The Pitfalls and Limitations of Blockchain
The idea of a blockchain, or distributed database as it is technically known, has only come about in recent years. While originally developed to facilitate the bitcoin cryptocurrency, the technology is now seeing interest from organizations in traditional lines of business.
Blockchains can provide a number of advantages, including being secure by design and highly resistant to the modification of the data that they contain. Records, or blocks, can be identified and verified with a high level of integrity, and this is one of the biggest reasons why this approach to recording information is garnering interest from financial institutions, organizations that handle large transaction records, and even the medical industry where accurate and verifiable records are critical.
With so many advantages to using blockchain, it’s surprising that only a handful of high profile companies have moved towards this type of database… or is it?
When you take a look at some of the downsides of the technology, it becomes easier to understand why some of the largest accounting and financial firms are still in the early stages of their feasibility studies. Let’s take a look at what these pitfalls are, and how much impact they could have on the future growth of blockchain utilization.
Blockchain is Environmentally Flawed
The biggest ‘sell’ for blockchain is that when implemented correctly, it can potentially eliminate the possibility of any type of fraud within a closed database. However, to achieve such integrity, blockchain (by design) uses an almost unfathomable amount of computing resources and energy.
On extremely large cryptocurrency blockchains, a single transaction uses the equivalent energy that 1.5 average households do in a single day. If blockchains were the defacto form of database for the majority of businesses, you could safely assume that the world’s available energy and computing resources wouldn’t be able to keep up. Of course, blockchains aren’t supposed to take over every kind of conceivable database, but it’s still interesting to note that superior fraud protection comes with the caveat of huge energy demands.
Larger Blockchains Mean Longer Verification Times
In 2016, it took an average of 43 minutes to verify a single bitcoin transaction record. By comparison, standard ATM transactions are processed almost instantaneously on archaic network connections, and will reflect immediately on a financial ledger. Even interbank money transfers can be completed in seconds.
As a blockchain grows, verification times become longer, and as mentioned, that means that more computing resources are required to process even the smallest transaction. Younger networks or inherently small blockchains wouldn’t suffer the same problems, but there’s no denying that this is a significant limitation of the technology.
With these two points, it becomes evident what the pitfall of blockchain is.
By design, the technology is made to deter fraud by making it economically and sometimes practically unviable. There’s no denying that as a chain grows, fraud becomes virtually impossible. Unfortunately, this also means that the entire chain becomes computationally intensive and inherently slow to verify records; which is one of the biggest limitations preventing blockchain from being widely implemented today. Banks and other large institutions would also need to develop their own implementation of the technology to suit their needs, and as yet, no major player has made a significant investment.
Blockchain may well play a significant role in the future of banking, finance, and other forms of critical record keeping, however, the risk and pitfalls appear too great for the technology to impact the mainstream at this time.
About Bill McCabe/ Internet of Things Recruiting — Executive Search/ Retained Search for the Internet of Things/ Machine 2 Machine/ Big Data Markets
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