challenges of blockchain

Challenges in Blockchain Technology Today

Since the advent of Bitcoin in 2009, blockchain has become a buzzword. Enterprises, regulatory bodies, individuals, and researchers are fascinated by this nascent technology and are exploring its application within their respective fields. Blockchain is celebrated as a disruptive technological advancement because of its equitable offering: it is a distributed ledger that records and stores data once it has been validated by the computers or nodes on the ledger’s network. Every block of data that gets added to the existing chain is backed by the principles of cryptography.

There are several benefits that emerge from the above definition of a blockchain, one of the most lauded being decentralization. A blockchain dis-intermediates the fundamental role played by centralized authorities and third parties in the verification and validation of data or transactions, by allowing an open network of nodes perform the necessary tasks. This reduces cost, augments efficiency, and creates a trustless ecosystem; benefits that cannot be achieved with manual, legacy processes. Transparency is inherent in a public blockchain, because everyone on the network has access to the ledger.

All of the above has led to blockchain being known as Internet 2.0, and being explored by 80% of the participating organizations in the Deloitte 2019 Global Blockchain Survey. However, the technology carries a unique set of challenges with it that have greatly contributed to its slow-moving adoption, including lack of scalability, limited interoperability, a dearth of blockchain developers, insufficient standardization, extensive energy requirements, and the absence of regulatory clarity.

Challenges of Blockchain Technology

There are still certain challenges that blockchains have not yet overcome.

Scalability

Legacy transaction processing networks are known to process thousands of transactions in a second. Conversely, blockchain networks are considerably slow when it comes to transactions per second. As an indication of the most prominent public blockchains, the Bitcoin blockchain can process three to seven transactions per second, and Ethereum can handle approximately 20 transactions in a second. This performance, in comparison with their centralized counterparts, has deemed the technology as non-viable for large-scale applications and mass adoption.

Blockchain technology gained traction by introducing decentralization and transparency across various platforms, supported by a large network of nodes. A higher number of nodes amplifies the merits for which blockchain is recognized as a revolutionary force. However, most blockchains lack the capability of effectively supporting a large number of users, meaning that transaction throughput is longer, and processing costlier.

To empower mass scale adoption of this technology, several solutions have been introduced that address the challenge of scalability, with more in the pipeline. Lightning Network is a layer two protocol that offers off-chain settlement among the participants aimed towards the Bitcoin network to enable instant transactions with low costs and faster processing times. Sharding is a solution that groups subsets of nodes into smaller networks or shards which are then responsible for the transactions specific to their shard. It is spearheaded by developers in Ethereum, and when offered in conjunction with the proof-of-stake consensus mechanism, has the potential to scale up the application.

Interoperability

With over 2,300 cryptocurrencies and thousands of projects that are leveraging distributed ledger technology, numerous blockchain networks have floated to the surface. Most of these blockchains work in silos and do not communicate with the other peer-to-peer networks. There are no standards that allow for seamless interaction between these blockchain projects. According to Deloitte’s report, over 6,500 projects are leveraging a variety of blockchain platforms with different protocols, coding languages, and consensus mechanisms. Such variation significantly reduces the scope of collaboration and cross-blockchain transactions; nor can the existing blockchains facilitate data transfer between chains or integrate with traditional platforms.

Over time, various projects have evolved to offer interoperability among various blockchain networks, such as Ark, which uses SmartBridges architecture to address this challenge, and claims to provide universal interoperability, plus cross-blockchain communication and transfers. Another is Cosmos, which makes use of the Interblockchain Communication (IBC) protocol for supporting blockchain economies to operate outside silos, and transfer files between each other.

Limited Developer Supply

Every instance of groundbreaking technology requires time for the developer community to adopt it, and for educational institutions to introduce relevant courses. The blockchain landscape is currently in its infancy, and therefore suffers from an acute shortage of skilled developers. The lack of an adequately trained and skilled workforce for managing the complexity of peer-to-peer networks further translates into a sluggish rate of innovation.

Other than hardware and software, blockchain technology demands additional qualification and know-how. According to research conducted by Glassdoor, the demand for blockchain jobs increased by 300% between 2017 and 2018. Simultaneously, the Upwork Skills Index indicated that blockchain was the second-fastest-growing skill sought by recruiters in 2017. These statistics denote the tremendous existing demand for blockchain developers and other professionals. This gap between the demand and availability of adequately skilled resources has resulted in higher than average salaries within the industry, making its implementation even more difficult.

Standardization

With the wide variety of networks that exist today, there are no universal standards for blockchain applications. Standardization can help reduce costs, develop more efficient consensus mechanisms, and introduce interoperability. The lack of such uniformity across blockchain protocols further aggravates the issue of onboarding new developers, plus it also takes away consistency from basic processes like security, making mass adoption an almost impossible task. This has become a barrier to entry for professionals as well as investors.

To establish industry-wide standards with regard to various blockchain protocols, Ethereum launched Ethereum Request for Comments (ERC) under which a memorandum gets issued to describe the behavior or application, or methods of protocol execution. For instance, the most popular standard is ERC 20, for token contracts (similarly, ERC 137 is for name registries). Ethereum Improvement Protocols (EIPs) EIP 75 and EIP 85 are for wallet formats, representing standards that need to be followed by the platform, such as core protocol specifications, smart contract standards, and client APIs.

Energy-Intensive

Proof-of-work (PoW) was the first consensus mechanism for validating transactions and eliminating the need for centralization, and was introduced by Bitcoin’s blockchain. These protocols require users to submit proof of ‘work’ by solving complex mathematical puzzles, and require tremendous computing power. While proof-of-work paves the way for disintermediation by offering a trustless and distributed consensus, it also consumes huge amounts of energy. Experts have also called out that by 2020, Bitcoin transaction energy consumption could soar as high as the yearly electricity usage of Denmark.

In an attempt to overcome these challenges and offer a trustless consensus mechanism, proof-of-stake (PoS) protocols were introduced, that involve a combination of a participant’s stake in the network and an algorithm to randomly assign the task of validation to a node. Given that the participants are not required to solve complex puzzles, these mechanisms significantly reduce energy consumption.

Regulations

Since 2009, global enterprises and media houses have highlighted a lack of regulatory clarity regarding cryptocurrencies, and consequently in the underlying blockchain technology, which is a significant roadblock for mass adoption. Whilst blockchain ventures are trustless and decentralized, there are certain areas that require regulatory support, of which smart contracts is one. These are self-executing contracts that run on peer-to-peer networks and ensure automatic execution of the contract when certain predefined conditions are met. If the regulations do not cover smart contracts, it inhibits adoption as well as investment in the blockchain industry.

Over the years, there has been some progress on the regulatory front. According to a study by Deloitte, 17 U.S. state legislatures have passed bills concerning the adoption of blockchain. Furthermore, several other countries are formulating blockchain-friendly legislation to leverage the merits of this technology, including Malta, Estonia, Switzerland, Singapore, and Japan.

Conclusion

Blockchain technology has equipped the world with an innovative disruption that can be explored across a wide range of industries, but it comes with its own set of challenges which all contribute to the lag on the path to mass adoption. Over time, active and measured steps are being executed to eliminate these challenges, and keep the the trajectory of blockchain adoption pointing upwards.

* The information above does not constitute any form of financial or investment advice and should not be relied upon. Investing in Digital Assets carries risk. For more information please see our risk warning.

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