One thing I realized while researching so many different crypto projects over the last couple of month is that a large number of them seems to miss the point of utilizing distributed ledger technology. As an Investor in this industry, it is crucial to not only ask questions about the ability of a project to solve a real-world problem but rather understand if a blockchain is necessary for this process and if it really provides substantial value and an advantage over centralized databases.
In this article we want to look at a small framework, to cover the basics on how to evaluate which ideas actually need a blockchain and where the use of decentralized technologies makes less sense. Basically, we can say one thing: Yes, Blockchain has the potential to solve some severe problems in business, finance, and basically every industry, but this doesn’t mean that blockchain is always the best approach.
Luckily, two Swiss scientists, Karl Wüst and Arthur Gervais, have published a paper explaining when utilizing blockchain technology makes sense and when it is not the best choice. Here are some questions you should ask yourself when determining the value of blockchain for a certain project and use case.
Is data storage required?
„Hans wants to develop an app that helps users increase their math skills. Does he need a blockchain? „
Hans develops an e-learning app, which provides lessons and tips to its users. No data is stored here. The blockchain is a decentralized database, and the purpose of a database is to store data. If you have no data to save, then you do not need a database and thus no blockchain. If the business model or product you are looking at requires data storage at its core, let’s move on to the next step.
Is the project team the only entity who writes or saves data?
„Hans wants to develop an app that summarizes and bundles news articles (about his favorite soccer team) from different sources.“
„Angela runs a business that consists of two other companies and a tax advisor. These three entities regularly exchange money and data.“
Wüst and Gervais point out that you do not need Blockchain if you’re the only person who creates data. So Hans does not need one. He can develop an Android or iOS app and send his summaries through push notification directly on to the mobile devices of his users. This would be much cheaper and faster than using a blockchain. One purpose of decentralized databases is to avoid inconsistency. If you’re the only person creating data, then inconsistency should not be a problem. (There may be a small exception to this when it comes to certification processes of a central body, such as a university that grades students).
If, as in the example of Angela, there are several people or companies involved in a relationship which requires financial transactions on a regular basis, everyone must have their own documentation about these transactions (account, general ledger, etc.). And, this is precisely the point where inconsistencies and contradictions occur, since several parties are involved, and human errors are very common, especially when we are dealing with numbers. In this case, a blockchain would make much more sense.
In Angela’s example, everyone involved had to keep a separate ledger, increasing the likelihood of disagreement. The public ledger solves this problem.
Is there a trusted third party involved?
„During my childhood, My brother and I ran a barter trade (clothes, toys, etc.) whenever there was a fight, my mother intervened and settled the problem between us.“
In this case, our mother was the trusted third party. We did not need a Blockchain. If you can trust a third party to act as a mediator in your negotiations, a blockchain makes no sense. If you are looking at an industry which is known for its abuse of power inside these central entities, a blockchain could be the solution, not only to reduce cost by cutting out the intermediary but also to ensure security, transparency, and trust. If that’s the case, let’s move on to the next question.
Are the data creators anonymous?
„Peter wants to create an app that allows people to voice their opinions about their employers while protecting their privacy.”
In this day and age, it seems like, many people don’t really care about privacy anymore, but still, there are some of us who do. Maybe we do not want to reveal our identity every time we do something online or like in Peters case, there are other reasons to stay anonymous. Cryptocurrencies solve this problem. If you want to protect the privacy of your users, you should use a blockchain. In Peter’s case, it would be possible to create a distributed platform that hides the identity of its users.
Do the creators of the data trust each other?
„I can not believe that some of these Products on Amazon have hundreds of 5 star ratings. These ratings must be manipulated.”
Blockchains solves the trust problem. For example: in a central database, the central authority can manipulate data of its users, which in the Amazon example would be quite possible. In a blockchain, however, all users have the same set of data, which creates transparency and trust.
Do they need public verification?
„Klaudia wants to make the tuna supply chain more transparent. She wants people to know where the fish was caught, processed and packed.“
Do you want to make your data more transparent? In this case, you need a public blockchain, which will allow the public to access your records. In Klaudia’s situation, people who buy the tuna can, therefore, be sure that it poses no health risk. If you do not want your data to be publicly accessible, but only accessible to a group of special-privileged parties, you should consider restrictions or private blockchains.
Answering these questions should help you find out if an idea really requires the use of blockchain technology. Look behind the hype, many projects are building products on the blockchain that would, or already do work better in a centralized environment. Besides the question about a new products abilities to solve a real problem, the question about how it is going to do it is the most important one.
How do you see the use of Blockchain? Are there specific cases where you think it provides a real advantage? Let me know! 🙂
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