Blockchain technology is said to be the next big game-changer in tech. And that’s probably true. However, the technology is not yet ripe for large scale adoption as it comes with issues that need to get sorted. The major challenges are scalability, transaction costs, lack of regulation, lack of establishment support and security concerns.
The blockchain trilemma: scalability, decentralization and security
Every new transaction on a blockchain has to be verified by the entire network. After a new block has been added, a copy of the updated blockchain will be distributed amongst all network participants.
That works well as long as the network remains small. But as more participants join the network and more transactions are being recorded, computation will become more resource intensive. That leads to reduced mining capability and lower transaction speed.
Currently, the Ethereum network can process about 15 to 20 transactions per second (TPS); Bitcoin can process only 7 TPS. Compare that to the Visa network which can process 45,000 TPS. Blockchain is not yet fast enough for the real world. Not even close.
There are ways to solve this problem. We could for example use sidechains, a second layer on existing blockchains that increase scalability. Sharding is another way how some try to tackle the issue. It means that each node only stores a fraction of the network, instead of the entire blockchain.
However, these solutions also come with their own downsides.
Ethereum founder Vitalik Buterin describes the scalability trilemma: Blockchains, he says, can only have two out of the three attributes scalability, decentralization and security. Hence, if we increase the scale, at one point we will have to sacrifice either decentralization or security.
Blockchain transactions are not cost-effective
This point might be counter-intuitive, as blockchain is often touted as a way to reduce transaction costs. That’s partly true, because blockchain has the potential to cut out middlemen and thus reduce the need to pay third-party fees.
However, blockchain is not a cost-effective technology to conduct transactions. At least not the way it is being used today.
Blockchain transactions require large amounts of computing power. This is primarily due to the same reasons that create scalability issues: The entire network has to verify each transaction. On top of that, there will be storage costs. Hence, the larger the network grows, the higher its electricity consumption.
According to Blockchain Luxembourg, the cost per transaction on the Bitcoin network has been bouncing around between $20 and $160 since the beginning of the year. At this cost, applications which only require small transactions, for example P2P energy trading, would not be economically viable.
Blockchain’s energy requirement also comes at an environmental cost. Futurism claims the computing power required last year to keep the Bitcoin network running consumed as much energy as 159 of the world’s nations.
But that’s Bitcoin, one of the largest blockchain networks. The picture looks differently for smaller networks. Yet still, companies will have to work out ways to cut down transaction costs, otherwise many blockchain applications will remain a pipe dream.
Most governments have not caught up with the blockchain sector in terms of regulations. But blockchain comes with a wide range of legal challenges: data sharing, data privacy, smart contracts, fundraising, asset tokenization.
Many questions remain open. That bears a risk for blockchain companies, as governments could make decisions which are not in the industry’s favor.
On the bright side, some governments have started to push for better regulations, with Liechtenstein being the frontrunner. The Blockchain Act will be put into force in early 2019 and create legal certainty for blockchain players in the country.
Lack of establishment support
Big corporations, especially in the financial industry, make fortunes by playing the middle man. Decentralization is a serious threat for their business models.
Although banks are slowly starting to invest in blockchain technology, their secret hope is that it’s just a hype which will at some point quietly disappear.
The same goes for governments. The idea of having a decentralized cryptocurrency as a widely adopted means of payment makes central bankers lose sleep at night.
Many blockchain applications are clearly not in the interest of the corporate and political establishment. This could become a major hindrance for the industry. It already is. Try dealing with a bank as a crypto startup and you will see.
Although blockchain technology can help to increase data security and transparency, there are also security concerns.
Firstly, there is room for human error. Smart contracts are just as smart as the people who code them. “Garbage in, garbage out” holds true in this case.
Secondly, if more than 50% of the nodes in a network are corrupt, fraudulent transactions become possible. Satoshi Nakamoto highlighted this problem when he launched Bitcoin and called it a 51% attack.
Thirdly, if a user loses his private key and someone hacks the wallet, there will be little chance the value can be recovered.
Long story short: Blockchain is by no means perfect. But that doesn’t mean blockchain has no future.
When the internet boom started, there were more than enough technological hurdles as well. What we nowadays know as “the internet” was at first a very limited US military application. And today you can order pizza via a smartphone.
Isn’t that amazing?
Yes, it is. And blockchain offers great opportunities as well. But nothing in the world is worth having or worth doing unless it means effort, pain and difficulty.
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