Top 3 Things People Get Wrong About Blockchain
What are the top three things people get wrong about blockchain?
There are many ways to get tripped up, but CryptoVantage has chosen the three points we think are the most important misconceptions. We will differentiate between distributed ledger technology (DLT) and blockchain, highlight blockchain as an upgrade to the internet, and shed light on the dark side of blockchain technology.
Misconception #1: The Concept Behind Blockchain is Brand-New
That is to say, blockchain technology is based on technology that is not new. What are DLTs, and what is the critical difference between the two? DLT is a term that encompasses a variety of structures, including blockchain. Most generally, a DLT is described as a decentralized database managed by multiple participants, across multiple nodes. So far, this is general enough to describe blockchain technology, too.
Let’s take a step back. We can think of a decentralized database as any form of information that is stored and shared amongst multiple locations (nodes). Therefore, DLTs existed before computers.
Let’s use the Mongol Empire as an example. Whenever any coordinated action was necessary, information was carried on horseback to inform the disparate corners of the empire. After delivery, each corner (node) echos confirmation of receipt to the sender (by horseback) along with any new information from their corner of the empire.
That way, the status of the empire (database) can stay up-to-date amongst all its corners (nodes). Of course, the Mongol Empire represents centralized power, but their means of internal communication resembles a distributed ledger.
This brings us to the limitation, known as the “Byzantine Generals Problem”, that differentiates blockchain technology from other DLTs. In this problem, a group of generals somehow need to coordinate an attack.
The problem is, that messages by horseback can be intercepted, or worse, can lie by delivering the wrong message. This problem persisted with modern computers but changed with the advent of blockchain cryptography.
Blockchain technology is a type of DLT where transactions are recorded with an immutable cryptographic signature called a hash. The cryptographic hash function ensures that all nodes act in good faith while communicating consensus in real-time. In other words: it’s a better way of reaching consensus.
The implications of this breakthrough lead to the state of blockchain we see today.
Misconception #2: Blockchain Technology Has Limited Applications
When we think of the internet, recall that it started as an experiment in peer-to-peer communication. Many were skeptical at first, but as this peer-to-peer network grew, it became evident that the network effects of the internet were very significant. Now the internet plays an integral part in the information age we live in today.
Let’s contrast the internet with Bitcoin, which is a peer-to-peer electronic cash system enabled by blockchain technology. Many have been skeptical, but the Bitcoin network has continued to grow.
As growth continues, we will likely see daily tasks like bank transfers become less popular in the same way email (an internet technology) depopularized analog mail. That would, in effect, reduce the relevance of banks in day-to-day life. That might be difficult to imagine now, but similar doubts were expressed in the early days of the internet.
The internet is a peer-to-peer technology that enables the free flow of information. Bitcoin promises to piggyback on the internet to enable the free flow of value. Like Bitcoin, other projects are using blockchain technology to improve various societal challenges in what we now know as crypto. And as each blockchain network grows, we are also seeing their growing inter-connectivity with each other.
Therefore, blockchain is becoming a network layer that exists “on top” of the internet network. Blockchain technology is not mature enough to materialize all its potential network effects but, when it does, the world may be as unrecognizable as it became after the internet reached maturity. Blockchain should likely be viewed as the internet’s next step to reaching absolute maturity.
Misconception #3: Blockchain Technology Can Only Be Used for Good
The importance of this misconception should not be overlooked. It is easy to look at Bitcoin and crypto and be amazed at what they are doing for society but, like any technological advancement, we are playing with a double-edged sword. In short, central bank digital currencies (CBDCs).
If you haven’t heard of CBDCs, then it’s about time to start educating yourself. A CBDC is a cryptocurrency issued by a central bank that can be controlled by the government in that jurisdiction. Now, the same way Bitcoin was programmed to be decentralized, prioritize anonymity, and be immutable, a CBDC can be programmed to maximize centralization, simplify identity management, and allow manipulation.
What this translates into is a currency that the government can use as a form of power over its citizens. Limiting where you can spend your money, freezing your accounts, and unlimited bureaucracy are within the purview of the power that a CBDC can give your government.
This is why we mustn’t be blind to the dark side of blockchain technology. The freedom that Bitcoin and crypto can give us from the archaic limitations of modern society can also be stifled by CBDCs to reinforce those same archaic limitations, and worse. Luckily, we can opt out of CBDCs by holding a censorship-resistant cryptocurrency like Bitcoin. However, for the few that are lucky, many will be unlucky because not everyone will adopt censorship-resistant money before CBDCs go mainstream. And when that happens, people may find themselves holding their wealth in a CBDC that is programmed to be incompatible with purchasing decentralized cryptocurrency.
Amazing Blockchain, Ugly Blockchain
In the points above, we found the critical point of innovation that set blockchain apart from conventional DLTs, pondered the similarities between the internet and blockchain, and alerted ourselves to the inevitable dangers of CBDCs.
The advent of blockchain technology marks an important innovation to the world’s archaic systems of governance and value exchange. It is evident that blockchain technology is, and will continue, to have significant impacts on global society. However, as with any new technology, the person who wields it has a moral responsibility to use it wisely.