The Benefits of Blockchain

What Is a Blockchain

A blockchain is a list of records called blocks. Each of these blocks contains data—in Bitcoin’s case, each block contains transactions representing transfers of bitcoin from one user to another. Blockchains have several unique properties that differentiate them from standard databases and enable new use cases, the most important being Bitcoin.

➤ Learn more about blockchain.

Blockchains are most commonly used to support distributed networks, where members of a network do not know or trust one another. Each member of the network stores the entire blockchain independently.

Before the invention of blockchain, it was difficult for distributed parties to agree on a single source of truth, especially one that was constantly being updated. How can a large number of individuals keep independent databases and ensure they remain in sync? Blockchain solved this problem, known as the Byzantine Generals Problem.

However, it did so by sacrificing the efficiency and speed of traditional databases. Blockchain has been the source of much excitement over the past several years, but it is not a panacea. Blockchain’s unique traits allow it to solve critical problems, but there are significant trade-offs. In many cases, a traditional database is a superior solution for the problem at hand.

The Unique Traits of Blockchain

Accessibility

The Bitcoin blockchain is completely public and accessible to all. Anyone can read and write to the Bitcoin blockchain. This design was intentional, and it was strictly necessary in order to prevent bitcoin from being double spent and create a free and fair monetary system.

➤ Learn more about the Double Spend Problem.

Most traditional databases are not open and accessible by the public for obvious reasons: an open database can be spammed or false information can be posted by anyone.

In order to ensure Bitcoin remained an open system, without gatekeepers or controllers, its underlying database had to be accessible to all. However, this meant Bitcoin had several problems to solve, including spam and false information.

Inefficiency

In order to maintain the blockchain’s transparency and prevent spam and false information, rigorous requirements were placed on publishing information to the blockchain. This requirement, called Proof-of-Work, makes writing data to the blockchain far less efficient than traditional databases.

A Proof-of-Work-based blockchain requires intensive computation to maintain and extend. In order to publish a block of new data to the Bitcoin blockchain, one must play an energy-intensive guessing game. Although the actual computation involved does not achieve anything, the requirement places a large cost on publishing data to the network, preventing spam and providing an objective way for members of the network to agree on the state of the database.

➤ Learn more about Bitcoin mining.

The high cost of publishing data to the blockchain means that a Proof-of-Work blockchain is only worthwhile if it is underpinning a trustless, decentralized system.

In a centralized system, where only trusted members have the ability to read and write to the database, there is no need for Proof-of-Work or even blockchain. A regular spreadsheet or SQL database will often suffice.

Immutability

Another benefit of a blockchain’s Proof-of-Work mechanism is that once a block is added to the blockchain, it is extremely difficult to alter or remove. This allows decentralized members of the network to unanimously agree on the state of the blockchain and the data within it.

While this trait is a critical foundation of a monetary system like Bitcoin, database immutability is desirable in only a narrow set of circumstances. Most businesses and individuals require databases that they can alter at will. In a system that does not require immutability, blockchain is more of a burden than an innovation.

➤ Learn more about Bitcoin's immutability.

Use Cases for Blockchain

Blockchain’s unique properties enable it to solve problems and support use cases that were previously impossible. Blockchain enabled Bitcoin, a decentralized, trustless, peer-to-peer monetary system.

Blockchains have been proposed as solutions in many other industries, from healthcare and supply chain to voting and video games. However, the problem that blockchain solves—establishing truth in a trustless system—is not present in these industries. Thus, blockchain technology has very little to offer, and at very high costs.