Blockchain Advantage and

Disadvantages
Warren Fauvel
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Aug 11, 2017 · 6 min read

Attempting to explain the advantages and disadvantages

of blockchain technology, in it’s current format, for
developing solutions.

Over the last 6 months, we’ve been attempting to pull apart

blockchain, from concept, to economics. This article is designed to
record some of our thoughts about blockchain and why it’s useful,
or not. If we have something wrong, inaccurate or out of date, let
us know in the comments!

“Every disadvantage has its advantage” —

Johan Cruyff

Why is blockchain useful?

The key advantages that Blockchain offers are:

Distributed

Blockchain allows a wide variety of computers to take part in a

network, distributing the computing power. For example, Amazon
buys and maintains a private set of computing power for AWS, no-
one but Amazon can contribute this. In contrast the blockchain
organisation Ethereum allows almost anyone to contribute their
computer to their network, simply by installing their software.
Distribution helps to reduce risk in tampering, fraud and cyber
crime. With more nodes able to take part, systems are very hard to
“take down” via traditional brute force network attacks.
Trustless

Blockchain allows digital transactions to happen between parties

who do not trust each other. Imagine a digital coin stored in a file
on your computer. You may copy and paste the file an infinite
number of times. The value of this digital currency would close to
zero. In the past, central authorities (banks) have acted as ledgers,
keeping records of the number of coins each of us has available as
a centralised Ledger, to avoid the problem of duplication.

By distributing the Ledger to many Nodes, and synchronising this

Ledger via Consensus, blockchain allows parties who don’t trust
each other, to believe that the transaction is real and not
worthless. Over time, trust can be increased further, via shared
processes and immutable records of transactions. This facilitates a
massive range of potential digital transactions that couldn’t have
happened before without a central authority managing them.
Immutable

Once a transaction is agreed and shared across the distributed

network it becomes close to impossible to undo. In fact, over time,
it becomes harder and harder to undo. In a public ledger, like
Bitcoin, this means that you can explore the blockchain and
discover the number of Bitcoins in anyones account, or trace
where funds were distributed to. In other scenarios, this could be
used to track supply chains, or check who accessed certain files on
a network.
Decentralised

Blockchain also supports the reduction in centralised monopolies

or “middle-men” and removes costs. By distributing networks
blockchain can find economies of scale, without single centralised
investment. This increases competition in the market, by lowering
the barriers to entry, putting pressure on all participants to
become more efficient. Added to this, allowing peers to transact
with no requirement for trust disrupts the current business
practices of organisations who facilitate trust e.g. Banks.
Transactions directly between peers, may lead to reduction in
“middle-man” steps, further increasing market efficiency.
What are the challenges of
blockchain?
Blockchain is not without it’s weaknesses:

Wasteful

Every Node runs the blockchain in order to maintain Consensus

across the blockchain. This gives extreme levels of fault tolerance,
ensures zero downtime, and makes data stored on the blockchain
forever unchangeable and censorship-resistant. But all this is
wasteful, as each Node repeats a task to reach Consensus burning
electricity and time on the way.
This makes computation far slower and more expensive than on a
traditional single computer. There are many initiatives that seek to
reduce this cost focusing on alternative means of maintaining
Consensus, such as Proof-of-Stake.

Network speed/cost

Blockchain networks require Nodes to run. But as many of the

networks are new, they lack the number of Nodes to facilitate
widespread usage. This lack of resource manifests as:

 Higher costs — as Nodes seek higher rewards for

completing Transactions in a Supply and Demand
scenario
  Slower transactions — as Nodes prioritise
Transactions with higher rewards, backlogs of
transactions build up

Over time, successful public blockchain networks will have to

incentivise Nodes, whilst creating favourable costs for users, with
transactions completed in a relevant timeframe. This balance is
key to the economics of each blockchain.

The size of the block

Each transaction or “block” added to the chain increases the size of

the database. As every node has to maintain a the chain to run, the
computing requirements increase with each use. For large public
implementations of Blockchain this has one of two affects:

 Smaller ledger — Not every Node can carry a full copy

of the Blockchain, potentially affecting immutability,
consensus etc.

 More centralised — There is a high barrier to entry to

become a Node, encouraging a larger amount of
centralisation in the Network, with bigger players able to
take more control.

Neither of these scenarios is desirable, without considering the full

implications, as it will likely affect the use cases for blockchain
variants.
Speculative markets

Many blockchains are run using token/currency models to fund

development or manage the economics of Nodes. For example,
Ether (ETH) is the currency used to pay for computing power (or
Gas) on the Ethereum network. Therefore ETH is a currency for
computing power.

Traditional currencies like USD, GBP, EUR (also called Fiat

currencies) are generally linked to value of their respective
economies e.g. GBP to the UK. These economies are well
developed, regulated and stable. ETH is not. However, due to the
potentially disruptive nature of Blockchains, people have taken to
speculating on the value of the digital economies they create.

As these markets are subject to limited regulations, and are highly

speculative they are prone to rapid fluctuation and manipulation,
spiking transaction value. This presents particular risks when
transacting from Fiat currencies into blockchain currencies. For
example 1 ETH may cost ~$200 today, but ~$180 tomorrow, a
10% price fluctuation. Whilst this can create large rewards, it also
presents high degrees of uncertainty for projects developed on
public blockchain technology.

Hard and Soft Forks

Many blockchains and currencies decentralise their decision

making. For example Bitcoin allows Nodes to “Signal” support for
improvements to the core Software that run the network. This
allows the blockchain to avoid centralised decision making, but
also presents challenges when communities are divided about the
best course.

When Nodes change their Software, there is potential for a “Fork”

in the Chain. Nodes operating the new Software will not accept the
same transactions as Nodes operating the old one. This creates a
new blockchain, with the same history as the one it is built on.

Forks create significant uncertainty, as they have the potential to

fragment the power of the blockchain network into lots of variants.
They are also likely to be necessary, as without the capacity to
update the Software, the blockchain is unlikely to be future proof.

Immutable Smart contracts

Once the smart contact is added to the blockchain, it becomes

immutable, in that it cannot be changed. If there are flaws in the
code that may be exploited by hackers, they are there forever. This
is not a concern when a smart contract is not being used, but as
smart contacts behave like accounts, they can be used to store
large amounts of value.

This can create scenarios where hackers can exploit code flaws to
send the contents of smart contracts to their own accounts. As the
blockchain is immutable, these Transactions are very hard to
undo, meaning large amounts of value may be lost forever.