Why Use a Blockchain?

As the implications of the invention of have become understood, a certain hype has sprung up around blockchain technology.

This is, perhaps, because it is so easy to imagine high-level use cases. But, the technology has also been closely examined: millions of dollars have been spent researching blockchain technology over the past few years, and numerous tests for whether or not blockchain technology is appropriate in various scenarios have been conducted.

Blockchain technology offers new tools for authentication and authorization in the digital world that preclude the need for many centralized administrators. As a result, it enables the creation of new digital relationships.

By formalizing and securing new digital relationships, the blockchain revolution is posed to create the backbone of a layer of the internet for transactions and interactions of value (often called the 'Internet of Value', as opposed to the 'Internet of Information' which uses the client-server, accounts and master copy databases we've been using for over the past 20 years.)

But, with all the talk of building the digital backbone of a new transactional layer to the internet, sometimes blockchains, private cryptographic keys and cryptocurrencies are simply not the right way to go.

Many groups have created flowcharts to help a person or entity decide between a blockchain or master copy, client-server database. The following factors are a distillation of much of what has been previously done:
Is the data dynamic with an auditable history?
Paper can be hard to counterfeit because of the complexity of physical seals or appearances. Like etching something in stone, paper documents have certain permanence.

But, if the data is in constant flux, if it is transactions occurring regularly and frequently, then paper as a medium may not be able to keep up the system of record. Manual data entry also has human limitations.

So, if the data and its history are important to the digital relationships they are helping to establish, then blockchains offer a flexible capacity by enabling many parties to write new entries into a system of record that is also held by many custodians.
Should or can the data be controlled by a central authority?
There remain many reasons why a third party should be in charge of some authentications and authorizations. There are times when third-party control is totally appropriate and desirable. If privacy of the data is the most important consideration, there are ways to secure data by not even connecting it to a network.

But if existing IT infrastructure featuring accounts and log-ins is not sufficient for the security of digital identity, then the problem might be solved by blockchain technology.

As Satoshi Nakamoto wrote in his (or her) seminal work, "Bitcoin: A Peer-to-Peer Electronic Cash System": "Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable."

Private key cryptography enables push transactions, which don't require centralized systems and the elaborate accounts used to establish digital relationships. If this database requires millions of dollars to secure lightweight financial transactions, then there's a chance blockchains are the solution.
Is the speed of the transaction the most important consideration?
Does this database require high-performance millisecond transactions? (There is more on this point in our guide: "What is the Difference Between a Blockchain and a Database?").

If high performance, millisecond transactions are what is required, then it's best to stick with a traditional-model centralized system. Blockchains as databases are slow and there is a cost to storing the data – the processing (or 'mining') of every block in a chain. Centralized data systems based on the client-server model are faster and less expensive… for now.

In short, while we still don't know the full limits and possibilities of blockchains, we can at least say the use cases which have passed inspection have all been about managing and securing digital relationships as part of a system of record.

Authored by Nolan Bauerle; images by Maria Kuznetsov; Coindesk
NEXT: WHAT IS ETHEREUM?

INDEX: A BEGINNERS GUIDE TO BITCOIN AND BLOCKCHAIN TECHNOLOGY



What is Bitcoin?
It’s a decentralized digital currency


Why Use Bitcoin?
It’s fast, cheap to use, and secure


How Can I Buy Bitcoin?
From an exchange or an individual


How to Buy Bitcoin in the UK
Buying bitcoin in the UK


How to Store Your Bitcoin
Use a digital or paper wallet


What Can You Buy with Bitcoin?
Spend your bitcoins


How to Sell Bitcoin
A guide on how to sell your bitcoins


How to Accept Bitcoin Payments for Your Store
Learn about bitcoin POS systems


How do Bitcoin Transactions Work?
Bitcoin addresses and private keys


Is Bitcoin Legal?
The current regulation around bitcoin


Who is Satoshi Nakamoto?
The founder of bitcoin


How Bitcoin Mining Works
By confirming transactions


How to Set Up a Bitcoin Miner
Generate bitcoins yourself


What are Bitcoin Mining Pools?
What are pools how and how to join them?


How Does Cloud Mining Bitcoin Work?
Alternative bitcoin mining solutions


How to Calculate Mining Profitability
Can you make a ROI?


How to Make a Paper Bitcoin Wallet
Creating an unhackable bitcoin wallet


Can Bitcoin Scale?
A look at the debate and the tech


What is SegWit?
A new way of storing transaction data


What is the Lightning Network?
Off-chain transaction channels


What is Bitcoin Cash?
Same blockchain, different characteristics.


Hard Fork vs Soft Fork
Why and how do blockchains split?


What is the Difference Between Litecoin and Bitcoin?
It’s the silver to bitcoin’s gold


How to Buy Litecoin
How to buy the bitcoin alternative litecoin


How to Mine Litecoin and other Altcoins
How to generate your own altcoins


Understanding Bitcoin Price Charts
A primer on bitcoin price charts


Bitcoin E-Commerce Services for Merchants
How to accept bitcoin at your business


What is Blockchain Technology?
A system of distributed data and logic


How Does Blockchain Technology Work?
Cryptographic keys, distributed networks and network servicing protocols


What Can a Blockchain Do?
Identity, recordkeeping, smart contracts and more


What is a Distributed Ledger?
A dynamic, independently maintained database


What is the Difference Between Public and Permissioned Blockchains?
Can anyone read or write to the ledger?


What is the Difference Between a Blockchain and a Database?
It begins with architectural and administrative decisions


What Are the Applications and Use Cases of Blockchains?
Tokenization, auditing, governance, settlement and more


How Could Blockchain Technology Change Finance?
Cross-border payments, new asset classes, regulatory compliance and more


What are Blockchain’s Issues and Limitations?
Complexity, size, costs, speed, security, politics and more


Why Use a Blockchain?
To manage and secure digital relationships as part of a system of record


What is Ethereum?
A blockchain application platform and ‘world computer’


What is Ether?
The ‘fuel’ of the ethereum network


How to Use Ethereum
Wallets, trading and ‘dapps’


Who Created Ethereum?
Vitalik Buterin


How Ethereum Mining Works
‘Proof of Work’ and ‘Proof of Stake’


How to Mine Ethereum
GPUs, mining software and pools


How Ethereum Works
‘Turing-complete’ programming, ‘state’ and the ‘EVM’


What is a Decentralized Application?
A distributed ‘smart contract’ system


What is a DAO?
A ‘decentralized autonomous organization’


How Do Ethereum Smart Contracts Work?
Code, transaction fees and ‘gas’


How Will Ethereum Scale?
‘Sharding’ and ‘off-chain’ transactions


What is an ICO?
Initial Coin Offerings refer to the distribution of digital tokens.

Read the full article