Blockchain is a useful technology

Six myths about Bitcoin blockchain

Alexei Malanow, translation by Halyna Kubiv

Blockchain technology not only has advantages, but also disadvantages. Here is a brief overview.

EnlargeThis is how the virtual currency works
© ulifunke.com/bitcoin.de

Author: Alexei Malanov, expert in anti-virus technology development at Kaspersky Lab

I've heard several times that the blockchain is very cool, that this is a breakthrough and that the future belongs to technology. Unfortunately, some implementations are not as exemplary.

This article deals with a blockchain variant that is used in Bitcoin. However, there are other twists and turns of blockchain technology that have already eliminated the drawbacks of its Bitcoin predecessor. Blockchain is usually based on the same principles.

I think Bitcoin as a crypto currency is fundamentally revolutionary. Unfortunately, it is very often used in illegal activities, which I, as a security expert, cannot like. If you think of Bitcoin as a pure technology, it's a breakthrough.

All components of the Bitcoin protocol and the idea for how it worked were known before 2009. However, the Bitcoin authors have succeeded for the first time in bundling all of this and getting it to work. In the course of these eight years, only one serious vulnerability was found in Bitcoin: an attacker managed to get 92 million Bitcoins into an account. To reverse this transaction, the entire system had to be rolled back by a day. However, a weak point within eight years is a very good result.

The Bitcoin founders had one task: the system should work, although there is no central authority and neither participant trusts the other. They have succeeded in doing this, but with considerable sacrifices in terms of efficiency.

I don't want to discredit Bitcoin and Blockchain with this post. They are very useful technologies that are sure to be used in other areas. Since Bitcoin is currently in great demand, the advantages are almost exclusively described, although it also has its disadvantages. For the sake of completeness, I'll also address the cons.

Myth 1

The blockchain is a huge distributed computer

The blockchain can become an effective direct and natural means of coordinating all human and computational activity.

If you have not dealt directly with the principles of the blockchain (implemented in Bitcoin), but have only read opinions on it, you could get the impression that the blockchain is a kind of virtual computer network, with each computer in this network doing its own task that contributes to something bigger.

However, this impression is wrong. Each node in such a network does the same thing:

1. They all check the same transactions according to the same rules.

2. You enter the same information in the blockchain.

3. You save the same history (of the transactions) for all computers.

Myth 2

The blockchain is infinite. Everything that is already in it is saved for eternity

As already stated in point 1, every active participant in the network saves the complete history of all transactions. With Bitcoin, the blockchain currently has around 100 GB of data. This is how much memory cheap notebooks or modern smartphones have. The more transactions are carried out in the Bitcoin network, the faster the storage requirement grows. However, the size of the blockchain is growing exponentially: The required memory has grown by half for a year.

The Bitcoin network is a moderate example. Its competitor - Ethereum - has existed for two years and requires around 200 GB of storage from its users. In terms of current memory development, this means that the blockchain can still grow for around ten years. At some point, however, blockchain growth will overtake conventional SSDs in size.

In addition to the size of a blockchain, there is also a download problem. Anyone who wanted to install a local wallet knows the problem - no payments or other transactions are possible until the entire blockchain has been downloaded and checked. With the current sizes, this can take several days.

This naturally raises the question of whether the blockchain cannot be stored on a shared network node if the data is the same anyway. You can do that - but a flat, equal infrastructure becomes the usual client-server system with the usual problems: trust in the operator of this server. The purpose of Bitcoin - "Don't trust anyone because you have the data" - is lost.

In fact, there are now two types of Bitcoin users: the so-called fanatics, who download all the data from the blockchain, and the normal people, who set up their wallets somewhere on the server and don't worry about how exactly Bitcoin works.

Myth 3

The blockchain is efficient and scalable, the conventional currencies will die out

If every node on the network is doing the same thing, the speed of the entire network is the same as the speed of a single node. This is currently 7 transactions per second with Bitcoin - for all participants.

In addition, the new transactions are entered into the Bitcoin blockchain every ten minutes. With Bitcoin, however, you have to wait the additional fifty minutes after a new entry because the data is reset every now and then for no apparent reason. Imagine having to wait an hour in a store to get your gum.

In the global dimension it already looks quite unrealistic that the number of active Bitcoin users can be increased significantly in the foreseeable future. Every thousandth person uses Bitcoin worldwide. With transaction speeds like this, it will be difficult to attract additional users. For comparison: Visa processes thousands of transactions per second. The company can increase this number if necessary.

If normal currencies ever become extinct, it will not be because they are being displaced by blockchain solutions.

Myth 4

Bitcoin miners ensure network security

You may have heard of the big mining farms that do nothing but create the new blocks on the blockchain. They do this with the computing power of their computers - in other words, they change a block until the checksum of this block matches an existing checksum. Then the block is written into the blockchain, the miner receives a certain amount of credit in bitcoins, and the game can start over. Mining also ensures that changing the financial history takes the same amount of time as creating that financial history.

Bitcoin blockchain, for example, consumes around 975,000 US dollars for electricity every day. Not to mention the expensive hardware that is only used for these purposes.

The blockchain optimists claim that the miners are not doing unnecessary work, but are ensuring the security and stability of the entire Bitcoin network. That's right, the only problem is that the miners protect Bitcoin from the other miners. With the blockchain principle, which is also based on Bitcoin, there is a "risk of attack of 51 percent". The attack of 51 percent can take place if someone controls more than half of the entire network. The attacker can create his own financial history in the blockchain , whereby he ascribes more Bitcoins to himself or completely deletes Bitcoin transactions to other users. As soon as he publishes this alternative history, it is accepted by all other network participants. This makes it possible for the one who controls more than half of the network , can spend its resources several times, which is impossible with conventional currencies or payment options.

With the current bitcoin prices, it is extremely lucrative to mine new bitcoins. As long as this is the case, the many miners support the stability. As soon as electricity becomes more expensive, for example, and many miners get out, this can lead to massive “doubled” transactions.

Myth 5

The blockchain is decentralized and therefore indestructible

Since the blockchain is stored on every single node of the network, security services or state authorities cannot harm the network because there is no central point of attack. However, at least with Bitcoin, this is an illusion. Almost all independent miners organize themselves in so-called pools, a type of cartel, and thus share the work, but also the profits. The calculation is simple: a lot of time and resources have to be invested before a single block can be entered in the blockchain. You prefer to divide the tasks in a larger pool, but you always have an income.

There are currently around 20 larger pools for Bitcoin mining, but four of them control more than 50 percent of all capacities. That is, it is enough to gain control of these four pools to publish new transaction histories and to issue your own bitcoins more than once.

If you look at the distribution by country, the situation is even more serious: the majority of all large pools are in a single country - China - which makes the attack on Bitcoin even easier.

Myth 6

Pseudonymization and openness of the blockchain is an advantage

The blockchain is open, everyone can track every transaction. This means that Bitcoin in its blockchain implementation does not have anonymity, but pseudonymization. For example, if a ransomware attacker extorted bitcoins from his victim, everyone knows that this wallet belongs to a criminal. Since everyone can track the transactions from this wallet, the criminal cannot simply spend the extorted bitcoins, because as soon as he reveals his true identity somewhere, he can be arrested. Almost every exchange for exchanging Bitcoins for a conventional currency requires an identity confirmation.

That is why the criminals mostly use the services of a so-called mixer. This accepts bitcoins acquired in dubious ways and mixes them with a large amount of cleanly created bitcoins. The large amount of data makes it difficult to track the individual dubious bitcoins. This is roughly how digital money laundering works. The mixer retains a certain commission for this.

But pseudonymization can also lead to problems for normal users. For example, when you transfer a few bitcoins to your mother. Using the data on your wallet, she can then find out how many Bitcoins you had at any given point in time and what you spent them on. This works for every single transaction: Your counterpart can not only track your financial history in the past, but also see it in the future.

If this openness is a moral problem for private users, it can also mean bankruptcy for companies: Competitors know which suppliers, which customers the company has, and how much is in the account.

Conclusion

At the moment there are almost exclusively euphoric reports about Bitcoin and blockchain technology. However, these technologies also have their disadvantages, which are barely reported in the press.

So next time someone tells you that the invention of the blockchain is to be equated with the invention of the Internet, you should be skeptical about it.