Every breakthrough technological innovation goes through an initial exciting phase. Enthusiasts believe it will solve all of the world’s problems and then some, before we even get around to figuring out what its ideal applications (and limitations) are. With the recent mania in Bitcoin, you’ve probably heard of the blockchain tech powered it. It is important to note that, to the layman, there is still quite a bit of confusion as to what exactly is meant by a blockchain. Let’s understand it one more time:
Blockchain 101
Most modern technology relies on a ‘middleman’ of some sort. From something as simple as cellular calls – which require routing through an operator, to money, where people have to trust a third party such as a bank, to be able to complete a transaction. Blockchain technology, by using math and cryptography, provides an open decentralized database of any sort of transaction of value – money, goods, property, votes, contracts. In fact, almost anything. Every transaction is stored in a cryptographically protected block. These blocks are then linked into a chain, leaving no scope for alterations.
But if you have no middleman, how do you retain trust in the system? Without a bank being able to debit your customer’s balance and crediting your account, how would our monetary systems work? Who do you trust, if not the middleman?
On the blockchain, every transaction is recorded, as if on a public and distributed ledger accessible to anyone. In a closed database, a middleman maintains a private database of records – like a bank maintaining its accounts. However, blockchain tech makes all records open to the public, effectively killing the need for an intermediary. Now a copy of the entire blockchain with every transaction on it is available to the entire network. Anyone can access this data and prevent any unauthorized changes to it. While this means that if someone attempts to cheat the system or steal, they can be easily identified.
Blockchain = Privacy Killer
It’s a beautiful concept that has gained support from a fairly large number of people. But its design invites a rather obvious question – is the blockchain suitable for those who prioritise confidentiality? Just how much information are we willing to share in the name of distributed trust?
Since privacy is the key and the blockchain technically is a public ledger, how private and safe is the information? Take Bitcoin. As you make transactions using bitcoins, data gets stored on its blocks, which can be analysed to track everyone’s transaction history, and gain insights into all sorts of connections and behaviours.
Once individual users are using the blockchain to transact, it is possible for any outside party to mine their data and use it in unfavourable ways. Even if user names are anonymized, artificial intelligence, hacking and network graph tools make it easy to uncover real-life identities. Imagine everyone knowing who and what you’re talking/transacting about and with whom.
Oh and, since the blockchain is immutable, you can never get rid of your transaction history. Any purchases you’d rather forget? They’re going to be on the blockchain forever.
Don’t Fix What’s Not Broken?
Besides individual users, in a competitive market, businesses and corporations may prefer the privacy of a centralized database, rather than revealing their activities to other businesses on an open database. This makes even more sense if a trusted central party already exists and can provide territory in which the database can safely reside – and such a system is the one we’ve been using forever – our current monetery system.
Besides, cryptography only guarantees immutability to the ledger. There is no guarantee to the security of the overall system. Storage and management of private keys for authentification is prone to theft, and more importantly – loss. The advantage of having a central middleman or authority – like a bank – is that a bank may generate a new account PIN for you if you forget yours. This isn’t possible in a blockchain, since there’s no authority coming to a user’s rescue. A lost private key and mnemonic seed translate into an account lost forever.
Some experts argue that the compromise of privacy can be balanced with the help of ‘permissioned’ blockchain databases, depending on the preferences of the financial institutions. But even then, it would only provide limited security since there will only be a small number of participants. Private blockchains, such as the one running the cryptocurrency Monero – are rushing to solve this slowly emerging issue. But they bring with themselves their own potential regulatory challenges – will governments be comfortable with completely opaque monetary systems that they cannot track and access?
Yet, putting aside this criticism of blockchain’s compromise on privacy- the very thing it seeked to provide a solution to, let’s be open to the rapidly evolving nature of this technology, and the fact that innovative solutions may be underway. Too soon perhaps, to sound the death knell for privacy.