The blockchain is actually supposed to ensure more decentralization, democracy and transparency, but only a fraction of the business models survive on the market. What needs to be done so that the technology finally catches on?
In 2018, the Polish programmer Przemysław Thomann had the idea of building a blockchain platform - Mobycrypt, a cryptocurrency exchange. The platform should offer the possibility to create personal tokens within minutes and to automatically trade on crypto-token-based markets - without any technical know-how.
Thomann quit his programming job at Volvo. He put 2,200 hours of work into the project, wrote 80,000 lines of code, and invested 10,000 euros from his private assets. He soon attracted attention, found partners. An American celebrity met him in Warsaw as a possible investor. Everything looked fine. Then he waited and waited. The investor eventually jumped out. The legal regulations are too opaque, it said. The celebrity doesn't want to take any chances. Others did the same. Thomann gave up. The dream of an alternative to the banking system was over. The only consolation: he is not alone in this. There is great uncertainty among investors.
The blockchain pioneers imagined it to be so simple: more decentralization, democracy, security, transparency and uncomplicated financial transactions between parties without banks as intermediaries, based on smart contracts - a democratization of the financial system. Apparently this idea was naive: The China Academy of Information and Communications Technology (CAICT) announced in 2018 that only eight percent of over 80,000 blockchain projects from previous years had survived - most blockchain business ideas therefore have an average lifespan of 1 , 22 years.
The problem was quickly found. The technology had a downside: Because data is decentrally stored and validated as a chain of information, sometimes on hundreds of thousands or millions of computers, the technology not only slowed down the speed of many applications - it also consumed immense resources. This has now improved with the upgrade of the Ethereum blockchain network. Many hope for the ultimate breakthrough of the technology, but as Thomann's failure shows, it was not just due to technical deficiencies, but to a variety of factors.
Companies are still faced with a whole series of questions when it comes to blockchain: Does it offer added value from both an economic and an ecological point of view? What is my business model like? How do I really manage to make money with it? Is the blockchain even necessary or isn't a classic database enough? Are the legal frameworks right? How secure is the blockchain really?
Ethereum 2.0 should fix it
So-called smart contracts are a promising element of the blockchain. They were introduced with Ethereum. A simple example shows how they work: A company orders various materials from a supplier that are regulated in the contract. The money transfer initially remains in the balance - when the supplier delivers the material, it is scanned at the customer's and transferred to the blockchain. For example, if the quantity is incorrect, the supplier will not receive any money. If everything is correct, the customer cannot postpone or prevent payment. All of this is regulated by the smart contract, which is simply an algorithm that the contractual partners have agreed on. So far, the problem with such solutions has been: the higher the usage numbers, the more clogged Ethereum was. This was due to a cumbersome verification process: the model (proof-of-work) requires an automatically calculated confirmation that a new block is plausible to be added to the chain, for example a transaction or an incoming goods scan. For this, so-called miners are selected based on their available processor power. If the technology was overloaded, the transaction remained unnecessarily in limbo - so the efficiency of many blockchain applications dwindles with increasing popularity.
The first step of an Ethereum upgrade (ETH 2.0) implemented at the end of 2020 enables more speed, more efficiency, more scalability. Ethereum 2.0 is the transition from Ethereum to a proof-of-stake consensus process. With the new approach, the validators are selected based on their crypto shares. This means that the more shares someone has and the longer they hold them, the higher the likelihood of being selected as a validator and being able to earn money with it. ETH 2.0 requires 16,384 such validators - this number was reached shortly after the upgrade. The sum necessary to be selected for the so-called staking is therefore rather high - this is to ensure that the person chosen identifies himself with the currency. This also has the consequence that a possible attacker must have more than half of the total assets in order to manipulate a block. Last but not least, this concept increases performance: Whereas 30 transactions per second were previously possible, up to 100,000 is expected in future. The complete upgrade process, however, takes several years.
Blockchain - that's behind it
Blockchain technology stores data in chains made up of individual data blocks, each of which refers to the previous and following blocks. These references consist of unique sequences of digits that are calculated from the block content using what is known as a hash function. If the content of a block changes, the reference changes too - and the chain is broken. The complete chain is also stored decentrally on all computers that are part of the blockchain and are referred to as nodes. In order to add new blocks, they must first be validated by at least 50 percent of the nodes involved - an automatic process. The technology is considered to be one of the safest to preserve coherent data in the long term and thus map business processes.
Banks fear that the blockchain will depend on them with ever better technology, because applications can now be scaled at will. According to a PWC study, 88 percent of the financial institutions surveyed fear for their business. No wonder: If an algorithm decides on lending, it can happen as often as you like during the day, while the bank only has a limited number of employees. The Berlin startup Centrifuge, for example, offers companies to tokenize invoices or delivery notes. Such ideas are particularly popular with small and medium-sized companies and the self-employed. They often have difficulties in obtaining uncomplicated loans quickly - this was particularly evident in the corona crisis.
According to Defi Pulse, a provider of analytics services, investments in Defi applications increased by nearly $ 8 billion between late 2019 and September 2020. Defi stands for Decentralized Finance, an alternative system for financial services - decentralized, transparent, inexpensive because everything is automated. An example of a successful Defi-App is Chainlink, a solution for the verification of so-called oracles, which are used by smart contract platforms to map information from the physical world. Another example is the Compound protocol for lending and borrowing cryptocurrencies.
But how reliable is such a bank-free system? And how free? Defi relies on the smart contracts. However, algorithms are prone to error, especially since the blockchain protocol is constantly evolving. Any mistake could encourage misuse and lead to massive losses for the users of Defi applications. Finding flaws in smart contracts is not easy as standards are still lacking. Although the start of ETH 2.0 solves the scaling problem of the network, it is not yet clear how the change to proof-of-stake will affect security.
Stefaan G. Verhulst, co-founder and Chief Research and Development Officer in the Governance Laboratory, also points out that smart contracts often require physical anchoring that further restricts security. Suppose someone orders goods and a freight forwarder guarantees compliance with certain transport conditions, such as refrigeration, by means of a smart contract. One possibility would be to install a sensor in a truck that monitors the cooling temperature and regularly transmits the data to the blockchain. In this way, the promised conditions should be guaranteed on the entire route - because if the temperature falls, the contract is automatically void. The risk here is not the blockchain, but the sensor, according to Verhulst. Since it is part of the physical world, it is easy to manipulate.
Power just shifts
Democratization, too, is often more of a vision than reality. With the blockchain, power is shifting away from banks to other actors instead of disappearing. In the case of Bitcoin, this means, for example, miners, developers, market information services, investors and centralized exchanges. For example, developers can upgrade and shut down or disable decentralized apps. In addition, staking means that those who have more assets have greater chances of making even more money with staking.
Not very user-friendly so far
Jeff John Roberts, author of the book "Kings of Crypto", criticizes the user-friendliness of the consumer-oriented blockchain approaches. A good example are social networks with better privacy policies. The question arises, "why should people bother with these blockchain projects at all, especially when the existing technology options are easy to use and inexpensive or free," he writes. Ditching monopolists like Facebook may be appealing in theory, but few are likely to give up their accounts in the name of decentralization - a concept that is irrelevant to the average computer user. Mainstream acceptance would only take place if.
One example of this is the electronic patient file introduced at the beginning of 2021, which has to be made available by the health insurance companies. Patients can save medical data from the X-ray to the doctor's report. Here, too, some companies are working on implementing a decentralized blockchain solution. Instead, however, the telematics infrastructure was used, which has been strongly promoted by the legislator - the data is encrypted on a central server that is managed by Gematics. When asked if you ever thought of blockchain technology, one developer could only smile - why should you, when data is stored there forever. The patient should also be able to delete them. In addition to the Federal Ministry of Health, Gematics' shareholders are the organizations of doctors, clinics, Health insurance companies and pharmacies. The chronically ill, who are most likely to use such a file, should trust such a facility, in which their doctor is indirectly involved, no less than an anonymous blockchain.
Ironically, problems building a consortium are one of the main reasons why blockchain has been so slow so far, according to a Bitkom study from 2019. Patrick Hansen, Head of Blockchain at Bitkom and one of the authors of the study, says: “At the beginning, in particular, it was underestimated how difficult it is, in addition to the technical solution and implementation, to build up a consortium economically and to bring various players on board - that is, one To create an ecosystem for the blockchain. "
The management consultancy Deloitte comes to a similar conclusion: As the technology matures, the central challenges on the way to the large-scale introduction of a blockchain are stakeholder management and bringing together competitors and unlikely collaborators to solve common problems. With its own customers, it turned out that many of the core advantages of blockchain technology were only realized through cooperation with other parties in the ecosystem or through cross-industry partnerships. The value of a solution is directly related to the value of the network it serves.
Some companies like SAP are therefore trying to set up such consortia. For example, SAP cooperates with pharmaceutical companies and pharmacies to use the blockchain to ensure that medicines get from production to customers without being adulterated. After production, drugs are entered in a central database with a serial number. This is converted into a hash value and also registered in a private blockchain. From then on, the drugs are scanned over and over again across the supply chains. Similar to credit cards, an algorithm checks the plausibility, for example whether a certain amount of a drug can be in a certain place at all. In this use case, the parties could not agree on who should host a database that monitors the supply chain, in this respect, the blockchain is the better solution. And more efficient technology should encourage such approaches.
ETH 2.0 and also blockchain networks such as Polkadot or Tezos, which are going in a similar direction, will undoubtedly take some hurdles for increased blockchain approaches, but the big breakthrough can only come through
killer applications - and it may ultimately take courageous ones, small developer startups like Przemysław Thomann's.