Research Summary: Do you need Blockchain?
By Tony Siu
- The authors provide a structured methodology to determine whether blockchain is a suitable technical solution to a given real-world problem.
- Under that framework, solutions are divided into three categories: centralized databases, permissioned blockchains, and permissionless blockchains.
- The authors visited real-world use cases and analyzed them with the framework, including supply chain management, bank transactions, and DAOs.
What are the appropriate application scenarios for permissionless blockchain, permissioned blockchain, and traditional centralized database management?
Distributed ledger: A distributed ledger is a database that is consensually shared and synchronized across multiple sites, institutions, or geographies, accessible by multiple people.
Blockchain: The name of blockchain stems from its technical structure – a chain of blocks. Each block is linked to the previous block with a cryptographic hash. A block is a data structure that allows storing a list of transactions.
Permissionless Blockchain: Also known as public blockchains, they allow anyone to transact and join as a validator. Data on these blockchains are publicly available, and complete copies of their ledgers are stored across the network giving them censorship resistance and security. A permissionless blockchain has no centralized authority, and users can remain relatively anonymous as there is no need for identifying oneself to get an address or perform transactions.
Permissioned Blockchain: Also known as private blockchains, permissioned blockchains can be thought of as closed systems that require permission to access. Anyone interested in validating transactions or viewing data on the network needs approval from a central authority. This is useful for companies, banks, and institutions that need to comply with regulations or want complete control of their data.
Centralized database: A centralized database is basically a type of database that is stored and maintained at a single location only. The data traffic of centralized databases is more easily attacked or hacked and if any kind of system failure occurs at the centralized system, the entire data could be destroyed. However, since all data is stored at a single location it is easier to access it, has very minimal data redundancy, is cheaper and faster compared to other forms of databases.
Trusted Third Party (TTP): In cryptography, a TTP is an entity that facilitates interactions between two parties who both trust the third party. The Third-Party reviews all critical transaction communications between the parties with an eye toward the ease of creating fraudulent digital content.
Scalability: In the blockchain, scalability refers to the capability of the blockchain network to handle large amounts of transaction data in a short span of time.
Decentralization: In the blockchain, decentralization refers to the transfer of control and decision-making from a centralized entity to a distributed network.
Writers & Readers: Writers are participants with write operation rights to a blockchain network and readers are participants with reading operation rights to a blockchain network.
Supply Chain Management (SCM): A SCM is the management of the flow of goods and services. This includes all processes that transform raw materials into final products.
Demand Chain Management (DCM): A DCM is the management of relationships between suppliers and customers to deliver the best value to the customer at the least cost to the demand chain as a whole.
Fig. 1: The traditional SCM has no central entity and SCM based on a blockchain system has distributed nodes that participants can read or write from the SCM status quo.
Certificate authority: Authority that gives licenses to banks to participate in a blockchain system.
Internal banking: Internal banking aims at increasing financials generated from regular business activities. For this purpose, evaluation and control of costs are made, along with reviewing the budget. Moreover, the credit terms with customers are verified so as to effectively manage collection receivables.
External banking: External banking involves finances generated from outside sources of an organization. There are two types of external sources of finance: long term and short term, which can also be classified as equity financing and debt financing.
Data structure: In computer science, a data structure is a data organization, management, and storage format that enables efficient access and modification.
Cryptographic hash: A cryptographic hash function is an algorithm that takes an arbitrary amount of input—a credential—and produces a fixed size of enciphered text called a hash value, or just “hash.”
Smart contracts: are executable code built on top of blockchains. They are extremely useful for executing agreements between untrusted parties and promise to be a key enabler of social automation in the 21st century.
Public Verifiability: Blockchain allows any observer to verify the correctness of the state of a system, while different observers in a centralized system may have completely different views of the state.
Transparency: Due to Blockchain’s public verifiability, transparency of relevant data and processes is required.
Privacy: A key property of a system for guarding the identities of participants and the content of their transactions. Privacy is harder to achieve in a Blockchain system because transparency is required.
Integrity: Ensures that information is protected from unauthorized modifications. Integrity is closely linked to public verifiability, and compromised in a centralized system.
Redundancy: Data redundancy is achieved through replication across writers in blockchain systems, and by backups in different physical servers in centralized databases.
Trust Anchor: Represents the highest authority in a given system to grant or revoke read-write access to the system, and a key difference between blockchains and other centralized systems.
- Generally speaking, using an open or permissioned blockchain makes sense when multiple incompatible parties need to interact but are unwilling to use a TTP. Traditional centralized databases offer much better performance in terms of latency and throughput when compared to blockchain systems. This is largely due to the fact that a blockchain’s consensus mechanism adds another layer of abstraction.
- There is a tradeoff between decentralization, “How well a system scales to a large number of writers without mutual trust and throughput” and scalability, “How many state updates a system can handle in a given amount of time.” This tradeoff should be considered when deciding whether the use of blockchain technology is appropriate or not.
- If no data needs to be stored, no database is required. If only one writer exists, a traditional centralized database is preferable due to the effectiveness of database throughput and latency.
- Where there is a TTP, there are two implications. If the TTP is always accessible, write operations and verification-of-state can be delegated to it. If the TTP is usually offline, the TTP can function as a certificate granting authority classifying blockchain writers.
- If both parties agree there are no malicious writers, a centralized database is an appropriate solution.
- If the set of writers is not fixed and identified, a permissionless blockchain is the preferred option.
- The figure below depicts a flowchart in deciding whether blockchain technology is appropriate or not to solve a problem that requires a technological approach. Table 1 should also be considered alongside the figure below when deciding the appropriateness of a blockchain solution to specific problems.
- The author begins by describing the background and properties of blockchain technology, the different participants of blockchain, and introducing the idea of the Tensions between Transparency and Privacy.
- The authors analyzed permissioned and permissionless blockchain types in contrast to a centrally managed database and provided a methodology to determine whether blockchain technology was necessary in specific problem scenarios.
- Particularly, the scenario of supply chain management, interbank and international payments, and decentralized autonomous organizations were explored.
- The authors contrasted some properties of permissionless and permissioned blockchains and a central database. Latency and throughput are much better than blockchain systems in centralized systems. Please note that permissioned blockchains can be public.
- For supply chain management, according to the authors’ proposed framework, the main issue with applying blockchain to SCM is whether all writers can be trusted when interfacing between physical entities and digital entities. SCMs do require to store data, multiple writers are involved but an online TTP could always be utilized. Permissioned or no blockchain would be left for consideration if online TTP is not possible.
- For financial applications, according to the authors’ proposed framework, blockchain solutions seem appropriate because participants are risk-averse and do not prefer to rely on strong trust assumptions. There are multiple parties that act as writers in interbank payment systems, there is a trusted third party for single currency systems which may not want to act as verifiers for every transaction and may only act as certificate authority by giving out licenses to banks to participate in the interbank system. This implies that the writers of the interbank system are known and a permissioned blockchain is appropriate for this scenario.
- For a Decentralized Autonomous Organization(DAO), according to the author’s proposed framework, a permissionless blockchain is a good fit because a DAO requires storing unknown, mutually distrusting state writers. A dedicated permissioned blockchain may be used for a single DAO. In most cases, however, DAOs do not require their own blockchain and the DAO itself may just be built on top of existing blockchain networks.
- Deciding to use or not to use Blockchain technology is a serious matter: “Do you need a Blockchain?” has been discussed before.
- The first structured methodology: The authors provided the first structured methodology in deciding between solutions of permissioned blockchains, permissionless blockchains, and centralized databases. Trust assumptions, application requirements, involved parties, and technical characteristics were taken into account.
- Three application scenarios: The authors applied their methodology to supply chain management, Interbank Finance, and Decentralized Autonomous Organizations.
- Conclusion: There are indeed valid use cases for permissionless blockchains, permissionless blockchains, and centralized databases that need to be decided carefully.
- Permissionless blockchains such as Zerocash or Ethereum are built on techniques used by the first open and decentralized blockchain, Bitcoin, that improves privacy with more expressive smart contracts.
- There are protocol improvements for throughput of blockchains that allow transfers of digital assets between different blockchains such as hashed timelock contracts like the lightning network.
- Many companies now are developing their own permissioned blockchains through the emergence of Bitcoin. As permissioned blockchains are simpler than permissionless blockchains these permissioned blockchains can use more efficient protocols for consensus.
- The wider adoption of Blockchain-based solutions for digital-based problems may become more and more applicable in the future.
- Being the first more rigorous methodology to determine the appropriateness of blockchain use in resolving digital-oriented problems, the question of “Do you need a Blockchain?” for commercial and academic research may be looked at with deeper introspection. Further criterion on developing blockchain defining properties and decision making of “Do you need a Blockchain?” may be based on this paper’s insights.
- This study may be used for in-depth introspection of blockchain use particularly for supply chain management, interbank and international payments, and decentralized autonomous organizations.