As blockchain is still a relatively new technology, several misconceptions may lead companies to implement blockchain-based solutions where they are not needed. In this article, we will debunk 7 of the most common misunderstandings about the technology.
Myth #1: Blockchain is a database to store physical information
Unlike a traditional database, blockchains cannot store physical information such as pdf documents, videos, audio recordings, or similar. The real advantage of blockchain is that it can be used to facilitate an exchange between two or more parties. Blockchain stores transaction data. Everything stored is a “proof-of-existence,” meaning the blockchain contains a code that verifies the existence of a document, but it does not contain the actual document itself. As every network participant holds a copy of the entire blockchain; it would cost tremendous amounts of storage space if a blockchain would contain actual physical data files. Moreover, traditional databases keep information up-to-date at a particular moment. Blockchains, however, don’t only show real-time transaction data but also the entire history of transactions.
Myth #2: Public blockchains expose private data
While it is true that anyone can access a public blockchain and can read transactions, that does not mean that everybody can access private information or transaction details. Every network participant can download the code and have a look at the different blocks. However, the blocks only contain the amount of the transaction and a hash. Therefore, it is impossible to obtain or view any other information.
Myth #3: Blockchain transactions cannot be traced back
That said, blockchain transactions are also not completely anonymous. As transactions are shown on a public ledger, they can be traced back to a particular wallet address. Thus, the data of the transactions may be anonymous, but the transactions leave a path. Some exceptions exist through privacy tokens which use additional layers of privacy, but in general, blockchain-based transaction data is traceable.
Myth #4: Blockchain transactions are completely secure
Security on the blockchain is ensured by cryptography and the consensus protocol. Each block in a blockchain gets its unique hash code which is based on the hash code of the previous block in the chain. Thus, if a hacker wanted to change the hash of a block, he would also have to change those of all subsequent blocks, which would take vast amounts of computing power.
Moreover, as the whole network validates transactions, tampering with data becomes nearly impossible. That said, just look at the news headlines, and you will find a whole list of various blockchain security failures that happened in the past. Most of these security hacks were down to human failure, not so much the technological loopholes of blockchains. Nevertheless, blockchain is not 100% secure.
Myth #5: Blockchain networks verify the correctness of data
The consensus mechanism of a blockchain means transaction data is validated by the entire network. However, consensus mechanisms only validate if the transaction data is being hashed correctly. It cannot verify whether the input data is accurate. Thus, if a malicious actor would store incorrect information on the blockchain, the network would not be able to detect it. Furthermore, there is the security flaw called “51% attack,” meaning if more than 50% of nodes team up to verify false information as being true, it will be displayed as true on the blockchain. Put in other words: The truth on a blockchain is what the majority of nodes agrees upon to be true.
Myth #6: Smart contracts are legal contracts stored on the blockchain
Smart contracts have no legal implications in real life; the term is misleading. A smart contract is neither “smart” nor is it a “contract.” Smart contracts are merely programs that automatically execute operations encoded by their creators. Thus, the contract is just as good as its code. Also, they are not legally valid and cannot be enforced in a court setting. Nick Szabo has described smart contracts as a kind of ‘digital vending machine’ where users could input data and receive an item from the machine. That’s a good analogy.
Myth #7: DLT is just another term for blockchain technology
Blockchain is a type of distributed ledger technology (DLT), but not all distributed ledgers are effectively blockchains. The exact definition of the term “distribute ledger technology” is still up for debate, but the current dominant position is that DLT requires a legal identity with permissioned nodes to validate transactions. Thus, blockchain is not the only technology that meets this definition. Also, not every company that provides a distributed ledger solution is actually working on a blockchain, even if they may use the term for marketing purposes. R3 Corda, for example, refers to its technology as blockchain, even though Corda has no chain of blocks at all and departs radically from the architecture of conventional blockchains.
Those 7 myths are common misconceptions about blockchain technology. Over the past years, businesses have often been carried away by the blockchain hype and used the technology where a traditional database might have been superior. Thus, better get it right from the beginning and understand what the technology does and what it doesn’t. That will save costs and headache in the long term.