2018 proved to be a rollercoaster ride for the cryptocurrency sector, marked by sky-high valuations, a flourishing economy, incidents of fraud and cyberattacks, and a severe market slump. While the future prospects of decentralised digital currencies are uncertain, the technology itself shall still endure, regardless of its outcome.
The recent frenzy surrounding cryptocurrencies has sparked considerable talk about blockchain, an innovative technology that is predicted to have a profound influence on the digital domain in the coming years. Consequently, enterprises the likes of Samsung and Goldman Sachs have emerged as major investors in blockchain-based ventures like Sky Mavis, stimulating the creation of a multitude of businesses seeking to leverage this trend.
Despite its widespread adoption, questions still linger around the use of blockchain, particularly with regard to its impact on the environment. The rising issue of climate change necessitates attention towards the significant energy requirements of maintaining a blockchain network. Originally considered immune to security breaches, recent occurrences have demonstrated otherwise, undermining confidence in its inherent security.
The growing curiosity surrounding blockchain technology is undeniable, calling for a careful examination of its production expenses, and its diverse range of potential applications beyond cryptocurrency and NFTs. Whether blockchain is here to stay or simply a transient phenomenon remains to be seen.
Gaining Insight into Blockchain Technology
The notion of blockchain technology has been around for more than forty years. At its core, a blockchain is a digital ledger administered by a network of actors with an inherent lack of mutual trust. For a more comprehensive grasp of this concept, let’s dive deeper.
In simplest terms, a blockchain denotes a digital register that documents previous transactions. This registry is solely digital in nature; while it is possible to produce a hard copy, this would essentially be a reproduction of the living version that exists in the virtual sphere.
Peer-to-peer networking technology facilitates the decentralized deployment of blockchain, implying that the register is not confined to a singular, central location, but rather dispersed across a web of computers. Consequently, it is impossible to commandeer a data center physically and obtain unrestricted access to the entire ledger.
An assembly of managers scrutinizes and validates transactions, and is regarded as ‘distrustful’ until a majority confirms the legitimacy of a given transaction, following which it is incorporated into the distributed ledger. This method safeguards the independent verification of all transactions by each group before arriving at a consensus.
The question of what types of transactions may be recorded on a blockchain remains ambiguous. For illustration, the Bitcoin blockchain exclusively logs transactions between Bitcoin wallets. Conversely, other blockchains, such as Ethereum, have the capacity to store and transfer a variety of data. It is feasible to program a transaction tracker to employ the Ethereum blockchain.
One example of this is Axie Infinity, a game akin to “Pokémon GO” where all transactions are documented securely on a decentralised ledger. Several companies have also made bold claims about the potential of blockchain technology for diverse purposes such as cloud and identity storage.
The cryptographic links between blocks render it nearly infeasible for anyone to fabricate a fraudulent block, as a public ledger is accessible to everyone and is not centralised. Is this an oxymoron? Indeed, it is.
The Expenses Incurred by Blockchain Technology
Blockchain technology is renowned for its high-energy consumption. Two widely used techniques for reaching consensus include Proof-of-Work and Proof-of-Stake.
Proof-of-work Validators or miners, strive to resolve a cryptographic challenge that grows progressively tougher with each ensuing block appended to the blockchain. Once a miner successfully solves the problem, the transaction is validated, and they are rewarded with a token (such as Bitcoin).
Assuming the collective intellect of 200 preeminent mathematicians operating on a solitary problem, it is probable that a resolution would be achieved swiftly and proficiently. If one person succeeds in finding a solution unaccompanied, then time and effort would have been squandered. Furthermore, given that the process of mining for Bitcoin utilizes energy equivalent to an entire nation, it is apparent that there is a need to tackle the issue of energy consumption.
It is evident that those with greater computational power have a higher probability of successfully solving the cryptographic problem and acquiring the token. Thus, proof-of-work systems can confer an edge to sizeable entities over smaller ones in decentralised networks. This prompts scrutiny regarding the effectiveness of decentralised systems in ensuring a fair and impartial playing field.
Ethereum is progressing towards a more sustainable proof-of-stake mechanism. This approach entails choosing a handful of validators who are willing to stake their funds to verify fresh blocks. Upon successfully verifying a block, the validator is remunerated. Conversely, if the validator submits counterfeit transaction or data records, their staked resources would be curtailed, and they would be removed from their validation duties.
It has been observed that, although Proof-of-Stake (PoS) systems are more efficient in terms of resources as compared to Proof-of-Work (PoW) systems, they still demand a substantial upfront investment.This, in turn, intensifies the competition among validators, resulting in the formation of an oligopoly.
Unfamiliarity with the Purpose of Blockchain
A critical obstacle with Blockchain technology is the dearth of value it generates to warrant the allocation of infrastructure and resources. Advocates of the technology highlight its security as a primary advantage. Nonetheless, the theft of $600 million from Axie Infinity in March 2023, and the succession of Non-Fungible Tokens (NFTs) that have been pilfered over the past year, expose the technology’s vulnerabilities.
Undeniably, technologies such as peer-to-peer and cloud services existed before the inception of Bitcoin, and the concept of eradicating dependence on significant technology companies like Amazon and Microsoft has its appeal. Nevertheless, it is vital to assess if the benefits of centralised services have been exhaustively explored.
Accountability is a crucial factor for enterprises. Businesses are legally obliged to assist with data retrieval or provide compensation for data loss. Both Azure and Amazon Web Services are prepared to exempt any associated expenses when an account is subjected to infringement.
In the future, Blockchain technology could be leveraged to oversee individuals’ identities and manage entry and exit at borders. Nonetheless, at present, the essential resources, dedication and supervision are absent to turn this vision into reality. Although Blockchain is a fascinating idea, it has not yet offered resolutions to any pressing issues.
I do not intend to convey the impression that I am denigrating Blockchain. Conversely, I view the notion as remarkably commendable and even inventive. Nevertheless, I have not yet witnessed an instance where its implementation results in a net benefit without detriment to the environment.