Blockchain – Hype or real opportunity for companies?

Blockchain –this buzzword is familiar to many people, yet not everyone really knows exactly what it is or how it works. A panel discussion at the Data Festival 2018 might shed some light on these questions: Thomas Schmiedel, Data Scientist at Data Reply, Sebastian Heinz, CEO at Statworx, and Marco Plaul, Data Scientist at Alexander Thamm engaged in a discussion about blockchain, its application possibilities, advantages and challenges. Particular focus was placed on smart contracts. Nadiem von Heydebrand, Executive Data Scientist & CSO, moderated the discussion.

What exactly is Blockchain? And how does it work?

Sebastian Heinz clarifies the frequently-asked question: “What is blockchain?”. He explains that basically, it is data. It involves blocks of data that are connected to previous blocks and secured by a hash value. A hash is a cryptographic key that encrypts data within the block. The first block is called the genesis block. In its essence, blockchain is a sequential database.

What about Smart Contracts?

Just like any other kind of information, contractual information can be stored in blockchain within different blocks which allows the use of smart contracts. The interesting thing about smart contracts is the fact that their code is executed automatically once actions or terms of the contractual information have been fulfilled. An added benefit is that the contractual information is visible to all contractual partners.

Sebastian Heinz provides an example to illustrate the function of a smart contract: Imagine a campaign on Kickstarter, a community that helps individuals and companies in funding projects. Once a certain amount of money is funded – in this case, when the minimum amount of money for financing the project has been collected – then the money ought to be transferred to the project owner. This can be done manually or automatically by using smart contracts. In the latter case, there would be an IF-THEN-equation stored within a block of the smart contract: IF the necessary amount of financial resources has been collected, THEN the collected money is automatically transferred to the project owner.

In this respect, the use of smart contracts is both convenient and safe, as blockchain is extremely hard to manipulate.

What are the biggest advantages of blockchain (in the context of smart contracts)?

Marco Plaul points out the major advantages of blockchain:

  • Security

Information stored in blockchain is extremely difficult to alter. Once information is changed, the hash that is generated does not link to the parent block anymore. Consequently, any manipulation is visible to all parties of the contract and the network would reject the faulty modification. However, in theory, manipulation would be possible if the modifier holds 51% of the entire computational power. In that case, he or she would build the longest chain, which would then seem to be the original.

Sebastian Heinz adds that manipulation would also be extremely time-consuming. A regular proof-of-work, a mathematical problem that needs to be solved to secure the legitimacy of a transaction in a blockchain, takes about 10 minutes to complete. Supposing that the existing blockchain consists of 100k blocks, the time to establish the longer chain and therefore alter the information would take 1 million minutes (for one person). Therefore, it is basically impossible to manipulate blockchain and the storage of information in a smart contract is very secure.

  • Transparency

As mentioned before, all contractual partners have access to read the contractual information stored in a smart contract. Therefore, the actions that have been taken can be easily verified and checked.

  • Decentralization

Blockchain is a decentralized (sequential) database. This means that the information stored in the blocks is not stored (and controlled) by one single authority, but rather, its storage is decentralized.

Which industries can benefit most from blockchain?

Thomas Schmiedel highlights the difference between blockchain and a regular database to examine which industries can benefit most from blockchain. In contrast to a regular database, blockchain is both decentralized and distributed. Therefore, a whole network can be trusted to take care of it. Furthermore, blockchain is available and it is basically impossible. These two advantages suggest that blockchain would be especially useful for industries that handle privacy-relevant issues or transactions. Internal communication in companies can also benefit from it. Both of these considerations apply to the banking and finance industry, for example.

Sebastian Heinz adds that blockchain is especially advantageous for companies that have contractual relationships with third-party entities, such as intermediaries or customers. Since a smart contract is coded, it can be automated, and automated decisions can be made – similar to Machine Learning. He suggests an example in which (fake and legitimate) tickets are sold. Often, tickets are sold via eBay or in front of the stadium. How can the validity of those tickets be verified? If a unique key was allocated to each ticket and stored in blockchain directly, no fake tickets could be sold. In this scenario, intermediaries could be cancelled out.

So, what happens to intermediaries such as PayPal? Learn more about bypassing intermediaries in the video.

What are the biggest challenges in using blockchain technologies for companies?

As with any other technology, blockchain comes with some disadvantages. For example, the implementation of blockchain requires the expertise of skilled programmers, it cannot simply be installed. Besides that, Marco Plaul identifies a major challenge in the use of blockchain, in that many companies try to develop their own blockchain. However, it would be much more advantageous to collaborate on and harness network effects.

Additionally, there are some ethical concerns regarding blockchain. Consider a scenario of central institutions, in which there are many rules and regulations. When you replace central institutions with decentralized blockchain technology, everyone has to trust those decentralized networks. However, no one really knows what would happen – Chaos? Anarchy? Or would life continue as usual? Since no one has a definite answer to this ethical issue, this represents a major insecurity.

Last but not least, there is an ecological concern, since the use of blockchain requires a lot of energy. Thomas Schmiedel suggests that the major energy consumption derives from proof-of-work. However, there are alternative consensual algorithms (that do not scale very well) or other options that could replace proof-of-work.

You want to learn more about blockchain? Get all the details and watch the Blockchain Panel video here: