While the use of Blockchain may provide transformative advantages over other technologies in some cases, they are not a panacea and do not magically solve every problem. Many publications, reports, and news articles focus primarily on the ‘pros’ (and occasionally exaggerate the positive impact Blockchain technology can have) without mentioning or giving balanced attention to the ‘cons’. We believe it is important to understand the limitations of Blockchain technology, as well as the different trade-offs that arise as a result of different architecture and design choices. Without a clear understanding of these trade-offs, it is impossible to know where Blockchain technology can be best applied, let alone whether it should be considered at all.
Debunking Common Myths
#1 MYTH: Blockchain is ‘trustless’
REALITY: Blockchain always requires some degree of trust. Although Blockchain may help reduce the need for trust, they do not completely remove the need for trust. At the bare minimum, trust must be placed in the underlying cryptography. In the case of a permissioned network, trust must be placed in the operator(s) and/or the validators. If well configured, permissioned Blockchain is at best ‘trust-minimizing’ in the sense that they enable participants to independently validate transactions and verify the state of the system.
#2 MYTH: Blockchain is immutable or ‘tamper-proof’
REALITY: Transactions on Blockchain network can be reversed by network participants under specific circumstances. Similar to ‘trustlessness’, absolute immutability does not exist. The illusion that Blockchain transactions are immutable stems from its append-only data structure that suggests that data can only be added to, but not removed from the database. However, blocks comprising transactions can, in theory, be reversed if enough nodes decide to collude. Reversing transactions may be even easier with permissioned Blockchain than public Blockchain, where colluding miners would at least need to spend computational power and/or cryptocurrency funds to do so. However, permissioned Blockchain actors are bound by legal contracts and agreements that are designed to dis-incentivize collusion or other misbehavior. If ‘mining’ in a permissioned Blockchain is sufficiently decentralized across separate entities with different motivations, one can consider the Blockchain to be tamper-resistant.
#3 MYTH: Blockchain is 100% secure
REALITY: Blockchain is not automatically more secure than other systems. Blockchain employ cryptography for authentication, permission enforcement, integrity verification, and other areas. The mere application of cryptography, however, does not automatically make the system more secure per se. The system may be more resilient as data storage and permissions are distributed, but compromising the private keys of some network participants could give attackers full access to the shared database, including the ability to reverse transaction history. As a result, the management of private keys constitutes a crucial challenge. There is also the widely discussed “51% attack”, where malicious nodes can double spend or wreak other havoc on Blockchain.
#4 MYTH: Blockchain is ‘truth machine’
REALITY: GIGO (‘garbage in, garbage out’) applies to every Blockchain that uses non-native digital assets and/or external data inputs. Blockchain is particularly well suited for the transfer of assets or data native to the respective Blockchain (e.g., Bitcoin). However, Blockchain cannot assess whether a given input from the ‘outside world’ is accurate/true or not. If the input is inaccurate or wrong, the Blockchain will just treat it as any other input and consider all transfers involving the input as valid as long as certain conditions are met. This goes back to the first Blockchain myth of trustlessness: if ‘off-chain’ assets or data sources are digitally represented on the Blockchain, a trusted third party is required to verify and guarantee the accuracy of the input when inserting it into Blockchain.