Most blockchains are designed
as a decentralized database that functions as a distributed digital ledger.
These blockchain ledgers record and store data in blocks, which are organized
in a chronological sequence and are linked through cryptographic proofs. The
creation of blockchain technology brought up many advantages in a variety of
industries, providing increased security in trustless environments. However,
its decentralized nature also brings some disadvantages. For instance, when
compared to traditional centralized databases, blockchains present limited
efficiency and require increased storage capacity.
Advantages
Distributed
Since blockchain data is often
stored in thousands of devices on a distributed network of nodes, the system
and the data are highly resistant to technical failures and malicious attacks.
Each network node is able to replicate and store a copy of the database and,
because of this, there is no single point of failure: a single node going
offline does not affect the availability or security of the network.
In contrast, many conventional
databases rely on a single or a few servers and are more vulnerable to technical
failures and cyber-attacks.
Stability
Confirmed blocks are very
unlikely to be reversed, meaning that once data has been registered into the
blockchain, it is extremely difficult to remove or change it. This makes
blockchain a great technology for storing financial records or any other data
where an audit trail is required because every change is tracked and
permanently recorded on a distributed and public ledger.
For example, a business could
use blockchain technology to prevent fraudulent behavior from its employees. In
this scenario, the blockchain could provide a secure and stable record of all
financial transactions that take place within the company. This would make it
much harder for an employee to hide suspicious transactions.
Trustless system
In most traditional payment
systems, transactions are not only dependent on the two parties involved, but
also on an intermediary - such as a bank, credit card company, or payment
provider. When using blockchain technology, this is no longer necessary because
the distributed network of nodes verify the transactions through a process
known as mining. For this reason, Blockchain is often referred to as a
'trustless' system.
Therefore, a blockchain system
negates the risk of trusting a single organization and also reduces the overall
costs and transaction fees by cutting out intermediaries and third parties.
Disadvantages
51% Attacks
The Proof of Work consensus
algorithm that protects the Bitcoin blockchain has proven to be very efficient
over the years. However, there are a few potential attacks that can be
performed against blockchain networks and 51% attacks are among the most
discussed. Such an attack may happen if one entity manages to control more than
50% of the network hashing power, which would eventually allow them to disrupt
the network by intentionally excluding or modifying the ordering of
transactions.
Despite being theoretically
possible, there was never a successful 51% attack on the Bitcoin blockchain. As
the network grows larger the security increases and it is quite unlikely that
miners will invest large amounts of money and resources to attack Bitcoin as
they are better rewarded for acting honestly. Other than that, a successful 51%
attack would only be able to modify the most recent transactions for a short
period of time because blocks are linked through cryptographic proofs (changing
older blocks would require intangible levels of computing power). Also, the
Bitcoin blockchain is very resilient and would quickly adapt as a response to
an attack.
Data modification
Another downside of blockchain
systems is that once data has been added to the blockchain it is very difficult
to modify it. While stability is one of blockchain’s advantages, it is not
always good. Changing blockchain data or code is usually very demanding and
often requires a hard fork, where one chain is abandoned, and a new one is
taken up.
Private keys
Blockchain uses public-key (or
asymmetric) cryptography to give users ownership over their cryptocurrency
units (or any other blockchain data). Each blockchain address has a
corresponding private key. While the address can be shared, the private key
should be kept secret. Users need their private key to access their funds,
meaning that they act as their own bank. If a user loses their private key, the
money is effectively lost, and there is nothing they can do about it.
Inefficient
Blockchains, especially those
using Proof of Work, are highly inefficient. Since mining is highly competitive
and there is just one winner every ten minutes, the work of every other miner
is wasted. As miners are continually trying to increase their computational
power, so they have a greater chance of finding a valid block hash, the
resources used by the Bitcoin network has increased significantly in the last
few years, and it currently consumes more energy than many countries, such as
Denmark, Ireland, and Nigeria.
Storage
Blockchain ledgers can grow
very large over time. The Bitcoin blockchain currently requires around 200 GB
of storage. The current growth in blockchain size appears to be outstripping
the growth in hard drives and the network risks losing nodes if the ledger becomes
too large for individuals to download and store.
Closing thoughts
Despite the downsides,
blockchain technology presents some unique advantages, and it is definitely
here to stay. We still have a long road to mainstream adoption, but many
industries are getting to grips with the advantages and disadvantages of
blockchain systems. The next few years will likely see businesses and
governments experimenting with new applications to find out where blockchain
technology adds the most value.