More and more slogans coming from oil and gas, technology companies or even consulting firms, are singing the praises of the blockchain technology and how it will disrupt the business as we know it today. Disruption seems to be kind of the word of the year: everyone wants to shake businesses somehow.
Despite the hype and excitement around this new tech., it might be legitimate to identify and understand the major arguments of the sceptical ones. The ones believing that ‘Blockchain is a solution looking for a problem’. Because, at the end of the day Blockchain technology is a new tool, but is it in all circumstances the right tool?
Why Blockchain in business transactions?
Initially, Blockchain is related to financial: the cryptocurrency Bitcoin, launched in 2009, is the most well-known use of blockchain, but this is just one of many potential applications. Today this system is highly considered for business transactions: the potential uses for blockchain are growing, some of which could have significant implications for the oil and gas industry but also, people believe, for the agro-business.
What is the Blockchain?
As it is simply and very nicely explained by a Deloitte report « a blockchain is a “single source of truth” for shared information, such as financial transaction data (e.g., a quantity of bitcoins), legal contracts, deeds of ownership, and identity documentation.
The information is recorded on a ledger that is distributed across every node (i.e., computer) in a network on the internet, and is structured and encrypted in such a way that it cannot be altered without agreement by a majority of the nodes in a network (which automatically and simultaneously check the change against the ledger).
Any change, such as a payment from person A’s bitcoin wallet to person B’s bitcoin wallet, must be requested by the owner of the data (person A in this case), using a combination of private and public keys that validate the identity and legality of the transaction. The greater the number of nodes in a network, the more secure it is, since any attempt at fraud would require the corruption of the same chain in every node in a network simultaneously during the few seconds that the blockchain is processing a change.
This process directly addresses the underlying issue of trust in society and business that creates the need for third-party validation (e.g., by banks or lawyers), since the network itself validates the change. When new information is added into the blockchain, a new block is created that is linked to the previous block (containing a related transaction or contract) and, therefore, the historical data remains in the chain and an audit trail exists ».
The report also dresses the list of the diverse benefits that we can get from this technology for the business, primarily for oil and gas, such as cost and time savings, transparency for individuals, states and companies and lower risk of fraud and disputes. These are of course very encouraging and exciting, however, they open doors to many challenges and scepticisms.
The limits of the Chain
- The challenge of large-scale adoption
All parties in a supply chain will have to adopt the technology: there must be full engagement from all the participant – companies, organizations and states – in order to sustain the ledger and the whole raison d’être of such a system.
In that regard, Samantha Radocchia, Co-Founder & CMO at Chronicled mentioned in an article, that education is a challenge, among others, that holds the Blockchain from large-scale adoption: « the biggest reason education is the first obstacle is that you have to consider who really needs to buy into using blockchain technology in order for it to scale. It’s not just theorists and coders. It’s CEOs, heads of marketing and business development, even investors who are going to decide to foot the bill—or invest in the Ethereum platform, period. It’s worth noting, too, that this doesn’t mean every single consumer needs to fully understand how to build a block on the blockchain, for example. Just like everyday tech users don’t really know how the Internet itself “works,” but they have enough working knowledge to be able to use it—and use the programs built on top of it. »
Blockchain will thus have to face the, not impossible but very difficult, challenge of going mainstream. The technology behind it is already very complex and it can confront a heavy regulated business environment. “Blockchain is thus also turning out to be more complicated than most of us thought,” warns Kris Henley, communications manager with the Centre for the Digital Economy at the University of Surrey. “Its tremendous potential is mitigated by its steadfast resistance to being a ‘magic’ solution, and its need for regulation like so many game-changing technologies of the Digital Economy.”
“Processing trades via blockchain would not simplify the capital markets, but rather move the complexity around,” Pierron adds.
- Access to the technology
Doing business with developing countries means also facing issues such as education, access to the internet, energy security etc. Lack of infrastructure is thus a solid roadblock. All these challenges can undermine the well-functioning of such a technology for the lambda people and business partners, or even states and its authorities. In the context of agri-business, we can imagine that the smallholder farmers living in rural-areas do not have access to internet connection. A fortiori, 39 percent of USA population living in rural areas of the US do not have access to high-speed internet connection, meaning that this can be an acerbated issue for developing countries.
More generally, developing and partner states would face the challenge to hire, train and develop regulatory officials and implement the technology. There is a hudge need to foster engineering and organisation effort to reach the potential that blockchain tech could offer. States with high level of corruption might even refuse to adopt such a system, what would be their incentives to do so?
- Security concerns
Blockchain aims to prevent fraud, however, a digital transaction can be as vulnerable as the traditional papers transactions if they are not properly secured or if the fell in the target of hackers. If the system is reputed to be safe, we cannot say the same for the systems developed around it. Bitcoins security breaches and the millions of dollars lost are a testimony to this concerns.
The consented immutability of the blockchain information can make it easier for interlopers to change the trusted ledger to one’s party’s benefit: in the agri-business, it can be obscuring a failed pesticide test of adding a fake organic certification, as said by Sara Menker, the CEO of Gro Intelligence.
- Will it decrease transaction costs?
Some experts believe that transaction costs will not be ultimately saved by the adoption of this technology. “Moving cash equity markets to a blockchain infrastructure would drive a significant increase of the overall transaction cost,” according to Axel Pierron, founder and managing director of financial consulting firm Optimas LLC. “Trading on a blockchain system would also be slower than traders would tolerate, and mistakes might be irreversible, potentially bringing huge losses” he adds.
Transaction delays can also result from the many factors such as a private key lost by one party or even, in worst cases where the key would be into the hands of hackers, that could threaten the entire chains’ security.
Moreover, the Blockchain system is still facing performance issues: scalability is one of them, it refers to the capacity of a system to adapt itself to increasing transaction volumes, and be able, despite that, to handle and process transactions in a shorter period of time. As states Pierron, ”the delay before the final assurance that a transaction has been recorded ‘for good,’ that can be up to a couple of hours, would create too much uncertainty for market participants, especially during time of high volatility,”.
- Energy consumption
Engerati enlights one major downside of energy blockchains, namely the fact that they consume lots of power. The following is an extract of the article.
The article leads on a research written by World Economic Forum, claiming that the energy consumed in computational capability in the blockchain network is unsustainable : “estimates of this energy consumption range from the power used by nearly 700 average American homes at the low end of the spectrum up to the energy consumed by the island of Cyprus at the high end, or more than 4.4bn kWh.
The authors go on to cite an early 2015 report in ‘The New Republic’ that the combined processing power of the bitcoin network was hundreds of times greater than the aggregate output of the world’s top 500 supercomputers. ‘Processing and protecting the more than $3bn worth of bitcoins in circulation requires more than $100m in electricity each year, generating a volume of carbon emissions to match,’ wrote the article’s author, Nathan Schneider.
The authors point out that there are two issues to the energy consumption: one is around the electricity used to run the machines and another is around the energy used to cool them so they don’t fail. ‘Here’s a rule of thumb: for every dollar, a computer burns up in electricity, it needs 50 cents to cool down”. “The acute drought in California has raised serious concerns over using precious water to cool data centres and bitcoin mining operations,’ they write.”
However, if we must be fair, we should also look into the distinction between proof-of-stake and proof-of-work technologies in the regard of the energy market and the glance of hopes that emerges around energy consumption of the Blockchain, and even what some people lead to think, could be opportunities. This discussion is held in an article of the Guardian. David Martin, the manager of Power Ledger, was asked by the Guardian whether the blockchain process was not underpinning the whole system gobbling up most the power. “Not so”, claimed David Martin. He claimed the energy-consumption issue has been averted by adopting a vastly more efficient form of blockchain than that which is used by bitcoin. Whereas most blockchain relies on proof-of-work processes, Power Ledger employs something called proof-of-stake. The former consumes vast amounts of energy as it involves solving ever-more complicated mathematical equations, but proof-of-stake blockchains are based on pseudo-random chance. “It uses the fraction of energy of conventional blockchain. Proof-of-stake is ideally suited for energy,” Martin says.
One of the leading critics of blockchain’s energy-consumption backs the approach. Michel Berne, the director of economics studies at Telecom management school in Paris, has been highly critical of the carbon footprint of the blockchain, but he thinks, for energy markets at least, proof-of-stake could be a solution. Yes, I believe that proof-of-stake blockchain applications can validly compete with other non-blockchain based solutions in energy trading,” he says.
“Peer-to-peer energy trading is nascent, notoriously difficult to manage and blockchain solutions might be useful.”