The truth about blockchain

Ryan Gledhill, co-founder and CEO of Thallo

By Ryan Gledhill, co-founder and CEO of Thallo

The collapse of FTX last year hasn’t helped the reputation of blockchain. But blockchain is more than just cryptocurrency. So what is it? And why should you care?

Blockchain is a technology that can be described as a collection of digital records, like a database, where the records are linked to each other, where they’re strongly resistant to being altered and where the records are protected using cryptography.

I’ve been working with the technology for several years and in 2021 I co-founded a climate tech company that is bringing blockchain to the voluntary carbon markets.

The most important attribute of blockchain is that it’s decentralised, so information is shared among every participant in the blockchain. It’s impossible to change, since every participant has a copy of the record. It’s autonomous, so participants can transact without involving governments, banks or other third parties. Blockchain is transparent, with the records publicly available for everyone to see. And finally, blockchain is highly secure, thanks to cryptographic algorithms and the mechanisms of consensus and decentralisation.

Many consider blockchain to be the next version of the world wide web, or web3. Specific applications of this technology include cheaper cross-border payments and remittances; high-integrity audit trails in financial contexts; supply chain management; or for the purchase or trading of carbon credits, which is what my company, Thallo, offers.

Myth 1 – Blockchain is a scam

Unfortunately, blockchain is still most frequently assumed to mean cryptocurrency. But cryptocurrency is only one application of blockchain technology, just like Facebook, Amazon, Netflix or Google are specific applications on the internet.

The vast majority of cryptocurrency is not used for criminal activity. According to a recent report by Chainanalysis, criminal activity represented 0.34% of all cryptocurrency transactions (roughly $10bn of transfers) in 2020. According to the UN, it is estimated that between 2% and 5% of global GDP ($1.6 to $4 trillion) annually is connected with money laundering and illicit activity.

Of course, the collapse of FTX has some people worried about crypto and blockchain. To prevent systemic failures and financial contagion, consumers need to be able to inspect and verify the assets underlying a blockchain protocol. However, there are powerful tools to do this, like Chainlink’s Proof of Reserve offering.

Myth 2 – blockchain isn’t secure

It is extremely difficult to attack a blockchain, especially if the blockchain is sufficiently decentralised. To alter a proof of work chain such as bitcoin, an attacker would need to gain 51% of all the power in the network. In the Bitcoin network, that means a single entity would need to gain control of more than 5,000 separate nodes (which are often anonymous) all at once. The more power securing the network, the less possible it is for one entity to have access to enough energy to successfully attack bitcoin, and the more costly an attempt to create a divergence.

Proof of stake security does not depend on power, but rather access to validators, which are selected at random to add new blocks (information) to the chain (ledger). To attack a proof of stake chain, one would need to control 51% of the entire list of validators. It would be very obvious if someone attempted to accumulate enough validators to attack the chain, and could easily be stopped. If a bad actor is discovered, that validator’s stake is confiscated and re-distributed among the others. Finally, if somehow an attacker was successful, the community could vote to recover the chain to a state before the attack occurred.

Myth 3 – blockchain consumes a lot of electricity and has a negative environmental impact

It all depends on the consensus mechanism. Bitcoin’s high energy consumption, for instance, is inherent in its proof of work consensus mechanism. Proof of work networks are run by miners who compete to add new blocks of transactions to the network. These miners compete by trying to solve mathematical equations by chance, which consumes high amounts of computing power.

This does not apply to all blockchain designs. In a proof of stake consensus mechanism, network validators – which fulfil a similar function to miners in p roof of work mechanisms – support the network by putting up a token stake to determine which transactions are added as blocks to the blockchain.

As the proof of stake validators are not competing through computational power, but through economic resources such as network tokens, energy consumption is only a fraction of the consumption with proof-of-work. Blockchain networks that use proof-of-stake mechanisms include Ethereum, Polygon and Celo – blockchains Thallo is currently building on.

Myth 4 – Blockchain is inaccessible and benefits only the tech-savvy

Blockchain’s raison d’être is the right to interact freely without any intermediaries. Blockchain came into existence to support secure, peer-to-peer transactions without the need to place trust in third parties such as banks or government. In traditional internet and financial systems, third-party verifiers and central authorities are needed because one cannot simply trust everyone on the internet.

Blockchain changes this. Thanks to the creation of immutable and transparent ledgers, smart contracts and decentralised verification, blockchain cannot favour any of the participants of the system so everyone has equal rights and the system is inherently safe.

The next phase is for blockchain to be used alongside the underlying technology of familiar internet applications away from the end user, offering the benefits of blockchain to anyone in the world with a computer or smartphone.

Blockchain and Web3 technology offer a hopeful vision of the future: decentralised, secure and transparent. The very opposite of so-called Big Tech and the internet as it is today, dominated by a few giant players.