Blockchain: opportunities and risks

Blockchain: opportunities and risks
10 Nov 2021

No more banks, no big stakeholders – a revolution in the online world. What seems utopian today could fundamentally change our society, just like the internet did.

Bitcoin and other cryptocurrencies are based on blockchain technology. Although these are the most familiar applications of the technology, many more sectors could benefit from it in future too. Every type of possession, whether art, music, property contracts or energy – and even our own identities – can be saved and managed using the blockchain. The technology, which ensures the data is tamperproof, should enable many institutions such as notaries or banks to be bypassed. Bureaucracy would disappear and corruption could be stopped too.

How does blockchain technology work?

The blockchain was conceived in 2008 by an unknown person using the pseudonym Satoshi Nakamoto. The objective was to manage the money systems of a large public network without government input or control.

Essentially, the blockchain works like a database and is a tool for administrating and storing data. A list of data, stored in blocks. Traditional databases hold their information centrally on a server, e.g. in banks, notaries or companies. In the blockchain, information is stored decentrally, i.e. spread across many different computers which form the blockchain network. All the computers hold an identical list of data and, together, they take on the role of agents such as banks or accountants.

This enables corporate data to be shared safely in the network without being tampered with, and to be stored as safely as it would be in a bank vault. Security is ensured by decentralised and public storage. The blockchain is a distributed database where the same information is stored on many computers and servers simultaneously. This means, compared to conventional databases, it is tamperproof and protected from corruption. Once it has been saved, data can neither be changed manually nor due to a technical error. So it is easy to check whether data has been removed from the blockchain, because identical copies of it are stored on other computers.

In order for data to be accepted by the blockchain, it must fulfil a range of prerequisites. For Bitcoins, for example, it is checked that enough Bitcoins are available. This is simple to do because all previous transactions can be viewed. Only then is a new data block created. Each new block is encrypted using hash-based cryptography and linked with previous transactions so that all the information can be traced back seamlessly.

But not only cryptocurrencies can use the technology: other, completely different, everyday applications are also conceivable. The technology can make many personal documents fraudproof, such as certificates, references and personal identification documents. Data could only be uploaded to the system by authorised authorities such as schools, banks, etc. – making it impossible to forge important documents.

Disadvantages of the blockchain: astronomical electricity consumption

But blockchain technology also has a critical disadvantage: it uses colossal amounts of electricity. According to a calculation by Cambridge University, in 2017 the electricity consumption of the blockchain-based cryptocurrency Bitcoin was 6.6 terawatt hours annually. In 2021, annual consumption has shot up to 126 terawatt hours – meaning that it uses more energy than Finland – a country with over 5.5 million inhabitants.

The reason for the gargantuan electricity consumption is the computing power required. At the beginning, back when cryptocurrencies were less popular, this was mainly “mined” from small computers, which used correspondingly small amounts of energy. But nowadays enormous data centres are needed, which consume staggering quantities of energy. Verification of the blockchain entries – the “proof of work” mechanism – is responsible for the largest proportion of the electricity used. So this technology is already viewed as outdated and could be replaced in the future.

To make the blockchain more environmentally friendly, two factors are critical. One of these is an efficient verification process, as discussed above. The other is using renewable electricity. The Global Mining Council (BMC) calculated that 56% of Bitcoin mining is performed using renewable energy. Other users of blockchain technology should also pay attention to the source of the energy they use and how it is generated.

Supply chain transparency

However, the blockchain can also offer an advantage for establishing sustainable processes. There is often a lack of transparency in the acquisition of resources and conditions in the manufacturing process. The blockchain could ensure that critical processes along the supply chain are tamperproof and viewable by anyone. This would fundamentally change the production process, because nobody would be able to hide behind ignorance or forged papers of origin.

For example, when buying chocolate, the consumer could check the entire production process from the harvest to the point of sale. This would include the salary paid to the workers, the transport costs, the carbon footprint and the resources used.

Summary

Blockchain technology holds great potential for changing our economy. But there are still multiple hurdles to overcome before it can be rolled out more widely, such as the inefficient verification process and the source of the energy needed to make it work. Extensive economic and political cooperation will be required to enable widespread application of this technology.


Lisa Neulichedl