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Blockchain Revolution
Without the Blockchain?
Hanna Halaburda
Associate Professor of Technology,
Operations and Statistics, Stern School
of Business, New York University
B
lockchain—often called “the smart contracts, encryption and a distributed
technology behind Bitcoin”— ledger—are separate concepts. The three may
has attracted a lot of attention, be implemented together, but they do not need
perhaps somewhat comparable to be. We analyze them separately and argue
to that devoted to the Internet at the time of that most of the proposed benefits come from
the dot-com boom. Many are excited about encryption and smart contracts. But encryption
this new technology, supposedly based on and smart contracts do not need blockchain.
a public, permissionless, distributed ledger
So, while the wave of excitement may facilitate
that cryptographically assures immutability
adoption of new technology solutions, the
without a need for a trusted third party
landscape after the so-called blockchain
and allows for smart contracts. Large and
revolution may include very few actual
small companies want to get on board,
blockchain applications. Instead, the changes
since they expect this technology to lower
could focus on encryption and smart contracts.
their costs by making transactions quicker,
safer, transparent and decentralized.
However, the technology behind Confusion around what
the blockchain is for the most part blockchain actually is
not well understood. There is no The market’s excitement about blockchain
consensus on what benefits it may technologies is growing and is perhaps best
really bring,1 or on how it may fail. summarized in the increasingly popular slogan
Optimism in the face of novelty and “blockchain revolution.” It is estimated that
uncertainty of a new technology is not a the blockchain market size will grow from
new phenomenon, but it does affect the US$210 million in 2016 to over US$2 billion by
economy, for example, through optimistic 2021.2 Blockchain technologies are expected
valuations of blockchain-referencing startups. to change the way the financial industry,
This optimism also appears in estimates supply chains, government record-keeping
quoted by the media that indicate large and many other areas operate. The Financial
cost savings but don’t offer much detail Times 3 describes the technology as follows: •
about how those savings would occur.
A more careful look into the technology
reveals that most of the proposed benefits
of so-called blockchain technologies do not
actually come from blockchain. What gets
bundled up as blockchain technologies—
34 COLLER VENTURE REVIEW 35
ledger can be secure without a trusted third the properties of the distributed ledger that
party 9 or needs to involve smart contracts. is supported by this modified system.
More importantly, encryption or smart
contracts do not require a distributed ledger
Smart Note also that smart contracts are not a core
property of the Bitcoin blockchain. The Bitcoin
(i.e., blockchain) to be implemented. contracts, system allowed for additional comments
encryption along with the transactions, which provided
Where is this confusion and rudimentary capability to create code that
coming from? would allow for automatic execution of some
distributed transactions. Ethereum expanded on this
Confusion around blockchain can be traced to feature, introducing a blockchain with the
the origin of the term. The term “blockchain” ledger main purpose of facilitating smart contracts.13
was introduced as shorthand for a “chain of each bring Mainstream media’s use of the term “smart
blocks of transactions,” which was part of contracts” solely in the context of blockchain
the Bitcoin system. Therefore, in the Bitcoin different may have created the perception that smart
context it meant a “distributed ledger of benefits contracts are native to blockchains. However,
transactions.” Later, “blockchain” became a code automatically executing a transaction
an independent term in media discussions of can be implemented by a wide range of entities.
whether there are other uses for distributed
ledgers of transactions beyond Bitcoin. Therefore, smart contracts, encryption
and distributed ledger are separate
Since it started in 2009, the Bitcoin system, concepts. They may be implemented
which operates without a trusted third party, together, but do not need to be. The term
has been successful in preventing fraud on “blockchain” should not be used as a catch-
its blockchain.10 That is, Bitcoin’s blockchain all aggregation of these different terms.
has proved to be for all practical purposes
“immutable.” For this reason, it is often said to
be secure. Bitcoin’s blockchain is also public Why is it important to consider
(all transactions are visible) and permissionless smart contracts, encryption and
(any computer may participate in validating distributed ledger separately?
transactions and adding them to the ledger).
Blockchain is an electronic ledger of The main sources of savings are supposed The broadening of the meaning of
A technician inspects
the backside of bitcoin transactions that are continuously to come from increased security, faster Some pundits erroneously extrapolate that “blockchain” to include smart contracts,
mining at Bitfarms maintained in blocks of records. What transactions and a shared ledger.7 Faster any blockchain will have these properties: encryption and distributed ledger could
in Saint Hyacinthe, gets its developers, investors and fans so transactions on blockchain are often—but distributed, secure, public, permissionless simply reflect the evolution of a term in a
Quebec excited, however, is that ledgers are jointly not exclusively—ascribed to smart contracts and will operate without the need for a living language. However, precision matters
held and run by all participants. It is meant (i.e., automated execution of transactions). trusted third party. This extrapolation may for estimating costs and benefits, or even
to be cryptographically secured to prevent A shared ledger is supposed to contribute to come from an illusion that the Bitcoin’s for predicting the best uses of blockchain
anyone being able to manipulate records, cost savings because blockchain is assumed blockchain properties come solely from technologies. Smart contracts, encryption
such as who voted for whom, or who to operate without a trusted third party and technology, while they actually come from a and distributed ledger each bring different
owns a bank account.4 therefore to eliminate intermediaries. combination of technology and an incentive benefits. And since they can be implemented
system that accounts for the behavior of independently, an optimal solution for a
However, these assumptions about the benefits
human participants. Yes, the Bitcoin system particular application may include only some
The revolution is supported by a few forces, of blockchain seem to confuse at least three
uses cryptographic tools: public-private key of these tools but not others. This may matter
the most significant of which is the expectation different concepts: (1) encryption, (2) smart
encryption, hashing algorithms. But the system for the future of the blockchain revolution.
of substantial cost savings, as described in the contracts, and (3) distributed ledger, a type of a
is virtually immutable11 because changing
following quotes from the Financial Times: distributed database. The three may be applied Smart contracts are computer programs
the blockchain’s history is too costly.12
together. But they are separate tools, and not all that automatically implement the terms
Blockchain is the electronic ledger
of them are necessary in a blockchain system. Bitcoin’s blockchain has these properties of an agreement between parties. One
originally built to underpin bitcoin
because it is a part of the Bitcoin system. example typically given is that of a car
markets. Promoters say it will lead So, what is “blockchain”?
Other distributed systems may not be able
to cheaper, more secure ways of lease: upon a missed payment, the car
While there is no one standard definition to sustain these properties. This is because
settling all kinds of transactions.5 would automatically lock and control would
of blockchain, the most parsimonious and the Bitcoin system is much more than just
return to the lender. Since execution of a
The technology—an electronic ledger commonly used is a “distributed ledger the blockchain. The system also involves
smart contract does not involve a decision
with records stored in “blocks”—aims to of transactions.” 8 This is why the term native cryptocurrency ( bitcoins), mining
or an action by a human, it may be faster
automate the complex networks of trust “blockchain technologies” is often used and other elements. Changing the elements
and minimize the number of mistakes.
and verification on which modern finance interchangeably with “distributed ledger of the system, e.g., by removing the native
Both the increased speed and reduction
sits, potentially cutting tens of billions of technologies.” This parsimonious definition cryptocurrency, or by changing the proof-
in errors would result in cost savings. •
dollars of costs from the financial sector.6 allows blockchains to have different of-work mechanism, affects the incentives
attributes. Specifically, not every distributed of the participants and therefore may alter
36 COLLER VENTURE REVIEW 37
The term “smart contracts,” and the car
example, come from Nick Szabo’s 1997 US$17 million This essentially describes a paradigm shift
in the approach to cyber security, and
article,14 published 12 years before Bitcoin we should pay attention to it. Given the
and its blockchain. Some media outlets Average annual cost of cyber crime large sums currently spent in relation to
to a large U.S. company, 2016
state that “through blockchain technology, fraud and hacking, this shift has potential
smart contracts are now a reality.” 15 for significant cost savings. A 2016 study
However, smart contracts were a reality of large companies estimated that cyber
long before. An automated recurring
US$9.5 million
crime costs the average large US company
payment that someone sets up with a bank US$17 million. The global average is US$9.5
is an example of a smart contract. Blockchain million.19 However, it is doubtful that we need
is not needed to gain the benefits from Average annual cost of cyber crime By looking at Bitcoin’s blockchain blockchain to get the benefits of encryption
smart contracts, because smart contracts to a large global company, 2016
and the fact that it has not suffered a and to trigger these cost savings.20
can be set up on a centralized system –
a bank’s system or a platform dedicated breach since its inception, the pundits
What are the benefits of blockchain?
to smart contracts used by individuals. extrapolate that any blockchain by its
The arguments above show how smart
Encryption, which increases the security of a nature offers added security benefits contracts and encryption can result in
computer system, may also result in significant
cost savings.16 Currently, encryption is beyond encryption. cost savings. But what about the benefits
underutilized in business practice. For of distributed ledger, i.e., the blockchain
example, until recently public-private key itself? Distributed ledger allows multiple
encryption was typically used to log into a parties in the system to add transactions to
business’s information technology system, a shared ledger in a way that the changes
but once users were admitted into the system, are reflected consistently across all its
there was some, but little protection.17 copies.21 It brings benefits in places where
reconciliation of contradictory ledgers
Excitement about blockchain turned is costly. At the same time, recording
more attention to new developments in transactions on a shared ledger takes more
cryptography. Bitcoin’s blockchain uses time than on a centralized ledger because of
the reconciliation mechanisms (consensus
standard, well-established cryptography tools mechanisms) that need to be employed.
(public-private key encryption, hash functions, Moreover, the need to store the copies of the
etc.). But novel tools developed in recent years ledger in multiple locations may significantly
allow for much bolder uses. The premise is to add to storage and computational costs. To
create encryption systems that would protect date, it has not been clearly demonstrated
the information—no matter where it is stored— in which circumstances the benefits of
rather than protect a specific computer. employing a distributed ledger outweigh
Serious efforts in this direction have already the cost of delays and duplicated storage.
been undertaken by industry heavyweights, Moreover, with the experience of Bitcoin,
as stated by proponents of blockchain technologies
R. Martin Chavez, the Chief Financial expect more from the new technology
Officer of Goldman Sachs: than just a distributed ledger. By looking at
Bitcoin’s blockchain and the fact that it has
We focused on encryption and key
not suffered a breach since its inception, the
management, worked on these issues with
pundits extrapolate that any blockchain by its
AWS and Google, and now we are in a new
nature offers added security benefits beyond
state. Our developers are indifferent as to
encryption. They also expect that adopting
whether a particular data compute load will
blockchain would result in further cost savings
happen out of Amazon and Google [cloud
due to disintermediation, since Bitcoin’s
computing services] or whether they will
blockchain does not require a trusted third
happen in our own data centers. And we
party to be virtually immutable. Indeed, the
assume that all the computers are hostile;
core of Bitcoin’s computer-scientific innovation
it doesn’t matter whether they are at AWS
was the security of a permissionless distributed
or our own data centers.18
ledger, so that there is no need for a trusted
third party anywhere in the system.22
Distributed ledgers are a special type of
distributed databases, which have been •
38 COLLER VENTURE REVIEW 39
known and used for three decades. But Bitcoin’s virtual immutability comes not
while previous distributed databases were only from encryption but also from the
permissioned and required a third party to incentives embedded in the system. What
manage the permissions and help maintain the makes the ledger immutable is the fact that
The technology database, Bitcoin was the first that allowed for
a permissionless distributed ledger.23 So yes,
adding a block to the blockchain is costly.
A network participant (say, a Bitcoin miner)
behind the
Bitcoin’s blockchain is virtually immutable needs to expend significant resources to win
without a need for a trusted third party. the tournament (to be the quickest to find
a solution to a puzzle), which awards that
blockchain is for the However, these benefits may be difficult
to realize in a blockchain without Bitcoin. participant the right to add a new block of
transactions to the blockchain. This cost also
most part not well
It has proven to be a challenge to create a
decentralized, permissionless and secure makes rewriting the history of the blockchain
blockchain to transfer assets other than expensive, resulting in virtual immutability.
understood. There a native cryptocurrency (for example,
bitcoins for the Bitcoin blockchain).
The network participants are rewarded for
their costly work with bitcoins.25 Without
is no consensus on The first major challenge is the gateway
bitcoins (or other native cryptocurrency), the
network participants need to be motivated
problem: the information about the underlying
what benefits it may
by incentives from outside of the blockchain.
assets needs to enter the blockchain in the
first place. For example, suppose we want to In most of the currently proposed applications,
really bring, or on use a blockchain to record and transfer land-
ownership titles. To initiate this process, a
both challenges have been addressed by
creating closed, permissioned blockchains.
how it may fail gateway needs to attest that a specific plot of This is because a blockchain without
land exists and to assign it to an initial owner. bitcoins is no longer virtually immutable
Whether the gateway is an individual, an without a trusted third party. In many cases,
institution or a consortium, it needs to be a permissioned blockchains are the right tools
trusted third party for subsequent users of for their purpose. We need to recognize,
the blockchain. Importantly, Bitcoin does not however, that they depart from Bitcoin’s
need a gateway. Since the Bitcoin currency is innovation. They effectively go back to the
native to its blockchain, all bitcoins are created traditional concept of distributed databases.
on the blockchain automatically and can then
Moreover, if permissionless is not the goal,
be transferred as per the Bitcoin protocol.24
then we need to consider whether a blockchain,
The second major challenge is assuring i.e., a distributed ledger of transactions, is the
immutability of the ledger without a native optimal design choice for those permissioned
currency. It is important to remember that distributed databases. Proof-of-work is a quite •
It is important to remember that Bitcoin’s virtual
immutability comes not only from encryption but
also from the incentives embedded in the system
40 COLLER VENTURE REVIEW 41
The future of the 1 For example, some pundits 11 Bitcoin’s blockchain is 19 2016 Cost of Cyber Crime
point to “privacy” while immutable with very Study & the Risk of Business
blockchain revolution others to “transparency” high probability, but does Innovation, Ponemon
as a benefit of blockchain. not guarantee absolute Institute Research Report,
Blockchain technologies will likely have 2
immutability. October 2016. The numbers
As estimated by Markets and are steadily increasing. In 2015
a significant impact on many industries, Markets, a market research 12 The Bitcoin system makes
the average cost was US$15
company (https://www. adding a block to the
not just finance. However, this may million in the United States
marketsandmarkets.com/ blockchain artificially costly and US$8 million globally.
not happen in the way envisioned. Market- Reports/blockchain- by making verification
technology-market-90100890. nodes compete to solve 20 The Goldman Sachs solutions
Computation and communication technologies html). Market size is
measured by revenues
a cryptographic puzzle.
This also makes changing
described in the Chavez quote
do not rely on blockchain.
About the Author
have decreased the cost of experimentation from sale of blockchain- blockchain’s history
21 Technically, distributed
and digital entrepreneurship. This resulted in a related solutions. prohibitively costly. Changing
this feature, while leaving all databases also have other Hanna Halaburda is Associate Professor
proliferation of start-ups, creating competitive 3 It is worth noting that among desirable properties, but this
all the media excitement,
the cryptography in place,
one seems to be the focus
of Technology, Operations and Statistics
pressure and exposing inefficiencies in existing could jeopardize the safety
at the New York University Stern School
the Financial Times’ voice is of a blockchain operating in the context of blockchain
( legacy) systems. Both new and existing players probably the most cautious without a trusted third party. technologies and fintech. of Business.
in blockchain matters.
are looking with interest at the properties 13 See www.ethereum.org 22 The security of the ledger is
4 Much of Halaburda’s work focuses on
inefficient consensus mechanism, not only of smart contracts and Bitcoin’s blockchain. J. Wild, “Blockchain believers not guaranteed. However,
hold fast to a utopian vision,” 14 N. Szabo, “Formalizing and the probability of a failure competition between platforms, e.g. Apple’s
in terms of electricity, but also in terms of But as they realize the benefits of different Financial Times, January 27, Securing Relationships is pushed so low that the
iPhone vs. Android or eHarmony vs. Match.
speed and resilience. And maintaining the aspects of the system, it may turn out that new 2017. on Public Networks,” ledger is considered secure
The most current theme in her research is
First Monday, September for all practical purposes.
entire history of transactions consumes more encryption tools and smart contracts have 5 G. Meyer and N. Hume, 1997. Available at http:// Nonetheless, there are factors the development of digital currencies and
“Trafigura tests blockchain
memory than, for example, keeping balances. large and clear benefits, while distributed for settling US oil market
firstmonday.org/ojs/index. that can affect this probability.
blockchain technologies.
php/fm/article/view/548 Some are well known and
ledgers may have a more limited appeal. And deals,” Financial Times, discussed in the literature,
We accept these inefficiencies in Bitcoin’s March 27, 2017. 15 See, e.g., A. Lielacher, “A Halaburda’s work has been published in
for many applications, the most suitable will such as the 51 per cent attack.
blockchain because they allow for a 6 P. Stafford, “Blockchain
Cost-Benefit Analysis of Management Science, RAND, American
be the traditional distributed database rather Using Smart Contracts in 23 There were earlier, less
permissionless distributed database. consortium raises record Banking,” BTCManager. successful tries to establish Economic Journal, Games and Economic
than one based on Bitcoin’s blockchain. $100m,” Financial Times, com, April 14, 2017. Available permissionless ledgers, Behavior and other academic journals.
As we see, blockchain applied outside of May 23, 2017. at https://btcmanager. e.g., bit-gold.
Most of all, we need to realize that outside She also wrote a book (joint with Miklos
Bitcoin (or other native cryptocurrency) 7 Additional expected benefits
com/a-cost-benefit-analysis-
of Bitcoin (or other cryptocurrencies) of-using-smart-contracts-in-
24 Note also that while Bitcoin Sarvary) on digital currencies, Beyond
loses its desired properties. It is no longer include public data and time- is decentralized in the
stamping of transactions.
banking/ Bitcoin: The Economics of Digital
permissionless and immutable without the we do not have a technology that offers sense that verification and
16 The security of Bitcoin’s settlement of transactions Currency (Palgrave, 2016).
need for trusted third parties. If we accept “permissionless distributed ledgers that 8 Note that a “ledger of
blockchain comes from two occurs in a decentralized
transactions” is different from
permissioned systems, the three decades of cryptographically assure immutability a “ledger of balances.” The sources: (i) encryption tools, way, the issuance of bitcoins Before her appointment at NYU, Halaburda
without a need for trusted third parties.” former keeps the history of such as public-private key, is very much centralized and was a Senior Economist at the Bank of
extensive research on distributed databases using hash functions, etc; controlled by the algorithm.
transactions, as in the “chain Canada and an Assistant Professor at the
in computer science offer us more efficient The blockchain revolution may give us of blocks of transactions.” and (ii) incentives induced
25 Recently, alternative
A ledger of balances wouldn’t by the mining scheme. We Harvard Business School. A shorter version
solutions: better consensus mechanisms new tools and change the landscape of focus here on encryption. consensus mechanisms
be a blockchain. have been proposed, such as of this article appeared in Communications
and memory storage strategies. Maybe they some industries. But since the benefits 9 Alternatively, one could insist
As we discuss later, the
proof-of-stake. So far, they do of ACM.
incentives induced by mining
would do a better job than blockchain. of encryption and smart contracts can be on defining “blockchain” to are difficult to sustain in not offer immutability with as
blockchains without native high probability as the proof-
be a distributed ledger that is
One of the indirect effects of the blockchain realized without a distributed ledger, the secure without any trusted cryptocurrency and without a of-work as implemented in
the Bitcoin system.
revolution may be the popularization of world after the blockchain revolution may third party. That is a more trusted third party (or parties).
restrictive definition that
traditional distributed databases. Distributed well be a world without the blockchain. would exclude most currently
17 For example, often,
information is encrypted on
databases have been a vibrant research field in proposed applications of
specific drives in companies’
blockchain technologies.
computer science for decades. Before Bitcoin, computer systems.
10 While there have been thefts
however, commercial and popular interest was of large sums of bitcoins,
18 R. M. Chavez, “Data,
Computing, and
mostly limited to back-office operations of large e.g., on Mt.Gox, none of them
Transformation in the
occurred by falsifying the
Internet companies, such as Facebook. The blockchain. The difference Financial Industry,” speech
at the symposium “Data,
blockchain revolution has brought distributed is akin to the difference
Dollars and Algorithms:
between a bank robbery and
databases to the forefront and may result in counterfeiting in the realm of The Computational
Economy,” Harvard Institute
wider adoption and new ideas for their use. paper currency. While “bank
robberies” have happened for Applied Computational
However, the benefits of distributed databases in the world of Bitcoin, the Science, January 19, 2017.
may be limited to very specific applications. system has proven to be Available at https://
resistant to “counterfeiting.”
And even in the context of these applications, www.youtube.com/
watch?v=VF6DrX9H0Ug
while valuable, it is not clear that distributed
databases would bring substantial cost savings.
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