Blog manager: Giovanni Capaccioli

Translated by: Lawlinguists

DLT, Blockchain: types and limits.

DLT, Blockchain

Intro

As we have amply  discussed in previous articles, the predominant element of a blockchain lies in the fact that it basically consists of a register of data distributed in its network. Limiting ourselves to this definition, the blockchain could, be easily and wrongly compared to DLTs (Distributed Ledger Technologies).

When we talk about DLT, we basically describe Peer-to-Peer networks that, through algorithms of consent, replicate identical copies of data within the distributed register.

Among various types of DLT there is the Blockchain . It distinguish itself precisely for its block structure: the data saved in it and equally distributed to all the nodes of the network, make up a list of “records” that clearly it grows over time, making the chain longer and longer.

The immutable , unalterable , distributed system , managed by the consent of the nodes and resistant to attacks or problems like the “51% Attack” or the “Byzantine fault tolerance” and others, generate a system equipped with:

• Cryptography that links each block, the previous one to the next.

• The timestamp that defines its “geolocation” over time.

• Transaction data.

The explosion of this technology starts with the Blockchain par excellence, Bitcoin . From this moment a net gap has been created which has led to the creation of a sort of subdivision of the Blockchain sub-category in:

Public Blockchain (Unpermissioned Ledgers);

• Open technologies , without an actor who owns them.

• They are not centrally controlled.

• Allow everyone to contribute to updating Ledger data: anyone can be one

participant who helps keep all identical copies of transaction records unchanged.

• All those who contribute to the system keep it active by consensus, which differs between blockchain and blockchain (ex: PoW and / or PoS and so on).

• The system does not therefore foresee any type of censorship : unless there are external attacks, the system does not provide for it that after the consent of the nodes someone can prevent or modify a transaction.

• “Inability to undergo the slightest shift in value or meaning”: immutability of system, of the data, of the transaction.

Blockchain Private (Permissioned Ledgers).

• In this case there may be an actor who owns it .

• In this case, consent for data approval and blockchain security can be activated

limited to a limited number of nodes considered (for some programmatic reason) “Trusted”.

• It is clear that in this particular case the system tends to be restored to governance

“Owner” .

• Large companies considered as big in the tech market, suitable for use by industries, banks, governments etc., develop blockchain in the cloud ; it must be emphasized that the distinctive element of the blockchain is not only decentralization, but also distribution of the register. In this case we can see that not only is the this technology is used in the cloud (like trying to “sell” the word blockchain as gold when actually is cloud based), but also the fact that the hardware property is centralized.

Public Blockchain Limits.

1 – Slowness

The public blockchains are very slow, the reasons may be various in relation to the topic discussed, but the two main ones that have long been brought to light are the “block size limit” and the Proof of Work taken as a whole.

Taking the most famous case, objectively, the Bitcoin PoW has been constructed and codified so that a block can be found, mined,  hashed, transactions can be inserted and secured, closed and accepted from the entire network of nodes in an estimated time of 10 minutes. Extremely secure, trusless, distributed and decentralized.

Furthermore, the Bitcoin algorithm adapts itself over time: the difficulty of the PoW is managed and modified automatically so that the actions for opening and closing the block, with the transactions within it, remain estimated in 10 minutes. That’s why Bitcoin is estimated to have 7 transactions per second .

2 – Environmental Impact

On the network there are opinions of various kinds on the consumption of currently most knwon blockchain: the Bitcoin PoW . Here I intend to analyze the real numbers. Here’s what comes out.

• To date, average consumption per year stands at 66 TWh , with maximum peaks of 73 TWh and peaks minimum of 49 TWh .

• 73 TWh is comparable to the consumption of a nation like Austria .

• A single transaction uses approximately 618 KWh , equivalent to the electricity consumption of a US family in about 21 days .

• 34 Mt (megatons) of CO2 are released annually , which is the equivalent of the CO2 released by Denmark .

• 293 kg of CO2 are released per transaction , equivalent to the CO2 released for 734,000 Visa transactions or for 49,000 hours of watching videos on YouTube .

• About 10 kt (kilotons) of electronic waste are produced annually , comparable to those generated by Luxembourg .

• 90 grams of electronic waste is produced per transaction , equivalent to the weight of about 1 “C” type battery.

The above mentioned data is certified by DigiConomist, and constantly updated, it is therefore plausible a scenario in constant growth of trend. The Bitcoin market, if one considers the medium-long term, is in a positive trend: it has faced (it is still facing) a trend retracement period, but it is rather obvious (even by looking exclusively at the link graph of DigiConomist ), that with the greater use of the network, the consumption and the production of the numbers mentioned above are destined to increase.

If on the one hand these are numbers that compared with the consumption of the enormously polluting sectors result

equivalent to a low percentage of incidence on the energy (and not only) consumption worldwide, on the other side

the current evolution of the blockchain system and what would happen to consumption, should be considered very seriously

if this technology was adopted en masse worldwide. If today has

this incidence on consumption despite being used by a low percentage of the inhabitants of the Globe, with a massive use in like “Visa or Mastercard circuit”, the numbers mentioned above would increase exponentially.

Only for Bitcoin there are 32 million estimated wallets , and only 34% of them are active , link to the source , and this without considering the numbers and consumption of other cryptocurrencies.

The world’s estimated population today is 7.7 billion people . The calculation is quite obvious.

3 – Security

One of the hardly predictable scenarios is certainly the security side . In fact, in recent years both the web-based technological ecosystems and, consequently, the related problems in  safety and processing of data have been developed, not only for companies or professionals , but for all users in general. What happens if you intend to use the blockchain as storage of all user data, rather than, for example, creating a private line to save sensitive data by pairing it with a blockchain?

to use in “notary” format?

1. The data stored in a blockchain are tamper- proof : this translates into

a pure impossibility (resulting from blockchain encoding) of data deletion, once it

has been placed in the distributed chain.

2. Blockchains are distributed, so even data control cannot be centralized and is

delegated to all the participants (at most to the miners, who in any case cannot be considered to be Data Protection Officers as required by GDPR ).

3. Smart Contracts are created to be autonomous in terms of decision-making: this can therefore open understandably critical issues on the front, for example, of appeals cases and disputes.

In general, what is going to “clash” with the GDPR , in this case, are two of the principles on which Blockchain built up to date its value and power:

• the data entered in the blockchains ais public and accessible by anyone participating in the chain;

• the data in the blockchains is kept unlimited (to guarantee and protect the whole

distributed register).

If we wanted to summarize what characterizes the GDPR, three keywords could be used: centralization , limitation and removability ( cancellation ) which are in stark contrast with the  keywords that characterize the blockchain , ie decentralization, distribution and immutability.

As we explained in the previous paragraphs, the GDPR grants EU residents executive rights in relation to the processing of personal data, including:

• the right to delete personal data when personal data is no longer necessary for the

purpose for which it was collected, when the person withdraws the consent or when the treatment continued data is illegal;

• the right to request the correction of incorrect data ;

• the right to limit the processing of data when its accuracy is challenged or when processing is no longer necessary.

These rights are understandable in the context of a centralized database controlled by a single controller with a finite set of processors. But when they connect to distributed Ledger technology, what are the possible solutions that will allow the use of the blockchain under GDPR?

4 – Legality

We often stop at the basic considerations, analyzing the blockchain , to extrapolate the possible merits to be applied to our relevant field of work. Sometimes we don’t consider details that can seem futile, but later manifest themselves “of interest”. Let’s think of one thing: the blockchains more known, to date, are based on automatic processes aimed at guaranteeing the parties; these processes come

automated by Smart-Contract that only accept positive balance proofs.

This means that, to make payments within public distributed and decentralized circuits, it is necessary to have a positive Wallet where the Cryptocurrencies are deposited then use it to carry out payments to miners. This means that, if a company was interested in proceeding with the integration of a blockchain certification infrastructure, it should have cryptocurrency account through one of the most widely used blockchains systems in the industry.

So far there may seem to be no problem. The problem unfortunately exists since currently there isn’t a law that protects a company that wants to have a cryptocurrency accountThis is not the case all around the world, but simply in the vast majority of states, with the exception of Switzerland and Malta in our immediate geographical proximity. The legal value problem is one very delicate issue, especially in cases of introduction of new methodologies, new technologies in one State or Continent.

Currently some States, among which the two mentioned above, have already moved to fill the gaps in the blockchain area, this is why in their territories of competence the illegality issue is a lot limited, therefore quickly verifiable for a company.

This changes within other states or European borders: being a technology developed

enormously only recently, it moves within the consequent legislative-legislative gaps that dictate the legal value in this regard. Moreover, especially in the case of the latter, the jurisdiction often uses the principle of  “analogy”, according to which an objective judgment is given (by the judge or by the Court) to express case, intervening in a deductive way either based on a different discipline, which is already regulated and considerd similar, or inferred by general principles of the law.

These are concepts of fundamental importance for a company because, if not approached with due precision, risk costing the company a lot in terms of time spent or capital immobilized in instruments declared “ex-post” illegitimate or for which the illegitimacy of a precise use.

5 – Economy

Currently, due to the costs related to network management, understood as emerging consumption and workforce, the Transaction cost for the Enterprise market is very high for every single transaction that fluctuates between 0.50 euro cents and € 1 each. This cost represents a huge economic limit for companies that intend to use blockchain technology in order to trace a supply chain, issue electronic tickets or search advantages on an industrial scale.

In fact, if we try to imagine what it would mean to pay 1 € per lot for a pharmaceutical company or for a ticketing, costs would skyrocket to millions of euros, however this limit could also be put in the background, since the technological advantage would still be higher than the current cost.

Speed is the real limit: the industry needs it and the public technologies available are very slow.

6 – Difficulties

The use of public technologies requires many IT skills, in fact, for this reason, the diffusion of systems at a capillary level is challenging since there are not many means to build interfaces within the reach of a less experienced public. Therefore cases of false starts or scams may harm an audience that, with the promise of easy profits, remains involved in scenarios that are not easily predictable.

Private Blockchain limits.

1 – Decentralization

Going a little below the descriptive surface of private blockchain systems , we often notice a couple of

elements that can turn up your nose:

• Centralization in terms of ownership.

• Virtualization of nodes.

The extreme summary of this is that they may not be considered real blockchains . The first point, in particular, which far too many try to hide, represents the real main limit because it affects the nature of this technology .

The question is rooted in the philosophical nature of sharing which also represents the nature of technology and the change of paradigm that provided in numerical terms to acquire the consent of many in favor of a given input: if the input is not accepted by a majority, it is discarded.

That said, even if within a private blockchain there are a million virtual nodes, these are owned by an entity that governs them, and therefore the intrinsic value of such technology disappears, damaging the consumer that will pay way too much for a cloud service.

2 – Economy

Private technologies are not free, they cost and often the price is set to a monthly fee based on the number of nodes that the customer decides to align. Currently the costs range from the minimum of 1,200 euros per month up to 18,000 euros per month for 3/4 nodes. In addition, it is clear from the contract documentation of majors firms that if the management fees exceed a certain volume, thus exceeding as agreed, it is possible that this volume will be counted separately as an adjustment.

3 – Scalability

Technologies like the ones we are talking about, have a big limit of scalability: they fail to support a number greater than 4 nodes without degrading performance and exponentially compromising the performance that sees the efficiency of transactions drastically reduced. A Possible solution to scale the system could be to work in groups of 4 nodes that align asymmetrically (in theory).

4 – Security

The security of the blockchain lies in the distribution and decentralization of the register: the more it is decentralized and distributed the more secure the chain in its extension. Therefore, if we think about the issue of private technologies, it is clear that the the figures just don’t add: summarizing, if security lies in

decentralization and distribution, then how is it possible to define safe a structure owned by one subject?

Even if the latter possessed enormous capital to cover possible losses, the fact remains that one of the main components of this technology is missing, like a plane without wings. This is why private technologies, although performing, are only an aggravation of costs on a known technological model, namely the Cloud.

Conclusions

Following the analysis of the limits of the Public Blockchain listed above, here it becomes clear the a problem that is proposed in a much wider area than the classic user ecosystem: the legal value . For this reason becomes difficult to operate in compliance , legally , in a scalable and sustainable way with the

totally public blockchain technology . The direct consequence is that the whole system, as presented and used, it is no longer as easy and risk-free as it seemed initially.

On the other hand, in light of what emerged in the previous considerations about the Private Blockchain, it is important to note that there is a clear interest of major players to hide behind the wording “Private technology” using it as a sort of semantic screening.

When the topic related to the public or private issue is addressed, in fact, the key to the reading it is not on the salient question, that is to say the ownership of the node itself and its relative Governace, but one has to face the issue by treating the subject only on the principle of having or not having the permission of validate a block.

Therefore the blockchain can make sense only if the consent lies in a distributed network whose chain comes replicated in a decentralized network over a significant number of subjects who do not have any correlation, otherwise the effect obtained is a conflict of interests damaging the system security

and its philosophical nature, or that the blockchain is born to guarantee immutability.

• How can we guarantee that the blockchain (or cloud based) company will exist forever?

• Who can guarantee that the blockchain (or cloud based) company does not get their hands on the chain or not compromises information in blocks?

• And again to ensure immutability , which in itself is a utopia in a constantly changing universe change, it is necessary to work on large numbers: if the data is controlled by a single subject, the probability that the data itself is compromised are greater than a data distributed on a number greater than one exponentially; the more the miners and validators, the more security and immutability can be guaranteed.

Be careful not to confuse the Permissioned issue with the distribution issue since the fact that to access a certain environment, some requirements are required, it does not mean that these permissions are in the hands of a single subject.

This semantic error allows cloud giants to use the word blockchain to describe your centralized infrastructure.