Since its 2008 debut, blockchain has developed quite a bit. The advantages of the distributed digital database, including transparency, speed, cost efficiency and scalability, have become apparent. What’s also become apparent is that blockchain still has a long way to go, and that some of its advantages can also present challenges.
8 Advantages of Blockchain
As we delve into eight distinct advantages of blockchain, two points are worth keeping in mind. First, while all blockchains are based on the same technological principles, all do not perform equally. Smaller blockchains with fewer users can be more nimble and efficient, while larger ones can be relatively slow and expensive.
Second, blockchain is an evolving technology. Whatever advantages it sports now are bound to become even sharper in the future. “The most vital improvements to blockchain will be in the realms of smart contracts and consensus,” said Sean O’Brien, founder of the Privacy Lab at Yale Law School. Layer 2 technologies will continue to revolutionize what’s meant by blockchain and bring more and more of what’s done on and offline into the realm of Web3, he said.
Blockchain Is Decentralized
No bank or entity controls blockchain, which some tout as its biggest advantage. Why? “A decentralized business model is one in which there is a greatly reduced opportunity for any single entity, or collusion of entities, to secretly manipulate the rules for their benefit,” said Dan Burnett, executive director of the Enterprise Ethereum Alliance, an organization focused on developing open blockchain specifications, according to its website.
He offered as an example, Uniswap, a decentralized exchange platform that uses a completely automated algorithm, which runs on Ethereum, to accomplish the exchange of cryptocurrency. No Securities and Exchange Commission or other governing body is involved because there doesn’t need to be, Burnett said. “No parties are needed for enforcement because it is enforced by computer code that just doesn’t allow for anything but what was programmed.”
Blockchain Enables Tokenization
Blockchain technology offers wealth-building opportunities to people who can’t currently access them in the form of fractional ownership, said Fairlane Raymundo, co-founder and director of innovation at Web3 marketing agency RayCo Media, who is also an NFT artist.
Take, for example, a real estate developer building a $2 billion apartment building. “In the old days, you would have to approach investors in person, asking them to invest in the whole thing at once,” she said. “Now, you can tokenize that property and allow 100,000 people from all over the world to invest small increments, each with full security and encryption, enabling each of those small investors an opportunity to earn capital gains in the real estate market they’re currently excluded from.” Cars, estates, artwork, record albums, businesses — practically anything can be tokenized and fractionally owned, Raymundo said.
Blockchain is Democratizing
The ability to tokenize is one example of blockchain’s ability to democratize — that is, to include people who, because of lack of finances or access, have been excluded from certain streams of business and industry.
“As long as the basic rules for transactions are followed, [blockchain] is open for participation by anyone, at any time,” said Alex Wykoff, director of product and Web3 at tech consultancy Wursta. “For example, if someone wanted to rival a regional grocery store, they could create an entirely new market for produce and give farmers a better means to push for prices in their favor,” Wykoff said.
“We know with transparency where funds will go, and we can process more transactions at scale and speed ... This frees up capital flow for all markets.”
Because the blockchain is a public arena in which individuals and businesses can redefine their relationships, “this is a monopoly-breaking power rarely seen in our traditional markets,” he said.
This democratization can also allow millions of people to participate in the banking system. “Today we have more emerging countries involved in the global banking network, and many issues surrounding cross-border payments create friction,” said Devon Drew, founder and CEO of DFD Partners, a data-driven distribution platform.
Blockchain, he said, addresses the accounting, payment speed, know-your-customer (KYC) and anti-money-laundering (AML) protocols, security, traceability and automation factors. “We know with transparency where funds will go, and we can process more transactions at scale and speed,” he said. “This frees up capital flow for all markets.”
Blockchain Is Fast
Just as the internet sped up written communications (compare sending a letter with sending an email), blockchain speeds up financial transactions. When you take out multiple intermediaries and streamline processes, transactions that take hours or even days in the traditional centralized system take minutes or even seconds in blockchain. Instead of needing to review and negotiate a legal document, for example, key details could be embedded into a smart contract.
Burnett predicts that speed will remain a giant blockchain advantage in the future. “Although we aren’t there yet, imagine closing on a house purchase or sale in less than an hour, including funds transfer,” Burnett said.
Blockchain Is Cost-Effective
Without a third party, transaction and other overhead costs are typically less than those of the traditional system.
Still, high gas fees, or usage fees, for blockchains such as Ethereum have gotten a lot of ink. “This is temporary,” Burnett said, predicting that costs will come down as blockchain technology matures. “We will see transaction costs measured in fractions of a dollar, if not fractions of a cent.”
Blockchain Is Energy Efficient
Huh? What about all the hubbub about the environmental toll of mining and the attendant use of computer power? This too will change and is changing even before Ethereum’s move to proof of stake from proof of work. Burnett points out all the energy and labor required for a traditional financial transaction: Driving to the bank to fill out paperwork, assuming the consumer has a bank account. Filling out the paperwork, having someone double check it and enter into the bank’s system, then waiting days for the transaction to complete.
“If you add up the human energy cost, plus building heating, cooling, electricity, et cetera for all of these humans, it will easily exceed the electricity cost of the comparable automated blockchain transaction,” Burnett said.
Blockchain Engenders Trust
One major example of this is smart contracts — agreements to buy something, sell something or execute most any kind of agreement (prenups, anyone?) that exist on the blockchain. With a smart contract, the parties agree on terms and conditions, which are entered into the blockchain ledger. The transaction is automatically executed when all terms of the agreement are met.
Once the smart contract is in the ledger, it’s immutable, or unchangeable. This means a buyer can’t back out or a seller can’t boost the price of an item. Immutability, it turns out, can also be a blockchain challenge, which will be addressed later in this piece.
Blockchain Is Transparent
Anyone with access to a blockchain can see what’s on it. The transactions might be anonymous or pseudonymous, but the terms are there. This transparency offers great potential for public service, said technologist and blogger JB Larson, a digital marketer at data recovery company Gillware.
“I am extremely optimistic about the benefits that society would recognize if major corporations and government entities adopted a publicly accessible distributed ledger for transparent accounting that’s in the public interest,” Larson said. “We pay taxes, but do any of us actually know where our tax dollars are being spent?”
Should a government entity adopt a public blockchain system, people could see what’s happening with the money they provide the U.S. government, Larson said. Nonprofits, too, could use blockchain as a way to prove to patrons that their donations are being used effectively, he added.
5 Disadvantages and Challenges of Blockchain
Pseudonymity
Blockchain transparency has its limits, though, because pseudonymity is completely possible. When cryptocurrencies are transferred, the sender knows the recipient’s wallet address and can verify that a transaction took place, and that someone received the money, but exactly whom isn't always clear.
That anyone can create a crypto wallet without associating it with their real identity raises concerns about illicit use cases, for instance money laundering and tax evasion. The IRS, in fact, offers a bounty to people who can help trace crypto transactions, Forbes reports.
Too, almost every exchange Americans use to buy or sell crypto must follow AML and KYC protocols.
Anonymity
Some cryptocurrencies are anonymous and offer little in the way of transparency and traceability. Some promise users that their transactions will be completely confidential. Another token is gaining a reputation as the go-to coin for Dark Web transactions. This might strike some as an advantage, but could strike others as a challenge as it could help enable nefarious activities.
Reliance on ‘Old’ Technology
“Blockchain projects currently rely far too much on the same centralized components and infrastructure that emerged from cloud computing and Web 2.0 topology,” said O’Brien of Yale Law School’s Privacy Lab. “Likewise, assets and marketplaces are too closely tied to traditional monetary structures — the big cryptocoin exchanges are a potent example of what not to do if we want a truly decentralized Web3 space,” he said.
Immutability
What’s put on the blockchain stays there, forever, warts and all. That can be a good thing, but in the case of an error on, say, on a smart contract, it can wreak havoc and prove very expensive.
Slow Adoption
“Some institutions are already using blockchain, but many are not,” said Fairlane Raymundo, the NFT artist. “Until blockchain technology becomes normalized, we will remain in the status quo,” Raymundo said.
That normalization is inevitable, she said, pointing out the growth and subsequent power (to divide and unite) of Facebook and other social media. “Blockchain could be used to make this world better in all the ways that globally matter,” Raymundo said. “It’s up to us where this technology is going, but the one thing we can’t do is ignore it.”