The blockchain technology is a hype. This increased public interest comes with many myths and misconceptions. Depending on their attitude, people may see blockchain as a panacea for all social and economic issues or a threat to the existing order. Let’s consider the 10 most common misconceptions about blockchain to understand what it is capable and incapable of.
Misconception 1: Blockchain = Bitcoin
This is the most popular misconception. Many people think the terms “Bitcoin” and “blockchain” mean the same. Thus, they often confuse one for the other. Let’s make it clear: Bitcoin (BTC) is the first cryptocurrency and so far the most famous implication of the blockchain technology. Blockchain stands for a distributed digital ledger storing the records about all the transactions made in the network. These transactions can use bitcoins or any other cryptocurrencies.
Why non-specialists tend to use the words “Bitcoin” and “blockchain” interchangeably? First, these words sound alike to an untrained ear. Second, the blockchain technology got into the spotlight due to Bitcoin and its unprecedented price rise in 2017. Some of the early investors became millionaires and their amazing success stories caught the public imagination. Bitcoin and blockchain came to fame together and merged into one “get-rich-fast” thing.
Misconception 2: Blockchain = Finance
“Blockchain = Finance” is a broader statement than “Blockchain = Bitcoin”, but the error is the same. Finance is the most well-known and widespread application of the technology, due to Bitcoin and other cryptocurrencies that mushroomed in the recent years. But blockchain is bigger than that.
Actually, the tech has many potential use-cases outside the financial industry. A distributed ledger can store any kind of records. Potentially, many sectors can benefit from blockchain solutions: healthcare, supply chain, voting, land registry, real estate, energy supply, environment protection, disaster management, and more. There are even blockchain-based dating apps for those tired of liars and frauds.
Misconception 3: There’s One Global Blockchain
This misconception probably roots in the famous phrase “Blockchain is the next Internet”. It means the technology is revolutionary and has a huge disruptive potential, but a lot of people take it literally. They imagine blockchain as a global network that covers the whole world. This idea is wrong, as there are many different blockchains, including public, private, and hybrid ones. Every network is configured to serve its particular purpose.
For instance, the Bitcoin blockchain seeks to ensure fast, cheap, and secure payments. The primary focus of the Monero network is financial anonymity, and so on. For every possible use case, there is a specific type of distributed ledger. Ideally, different networks should be able to talk to each other, but the problem of interoperability has yet to be resolved.
Misconception 4: Blockchain = Bank Killer
The second name of blockchain is “bank disruptor”.
Indeed, Bitcoin was created to solve the problems of the inefficient banking system, one of the major actors behind the financial crisis of 2008. Satoshi Nakamoto wanted to provide libertarians with a decentralized digital currency that would eliminate intermediaries from the process of money transfer. Of course, banks saw this innovation as a dangerous threat. Or a bubble that would burst very soon.
Much has changed since then. Though cryptocurrencies are still rather far from mass adoption, many banks are massively investing into the development of their own blockchain solutions. Obviously, the goal is not to disrupt themselves. On the contrary, banks and other financial service providers seek to move money in a faster, more secure, and friction-free manner. Last year, we watched a clear tendency for such cooperation and the trend is likely to persist in the future. Anyway, the list of big banks interested in applying blockchain is impressive.
Misconception 5: Blockchain is Public
This statement is only true for some blockchains. For instance, the Bitcoin network is public, according to its original mission. But as we mentioned before, there are various types of blockchains — public (Bitcoin, Ethereum), private ( Hyperledger), and hybrid ( Dragonchain).
You may see non-public networks as an effort to centralize the decentralized, but they are perfect for their purpose. For instance, private (or permissioned) blockchains are suitable for companies and organizations seeking to control who can become a participant and what exactly he or she will be allowed to do. Some members have more rights than others, according to their status in the system. For example, you may have a right to verify information or only view it.
Misconception 6: Blockchain is For Criminals
False. Blockchain-based coins are for everybody — just like cash. Then, why do many people associate technology with criminal activity and illegal practices? There are two big reasons for it.
In its early days, Bitcoin got famous due to the Silk Road marketplace started by Ross Ulbricht back in 2011. Silk Road was operating in the darknet and allowed users to buy and sell drugs and some other illegal stuff for bitcoins. The marketplace operators were sure that BTC transactions were impossible to trace, but it was a mistake. Long story short, Ross Ulbricht was tracked and arrested by FBI agents and now serves his double life sentence in prison. This story received extensive media coverage in 2013, and it was the first time when many non-tech people heard of cryptocurrencies. As we know, first impressions are hard to change.
The second reason why Bitcoin and blockchain have a bad rep is the abundance of scam ICOs (Initial Coin Offerings) that emerged between 2017 and 2018. The founders of new blockchain platforms were persuading people to buy their tokens and get rich, just like the early Bitcoin investors did. The idea was so simple and inspiring that there was no lack of investors. Unfortunately, over 80% of these ICOs were scams that left many investors ruined and disappointed. Though it has nothing to do with blockchain as a technology, this story left an unpleasant aftertaste in many people’s minds.
Let’s repeat it once again — blockchain doesn’t equal Bitcoin and Bitcoin is not completely anonymous. There are “private” coins for it, but that’s another story.
Misconception 7: Blockchain = New Generation File Storage
A lot of people see blockchain as a new type of database where you can store all kinds of files, like images, videos, PDFs, etc. It’s important to understand that blockchain systems don’t store information in its original form. Rather, they store the proof that this information exists. We may compare this process to keeping records, when you register transactions in your ledger.
Therefore, a distributed ledger cannot be seen just as a new-gen alternative to traditional databases holding physical information. Each solution has its advantages and disadvantages, depending on what you use it for.
Misconception 8: Smart Contracts = Traditional Contracts in Digital Format
Smart contracts are often mistaken for a smarter form of traditional contracts. We are sorry to disappoint these guys, but “smart contracts” is just the name for a special computer program that executes automatically when the pre-agreed conditions are met. Say, your aunt Alice promised to give you $1,000 for your 18th birthday. When the date comes, this amount becomes available to you. It doesn’t matter if aunt Alice still loves you.
The main difference between smart contracts and traditional ones is that smart contracts are not legally binding. Therefore, they mean nothing outside the blockchain they run on. It would be more correct to see them as digital tools, and not as an alternative to traditional agreements, written by lawyers. Because, if something goes wrong (though it’s highly unlikely), you won’t be able to sue the other party for non-payment. Not yet.
Misconception 9: Blockchain is 100% Immutable
Most of us have heard that one of the key features of blockchain is immutability. So, many people believe that the information we add to the system is 100% tamper-free and cannot be altered under any circumstances.
We’ll let’s make it 99,9 %, because nothing is perfect. Speaking of Bitcoin, if over 50% of all the network’s mining power concentrates in the hands of one person (or a group), these users will be able to control the blockchain. This situation is called “51% attack”. This attack is very unlikely, but not completely impossible. Now you understand why so many BTC users are worried that the majority of the Bitcoin mining resources belong to several big mining pools.
Misconception 10: Blockchain Will Eliminate All the Intermediaries
One of the big promises of blockchain is the elimination of intermediaries. This act should make all the procedures faster, cheaper, and hassle-free. But, as most broad statements, it’s not completely correct.
When we say that blockchain will cut out intermediaries, we mean within this particular network. As we know, in a blockchain ecosystem trust is ensured by math. Thus, we don’t need any trusted third parties as long as we operate within our ecosystem.
But if we need to cooperate and communicate with the outer world or other networks, we need intermediaries for that. For instance, a blockchain platform dealing with digital ownership will rely on external intermediaries for providing this ownership data.
Yes, blockchain can make internal and external interaction much more efficient and speedy. But it’s too early to say that all the intermediaries will have to retire or be retrained for other jobs.
Common Blockchain Misconceptions: Conclusion
These were the 10 most common blockchain misconceptions that still exist. Hopefully, we debunked some of the popular myths and gave you a better idea of what blockchain is and what it isn’t.