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How Much Blockchain is Really Needed?

Alex Lielacher
Last updated: | 4 min read

The blockchain has emerged as the biggest buzzword in the tech sector in the past 12 to 18 months. Blockchain startups have been appearing out of nowhere, fuelled by the industry’s easy access to funding through digital token sales. However, many of the new so-called “blockchain startups” often do not require a blockchain or their own digital token to succeed in their mission, which begs the question: “How much blockchain is really needed?”

Source: iStock/Laurence Dutton

How Much Blockchain Do Companies Really Want?

Outspoken bitcoin advocate Andreas Antonopoulos said at his speech at the Polish Bitcoin Congress in May that “the blockchain is just a very slow database”. He added that if companies want to adopt blockchain technology, they will need to want something that is “open, neutral, borderless, that no one controls and that resists censorship.” In reality, however, most businesses want a network that they can have full control over, which makes the blockchain – in its true form – rather redundant for most businesses.

Nonetheless, startups around the world are attempting to “blockchainize” everything. Critics of this, argue that this is done mainly with the intention to gain access to easy funding in the initial coin offering (ICO) market and without actually implementing a viable blockchain-based model.

Bobby Lee, CEO and co-founder of BTCC, a crypto exchange, for example, tweeted:

His views on the misuse of the ICO market to gain access to funding while touting blockchain are shared by many in the cryptocurrency community and is one of the key reasons why the ICO market has developed a bad name for itself despite still raking it in hundreds of millions for startups on a monthly basis.

Does Your Startup Really Need the Blockchain?

Before jumping onto the blockchain bandwagon, entrepreneurs should ask themselves whether they really need a blockchain to deliver the product, service or network that want to build.

To discover whether the blockchain makes sense for a business, entrepreneurs should meditate on the following two questions:

  • Do you need a blockchain or will a traditional database suffice?
  • What type of blockchain would you need? Permissionless or Permissioned?

The blockchain offers clear advantages over traditional centralized databases. If it is implemented correctly, the blockchain creates a more secure network through the decentralization of its validator nodes, which makes it near impossible to hack, and provides a consensus in a trustless environment. This, in turn, relieves the need for centralized database management.

Having said that, is your business not better off with a centralized database solution over which your company can have full control, that is easier to implement and manage, runs faster, scales better, and is based on more established technology (which will likely reduce operational errors)?

Furthermore, entrepreneurs need to ask themselves whether they need a permissionless or a permission blockchain for their business.

A permissionless blockchain would be something like the Bitcoin or the Ethereum network. They are open-source public networks that anyone can join as a user or miner. A permissioned blockchain provides access to a few selected participants who are able to join the network.

Permissioned blockchains can then also be split into public and private permissioned blockchains.

A public permissioned blockchain enables the public to view the data on the blockchain even if only a handful of participants can access it. A blockchain like this would make sense for a food supply blockchain, for example.

A private permissioned blockchain, on the other hand, has only a handful of participants and only these participants have access to the data on it. This type of blockchain solution is sought after by financial institutions, for example. However, if a company needs a private database that only a select few parties have access to, does this company really need a blockchain at all?

Princeton University computer scientist Arvind Narayanan challenged the notion of private permissioned blockchains. He said : “The key to Bitcoin’s security (and success) is its decentralization which comes from its innovative use of proof-of-work mining. However, if you have a blockchain where only a few companies are allowed to participate, proof-of-work doesn’t make sense anymore. You’re left with a system where a set of identified (rather than pseudonymous) parties maintain a shared ledger, keeping tabs on each other so that no single party controls the database. What is it about a blockchain that makes this any better than using a regular replicated database?

Investors Need to be Very Wary of “Blockchain” Startups That Don’t Need the Blockchain

Sometimes, you could get the impression that the blockchain is the technological savior of all mankind. A quick Google search on the subject matter suggests that the number of disruptive blockchain uses cases is dozens if not hundreds. However, how many of them have actually been realized yet and how many of them even make sense on a theoretical level? This is something that investors looking to invest in token sales should keep in mind.

Investing in startups that claim that they will solve this or that problem through the “blockchainization” of their product but – on closer inspection – do not actually need a blockchain to function are projects you will likely want to stay away from.