The Blockchain and Digital Identity Part 8

How Blockchain Could Change The Management of Identities and Passwords and Prevent Occupational Fraud. Potential Congestion Issues with Digital Identities.


This issue has occurred because the Bitcoin network is based on the principles of free market. The Bitcoin is a peer-to-peer digital currency, which means that it can only work with money if people recognize it as money based on their free will decisions. Because there is no government or central bank running Bitcoin, nobody has to use the network, just like people do not have to use any other decentralized networks. When you go to a legitimate store in any country, the store will only be accepting payments in the currency of that country. Exchanging currencies from one to another is a banking service, which means that an entity providing this service needs to follow the regulations of the country where it exists. Because of all of this, when you come to one country from a different country, you are forced to exchange currencies.

Nobody will force you in the literal sense of the word, but if you come to the United States with Swiss Francs, no store will accept the Swiss Francs and you will have to exchange them to the United States dollars. When you pay with a credit or debit card in a foreign country, you do not even notice that there is an exchange, but the exchange is present and does happen in the background. None of this happens with cryptocurrencies. You can pay with it only if you choose to and you do not have to be going through multiple third parties when you travel.

Also, transaction participants do not have to pay any fees to send money on the network. Even when they don’t anything, Bitcoin miners still have an incentive to include their transactions into the blocks of Bitcoin blockchain because the network rewards the miners with block creation awards regardless of what users on the network have paid in transaction fees. At the same time, just like the users don’t have to pay a fee, the miners do not have to include a transaction into a block that they mine. When the network became really popular in 2017, the number of transactions has increased quickly and miners were now able to choose which transactions to include into the Bitcoin blockchain blocks. It goes without saying that they were choosing the transactions with the highest fees as miners on the Bitcoin network get to keep 100% of the fees.

The second factor that contributes to the network effect is that popularity is self-reinforcing. In practical terms, this means that to be interested in going to a restaurant, people need to see a line of other people line up in front of the restaurant. For people to send funds in cryptocurrencies or to get a digital identity on a blockchain network, they would need to hear about others doing the same.

Getting rid of the line completely does not work. If a restaurant didn’t have a line, people that are driving by would not get interested in going to it. For this reason, it is much safer, more profitable and less risky for a restaurant to have a line of people outside all the time than try to push the prices.

The same is true of all digital networks: they need to have enough users that they can serve, but they can’t have more than they can handle because it would lead to all kinds of problems, such as problems with skyrocketing transaction fees on the Bitcoin network in the last quarter of 2017.


Congestion Issues

While a network effect can have many positive consequences for a business, entity, or a blockchain network, it can also have negative effects. Typically, negative effects occur when too many people start using something. An example from real life would be a highway. The more people use the highway that connects two points, the more other people would be interested in getting faster between the two points. However, at a certain point the amount of traffic will be more than the highway can handle, which would lead to congestion. The same can occur with a telephone service provider, an Internet provider or even a blockchain network where if a user doesn’t include a large enough fee, the transaction will be stuck for hours as “pending” because no miner wants to pick it up and include onto the blockchain. This is also an issue where suddenly a paper government-issue identification document gets a lot of advantages over a blockchain-based self-sovereign identity because while verification of a traditional identification document is not always instant (unless done by government authorities running it through an online database), the document is still a document. With blockchain, if a network gets congested, you may not be able to get a confirmation at all.