Blockchain is really just focused on doing one thing well

Since the birth of the Internet, no new technology has attracted as much attention as blockchain.

Blockchain is designed to run unregulated electronic money, a technology that many believe has great potential in government, identity, voting, corporate management and health care, to name just a few of the suggested use cases. But these big plans misunderstand what blockchain really does.

Blockchain is undoubtedly important and valuable as the inspiration for entirely new internet protocols and infrastructure. But it is a lot like the Wright brothers’ first powered airplane. Fantastic, but impractical.

Less than eight years ago, in November 2008, a mysterious and unknown developer who goes by the pseudonym Satoshi Nakamoto launched Bitcoin—the first practical electronic currency that doesn’t rely on a digital reserve bank. The distributed cryptocurrency scheme requires global consensus when a person spends the virtual currency, so she can’t spend it again. The blockchain’s trick is to broadcast every Bitcoin transaction to the entire community, then influence votes in the order in which the transactions appear. Any attempt to “double-spend” (transfer the same Bitcoin twice), or introduce a counterfeit currency that hasn’t been seen on the network before, is detected and rejected.

Without referees, continuous arbitration of blockchain accounts requires a network of peer-to-peer technologies that are resistant to information distortion and tampering.

Anyone can join the blockchain network for free, either as a holder and consumer of currency and/or as a node contributing to the consensus process. People are incentivized to participate in the form of a random reward reward, approximately one node every 10 minutes, whenever the ledger is settled. A node's chance of winning a reward rises with the amount of computing power it adds to the network, so running a node is called Bitcoin "mining".

The only authoritative record of anyone's Bitcoin balance is stored on the blockchain. Account holders operate wallet applications that display their accounts, and all they do is control their account balances and transfer Bitcoin to other accounts before they can spend it. There is no money in this wallet, all they do is control the account holder's private keys and provide a user interface to the blockchain.

In fact, Bitcoin is virtual, not even a virtual currency. The blockchain only records the transfer in and out of the Bitcoin wallet account, and calculates the virtual balance as a distinction between what is consumption and what is payment.

The only way to spend your balance is to use your private key to digitally sign an instruction to the network, specifying the amount to be transferred and the address to transfer it to (i.e. the public key). If a private key is lost or destroyed, the account balance associated with that key will be frozen forever and can never be spent.

There have been a number of unfortunate incidents involving the loss of computers or disk drives holding Bitcoin wallets controlling millions of dollars in value. Predictably, a large amount of malware has emerged designed to steal Bitcoin private keys and balances.

We’ve already sensed the enthusiasm for cryptocurrency innovation; the feeling is that if blockchain can “square the circle” for payments then it must have untold power in other areas.

In particular, many critics promote blockchain for the management of identity.

The most striking thing about proposals for “blockchain identities” is that most of them come from blockchain advocates rather than identity management experts. What is missing from most blockchains when it comes to blockchain identity proposals?

In fact, most unpaid use cases are just careful statements of the problem and proper analysis of why distributed consistency is important.

What can’t blockchain do?

Sadly, when you look closely, blockchain doesn’t do what most people seem to think it does. Blockchain doesn’t do anything. All it has is a record of a Bitcoin transaction and the associated metadata. The metaphor of having all that record on a blockchain masks the need for additional technology, processes, and more than just blockchain to represent physical items in code and oversee the distribution of that code. These are the requirements for additional key management, ownership registries, and administration.

Blockchains do not take into account these practical issues, nor do any other distributed ledger technology that follows Bitcoin. Blockchains are designed to manage cryptocurrencies, without any key management or registry. In the naked Bitcoin world, no one is trusted. There are no administrators, no third parties to vouch for any wallet holder or network node. The lack of friction is good for bank accounts (and illicit users), and it helps build peer-to-peer networks, but it must be maintained at a massive scale to protect against untrusted actors and systems.

Also, it is good to remember that the incentive for running the nodes of the blockchain comes from mining rewards. Reducing the use cases for Bitcoin that are not paid for and it is not clear who will pay for the infrastructure and how it will be done. The original blockchain and Bitcoin are inseparable. Now, there is a lot of recent research and development going on to alternative consensus mechanisms and participation models. But it is not up and running yet, and the established public blockchains are not up and running yet, and have not yet been proven to have the same security properties as the blockchain.

Blockchain does more than just one thing: it establishes the order of entries in a distributed ledger to prevent double spending without a referee. The authenticity of the contents of the ledger is an entirely different question. Blockchain does not magically make the ledgers themselves trustworthy, let alone the humans who created them.

Even though blockchain is not a "trust protocol" it's just a hype; it's actually quite the opposite. Think about it for a second: even though it's not stopping you from being cheated into paying with Bitcoin. But for anything of value beyond Bitcoin to be transacted through a blockchain requires additional agents, third parties, and auditors, and blockchains do not do transactions with trustless architectures.

High demands are best suited to blockchain's ability to decentralize things. But in fact, blockchain is just a ruling on the order of accounts in a decentralized ledger. Don and Alex Tapscott said: Blockchain is not a general or inherent "Internet of Value". It is designed for electronic cash and has no native connection to real-world assets.

Few businesses have shied away from evaluating blockchain technology, and if you are convinced to take a look, then take the first step to re-examine your security and record-keeping needs. Take the time to understand what blockchain does and all the things it forgets to do with other systems. If your business is decentralized and your assets are purely digital, then blockchain offers a lot, except that it is just another database.