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IT Engineering

Evaluation of Blockchain Technology in an IT Project

Lesezeit
15 ​​min

Adding a blockchain to the tech stack of a project is an important decision that has to be considered in the very early stages. Building it with a centralized architecture and extending it later with a decentralized technology can cause a lot of challenges. A blockchain changes how a project works in a fundamental way. But what makes it so different?

The first blockchain, Bitcoin, introduced by Satoshi Nakamoto in 2008, was designed for a special use case “A Peer-to-Peer Electronic Cash System” [1]. With the introduction of “The Second Bitcoin Whitepaper” from J. R. Willet in 2012, there was for the first time the concept of using the existing Bitcoin blockchain “… as a protocol layer, on top of which new currency layers with new rules can be built without changing the foundation.” [2] This concept of using a blockchain as a protocol layer was first realized with Ethereum in 2015 by Vitalik Buterin introduced as “A Next-Generation Smart Contract and Decentralized Application Platform”[3]. With this concept, Ethereum evolved blockchain technology from a special use case to a platform for a new way of developing applications. Decentralized applications were born. For further information, you can read these two articles about private and public blockchains.

Centralized vs. decentralized

The most common centralized model that is used in IT projects is the client-server model. A client is requesting data from a server, and the server provides services to deliver it. All are under the full control of a single or few entities. The trust system of our times is based on such models with centralized entities, which act as middlemen and get paid for their services.

This was first challenged in the finance sector by Bitcoin and its digital currency called bitcoin. A currency is defined by three basic roles. It acts as a store of value, a medium of exchange, and a unit of account. The cryptocurrency bitcoin fulfills one of them and provides the possibility of storing value for a certain point in the future. Value can also be transferred between participants. Because of the rare possibilities to pay with bitcoin, it does not fulfill its role as a medium of exchange, and because of its volatile characteristics, it does not work as a unit of account. A FIAT currency, such as the EUR, fulfills all the basic roles only because it is issued by a central bank and backed by a government. The combination of a FIAT currency and a blockchain network is called central bank digital currency (CBDC), and central banks are doing a lot of research in this field to combine the advantages of both worlds [4]. It would optimize an existing system by shifting several components to decentralization while keeping the core centralized. Modern blockchain networks like Ethereum act not only as a decentralized electronic cash system with an underlying cryptocurrency but also act as a trust layer for new kinds of applications. This can be used to reduce costs and improve efficiency in existing use cases, as well as to enable new ones.

Traditional centralized concepts are more and more challenged by new decentralized ones based on blockchain networks. They are competing against each other, each with its advantages and disadvantages. In the following part, we will focus, for simplicity’s sake, on public blockchain networks.

Is blockchain the ultimate technology for everything?

Blockchain networks use a peer-to-peer connection between the network participants without a central entity in between. They reach a shared consensus on what data is written. It also shifts control and power from a centralized entity to a network. This sounds not bad, and there is the question of whether this is the ultimate technology to build everything on. But like always, the reality is more differentiated.
The first difference is that a decentralized application is not powered by a single entity; it is operated by a network. The network effect is critical to a blockchain application’s success. Building on a blockchain network results in the advantage that there is no downtime and no single point of failure, but it is also more difficult to develop and maintain them. Because of the possibility to store and transfer value, consequential bugs can result in high damage. On this value, automatic workflows can be created through smart contracts, but there can be high energy consumption when they are based on a Proof-of-Work consensus algorithm. It is also no censorship possible. The user is a pseudonym, and they do not need real-world identities. If the project needs a know-your-customer (KYC) process, it is critical to store sensitive data on the chain and this would not be compliant with the general data protection regulation (GDPR). Decentralized applications have also full transparency and everybody can audit all transactions with a block explorer, but they are slower in performance. Users also have high entry barriers because they need a wallet, and they have full responsibility not to lose their private keys, which would result in the loss of everything that is owned by the user. The data are immutable and permanently stored, with no way to delete them.

So it is clear that the pros and cons have to be considered very differently. But how do you evaluate if it makes sense to build a project on a blockchain?

How to evaluate blockchain in IT projects?

I was particularly interested in how to determine which use cases a blockchain would be suitable for. To find out, I took two online courses in 2022, one at the Massachusetts Institute of Technology about Cryptocurrencies led by Prof. Gary Gensler and one at the Saïd Business School, the University of Oxford about the strategy and thinking behind a blockchain project led by Prof. Martin Schmalz [5]. The University of Oxford framework for evaluation is based on the book Basic Blockchain: What It Is and How It Will Transform the Way We Work and Live [6]. To evaluate whether it makes sense to build a project on a blockchain or on centralized technologies, a few questions need to be answered.

1. Are there multiple stakeholders involved?

This is one of the most important points. A blockchain network reaches its full potential when there are multiple stakeholders involved in a use cases and they want to operate it with a shared governance. As there are more stakeholders, the more sense it makes to consider a blockchain that can act as a trust layer between them and ensure that everybody relies on the same state. One example is when the digital transformation shifts from within a company to a workflow shared by many companies.

2. Is there a transfer of value?

A value on a blockchain network cannot be copied and pasted because it manages scarcity based on established rules. In this context, value can be digital currencies like bitcoin, but it can also be photos, artwork, written text, or personal data like browser history. A blockchain can manage the ownership of such items and control who has access when and under what conditions. If the value needs to be transferred, blockchain technology can provide that in an effective and trustful way.

3. Are there ongoing transactions?

A blockchain would be too ineffective when there are only one-time transactions. It should only be considered when transactions are part of an ongoing process. That could be a payment use case. A bank transaction, for example, needs up to 3 days, and the banking operating times are limited. A blockchain could automate this process in close to real-time, 24 hours a day, 7 days a week. Another example would be the ongoing transactions of a supply chain where the movement of a good is tracked gapless. If there are ongoing transactions, the blockchain can store them through shared consensus.

4. Is permanent storage of transactions required?

Storing data on a blockchain is append-only and immutable. The project requirements have to be aligned on this, and every piece of stored data has to be checked for legal and privacy issues. Can this data have a negative impact on a stakeholder in the future? This would be a strong argument against using a public blockchain network.

5. Is there a repeatable process?

A repeatable process that has to go through a central intermediary is expensive and dependent on a service that can have a single point of failure and act as a black box. If the project needs that, it can be useful to evaluate whether a blockchain network can automate this process and fulfill the requirements. The positive implication could be cost reduction and the possibility of being externally auditable. Through its decentralized architecture, a blockchain can replace a central intermediary and provide trust functionalities.

6. Are multiple stakeholders sharing the same state?

A lot of different centralized applications with various data silos operated by many companies that relay on the same goods are common, for example, in supply chains. They have all their own states and share them in an ineffective way. A supply chain on a blockchain would have a standardized protocol where every stakeholder involved can write, read, and audit data. This would increase efficiency and transparency and reduce communication errors. Unnecessary overhead would be eliminated.

High potential use cases of blockchain

In an article from 2018, McKinsey wrote that the industries with the biggest potential for using blockchain technology are financial services, government, and healthcare [6].

Our current financial system is expensive, with a lot of intermediaries in between that get paid by fees. Blockchain has the power to overcome our current physical borders and to create world currencies with a unique worldwide payment system. Improvements could include cost reduction, increased efficiency, faster payments, and more transparency.

On the government side, blockchain can leverage its permanent, immutable record-keeping. This can be helpful for the birth register, land register, and tax reports. That are all records that need to be stored in an immutable and append-only way. SSI can help here by sharing this government data with other entities, for example, banks when requesting credit. NESSI is a good example of such a system developed by the Bayerische Landesamt für Steuern.

A blockchain in healthcare can give patients ownership of their patient data and give them permission to share it with whomever they want. A blockchain-controlled permission layer can also give AI models access to train on non–patient-identifiable data that is now located in isolated data silos. The Ocean Protocol is a good example of building the foundation for the sharing of such sensitive data.

According to my observations, there are many more promising use cases that emerged after 2018 and have great potential.  One example is supply chain management with its platform DL Freight, which “… creates a shared truth between shippers and carriers, helping to reduce disputes, payment errors and the reliance on 3rd party auditing firms.” [8] Another example is in the energy sector, where the energy blockchain ecosystem EnergyWeb has its focus “… on decarbonizing energy grids with open-source, decentralized technologies.” [9] And a promising example of social media is Lenster, which is a “… decentralized, and permissionless social media app.” [10] and for music streaming Napster 3.0 with “Napster will unlock all the opportunities of Web3 for fans, rights holders and music makers.” [11]

They all have the same things in common: they all require permanent record-keeping based on a repeatable process with ongoing transactions between multiple stakeholders that share the same state. They are also heavily dependent on the network effect to be successful.

Summary: When a blockchain should not be part of the tech stack

A project based on a blockchain works in a different way than a project built on centralized technologies. Most of the projects fail because there is no change in perspective. Applying existing centralized concepts to a decentralized technology won’t work.

Another reason is that the requirements do not fit the technology. There are advantages and disadvantages for centralized applications and decentralized ones, and they all have their use cases. Making a good evaluation at the start of a project is fundamental to the project’s success. It has also to be analyzed in terms of the environmental, social, and governance (ESG) standards, also legal and regulatory implications.

Following consideration, the final question should always be whether blockchain is truly the best technology for this use case. If the answer is no, a blockchain should not be part of the tech stack.

 

[1] Satoshi Nakamoto (2009), Bitcoin: A Peer-to-Peer Electronic Cash System, online. Available at: https://bitcoin.org/bitcoin.pdf [Accessed 10 Nov 2022]
[2] J. R. Willet (2012), The Second Bitcoin Whitepaper, online. Available at: https://cryptochainuni.com/wp-content/uploads/Mastercoin-2nd-Bitcoin-Whitepaper.pdf [Accessed 10 Nov 2022]
[3] Vitalik Buterin (2014), Ethereum Whitepaper, online. Available at: https://ethereum.org/de/whitepaper [Accessed 10 Nov 2022]
[4] Today’s Central Bank Digital Currencies Status, online. Available at: https://cbdctracker.org [Accessed 10 Nov 2022]
[5] Oxford Blockchain Strategie Programme, Available at: https://www.sbs.ox.ac.uk/programmes/executive-education/online-programmes/oxford-blockchain-strategy-programme [Accessed 10 Nov 2022]
[6] David Shrier, Basic Blockchain: What It Is and How It Will Transform the Way We Work and Live, book. ISBN-978-1472144836
[7] Brant Carson, Giulio Romanelli, Patricia Walsh, and Askhat Zhumaev (2018), Blockchain beyond the hype: What is the strategic business value?, online. Available at: https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/blockchain-beyond-the-hype-what-is-the-strategic-business-value [Accessed 10 Nov 2022]
[8] DLT Labs (2022), TRANSFORM YOUR FREIGHT INVOICING, online. Available at: https://dlfreight-shipper.dltlabs.com [Accessed 12 Nov 2022]
[9] EnergyWeb (2022), We build operating systems for energy grids, online. Available at: https://www.energyweb.org [Accessed 12 Nov 2022]
[10] Lenster (2022), Lenster is a decentralized, and permissionless social media app built with Lens Protocol, online. Available at: https://lenster.xyz [Accessed 12 Nov 2022]
[11] Napster 3.0, Getting fans closer to the music, online. Available at: https://www.napster.com/de/wp-content/uploads/sites/5/2022/06/Napster-Litepaper-V1.pdf [Accessed 12 Nov 2022]

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