assert such tokens There are characteristics similar to Bitcoin in terms of liquidity, basically depending only on demand and supply.

However, when the contemporary currency is actually a mapping of real-world assets, then this will be a different story. For example, STO (STO) (such as company equity tokenization): Let us assume that tokenization does not affect demand and supply: If the assets are not allowed to be sold to the public, then if we put the same assets On the blockchain, it is also impossible to suddenly become suitable for sale to the public. In addition, it does not make an unattractive asset attractive, and a bad debt is still a bad debt, whether or not it is recorded in the blockchain.

Therefore, what we need to study is whether tokenization improves asset severability and reduces transaction costs compared to existing methods. As we mentioned earlier, transaction costs consist of various components.

For securities-type tokens, the cost of supervision will not be reduced. The regulatory costs of cryptocurrencies are low because they are not regulated at all, but card-type tokens must be regulated by the relevant authorities like other securities, so they should have similar regulatory costs.

In terms of verification costs, Bitcoin is Bitcoin, they are homogeneous, and the authenticity of their transactions is self-evident. The situation of the securities-type tokens is absolutely different. The value of the securities-type tokens depends on the assets behind them. For example, if a token-type token represents an overseas property, as an investor, you still need to check the location, decor, and actual return of the investment. This type of information is what we call general information (see above), and the blockchain cannot verify general information. In addition, you will need to verify the identity of the parties involved in the transaction to ensure that the transaction complies with relevant laws.

The blockchain does reduce the cost of execution and implementation, but it is limited to the part of the token transaction. The card-type tokens not only involve token transactions, but also transactions from endorsement assets that do not occur on the blockchain. Take overseas properties as an example, which involves rental income and operating costs. Unlike Bitcoin transactions, once Bitcoin is transferred, it is irreversible. But tenants may default on rent or even default. The management company can misappropriate rental income, or even abscond (why decentralized smart contracts can't solve the problem, see next section).

I don't spend too much time on severability issues. Most of today's assets are already highly separable, real estate REITs, and different types of funds for various investments. I agree that tokenization can improve the divisibility of assets. However, there are various ways to improve the divisibility of assets. Tokenization is not the optimal solution.

Therefore, blockchain does not really improve the liquidity of assets unless the token is not regulated and does not represent any real-world assets.

The decentralized nature of the blockchain enables it to function without a trusted authority; decentralization is not an end in itself. In the case of STO, every transaction necessarily involves personal information, authorities, and regulatory authorities. So what is the point of paying extra fees for decentralization? Therefore, if the assets of bad liquidity are caused by regulatory requirements and insufficient supply and demand, then the use of the blockchain will not help. If the asset liquidity is poor due to the high cost of executing the transaction, the private blockchain should improve the problem. STO is more like an internal system upgrade of the existing securities system than a paradigm shifting technology.

"The blockchain application is a decentralized application"

Decentralizing your application is valuable in some situations. For example, a decentralized gambling application (according to Standard Kepler Research, gambling applications generate 40% of the entire blockchain transaction). They do not have a license, and the user does not even know who the operator is, and there is no guarantee for those who participate in gambling. However, users can still trust them because the decentralized application ensures that the program code cannot be changed.

The decentralized application puts the core logic on the blockchain and the program is fully automated. So we can judge whether the program claims to be true or not. But just putting the program code on the blockchain doesn't make it a decentralized application. Please take a look at the following example:

Procedure 1:

A smart contract that stores 1000 tokens. The contract randomly sends a token to a wallet address every minute until all tokens have been sent.

Program 2:

A smart contract that distributes the income of a company evenly to the token holder. Each quarter, the company's CEO converts the company's profits into cryptocurrencies and distributes them through smart contracts.

Obviously, we can check the code to see if program 1 can honor their promise, but we can't judge whether program 2 will be executed. Although smart contracts are immutable, no one can guarantee that the CEO will send all profits to smart contracts. Therefore, Program 2 cannot be considered an effective decentralized application because the core logic and execution are not decentralized.

If we want to build a truly meaningful application on the blockchain, we must know its limitations, not just repeat the blockchain with a great future (and most of these statements are incorrect, or It is an empty talk about metaphysics.) Abuse of this technology has no practical benefit other than making it look like a gimmick or even a scam.

Although the blockchain is an over-hyped technology at this stage, we still believe that everyone can benefit from the blockchain.

Kepler Blockchain Labs is a Hong Kong-based company dedicated to providing companies with practical blockchain technology solutions. We believe in the core technology of the blockchain and reject unreasonable blockchain applications.




Source | Kepler Blockchain Lab

Chinese Translator | David Tang Proofreading | Tong Niu Niu

PANews is authorized as a Kepler Blockchain Lab partner to proofread and reprint