The 5 limitations and challenges of Blockchains
Blockchain | 07 Oct 2019
Limitations & Challenges: The 5Cs of Blockchains you should know
1ST C: COMPLEXITY OF THE TECH AND LACK OF TECHNICAL KNOWLEDGE:
One of the most basic reasons why the technology has not picked up despite blockchain’s increasing popularity may be that many do not have a good understanding and/or are unaware of the technical terms. This is so even for many trading in cryptocurrency, one of the most known uses of blockchain. As the tech and its concept are without precedent, the principles of blockchain are not always easily explained or understood.
It doesn’t help that there is little proper documentation, perhaps because the technology is new and still evolving. Investors in the meantime may be unable to ask questions directly or get their doubts resolved, e.g. for Initial Coin Offerings (ICO).
2ND C: CERTIFICATION (THE LACK OF):
Linked to the complexity of the tech is the lack of talent. While demand for blockchain seems to be on the rise, expertise is still limited. The high uncertainty also means difficulty in getting stakeholders’ buy-in.
3RD C: COST:
Cost can be considered on two fronts – cost as a barrier to scale and the increasing transaction cost.
a) Scalability: Blockchain relies on encryption and consensus to provide security over a distributed network. In order to “prove” that a user has permission to write in the chain, complex algorithms must be run, which require large amount of computing power. All transactions performed on the network needs to be verified by each of the nodes. Miners spend a huge amount of computing power to solve the computations via proof-of-work to verify and process the transactions, making it highly energy-consuming.
As the use of blockchains increases in various industries both horizontally and vertically, so will the processing power, in-house resources and expertise needed. At this time, the technology requires tremendous infrastructure and cost, making it hard to setup, maintain and scale.
b) Increased Transaction cost: When blockchain 1st started, transaction cost was almost free. As the network grows, this is changing. In fact, as there is no fixed regulation on the transaction fee, this is up to the transacting parties to decide. So miners may choose to process the transactions based on who are paying more. This will either mean higher transaction cost, or slowly processing of your transaction.
4TH C: CERTAINTY OVER SECURITY AND PRIVACY
As with many areas of tech, legislators have largely failed to keep pace with innovators and due to the lack of regulatory oversight, scams and market manipulation are commonplace.
As a speculative investor in cryptocurrencies, even if you choose to stick to the relatively established coins such as Bitcoin, Litecoin or Ether, there is a chance that the exchange or online wallet may abscond with your coins, be hacked, or be shut down by governments due to shady practices. This is a consequence of the lack of regulation, due also to the decentralised nature of blockchain technology.
Additionally, as blockchain is a distributed ledger, although identities might be anonymous, it is possible to link the user identity and information about the user through the transaction patterns. This presents concerns over privacy.
5TH C: CONSOLIDATION AND INTEGRATION WITH THE LEGACY SYSTEM
Any new technology will be viewed as a double-edged sword if there is already an existing system. As blockchain runs on the latest technology, it is difficult to integrate with older systems. Integration and consolidation of legacy systems and new technology often means additional resources such as funds, expertise and time, needs to be invested. These overheads pose a huge barrier to adoption, especially to SMEs. Digital transformation to implement a blockchain solution as part of an existing complex technology is made more challenging if a substantial investment was already spent on the legacy system.
While there are limitations, blockchain looks like it is here to stay and with it, its potential and uses. We conclude our blockchain series by looking to the future of this technology next. Follow us for more articles.