By Max Gulker, PhD December 26, 2017
This year has seen the proliferation of proposed applications and startups using blockchain technology. Predicting which will succeed and fail with 100 percent accuracy is, of course, impossible. But the likeliest candidates for success are the cases where the benefits of not relying on a central intermediary most exceed the extra costs of using a blockchain to process transactions. Will our health records and deeds to our homes end up on blockchains? The answer will depend greatly on these costs and benefits.
The benefits of not relying on a central intermediary are often larger than we first assume. Let’s look at the most well-known blockchain application, payment processing (Bitcoin is both a currency and a payment processing system, we’ll focus on the latter here), and one of the most important functions of today’s intermediaries, keeping our data secure.
We use central payment processing systems like credit cards, PayPal or bank transfers all the time, almost without thinking about it. As we do so, we implicitly trust these intermediaries to protect our personal and financial data from being stolen or internally misused. Data hacks of epic proportions do happen, but let’s assume for now that the probability of something bad happening each of the many times we use one of these intermediaries is very low. Does that mean that the cost of relying on these intermediaries to secure our data is low?
We place our trust in these intermediaries because they have made costly investments over time to engender that trust. Processing payments on a blockchain essentially avoids these costs. Firms that centrally process payments spend millions per year on hardware, software, employees and research and development to communicate to customers that their data is safe in each transaction. And all the major credit cards require their e-commerce merchants to meet the Payment Card Industry Data Security Standard, first rolled out in 2004. Merchant compliance, which includes network security, monitoring, and several other standards, is expensive. For the smallest e-commerce merchants (defined as under 20,000 transactions per year) accepting Visa, MasterCard or Discover, becoming compliant costs an estimated $75,000 to $90,000, and maintaining compliance costs an additional estimated $35,000 annually. For the largest merchants (processing over 6 million transactions per year), the costs are estimated to be ten times as large.
More at: Blockchains Could Save Millions in Data Security Costs – AIER