Problems That Exist In Blockchain And How They Are Being Solved
Given that the internet is a mecca of information and file sharing, a question arises- can we trust what happens behind the scenes?
As it stands today, the use cases of blockchain technology are relatively limited. Think back to the internet in the early 90’s — as promising as the internet was at the time, it was a very impractical concept to grasp for most.
In order for blockchain to be accepted on a wide scale level, it needs to be relatable. For example, data storage on the internet is centralized. Centralized data storage means that if servers fail or are breached by malicious actors, privacy and sensitive information can be compromised. This is where the functionality of decentralization comes to play. Thanks to blockchain technology, a complete peer-to-peer network (otherwise known as Web 3.0) distributes data among mutually agreeing parties. Although, blockchain carries with it problems, solutions are being found.
Illiquidity — One of the more popular issues that blockchain faces is illiquidity. In 2017 we saw a volume influx of user-generated tokens being built on the blockchain, specifically the Ethereum network. According to Coinschedule.com, there were 371 ICOs in 2017 alone. This number continues to rise exponentially for 2018. The problem of illiquidity came about when the abundance of tokens being offered overwhelmed the demand for them. The order book method proved to be insufficient for these lesser-known tokens because the demand for them wasn’t present. Liquidity can be looked at as the ability to convert an asset into fiat at any time, so if buyers and sellers of an asset aren’t present, we face the problem of illiquidity.
There are many solutions being worked on but Bancor Network seems to stand out. The Bancor Protocol allows any token to convert to any other token on its’ liquidity network. Anyone can use Bancor because it’s an open source protocol. Instead of the classic buy/sell order book, Bancor relies on automated smart contracts to accurately price and convert tokens. Using automated market makers allows liquidity for any token on the liquidity network. The market price is determined through their own algorithm aptly named- Bancor protocol. In short, the amount of tokens staked into the liquidity network determines the exchange rate of a token. Every time a token is purchased, the price increases because the available reserve tokens on the network are lessened. Learn more here.
Scalability — Scalability can be defined as the ability to handle a large number of transactions per second. In 2017 we saw the Ethereum network emerge in popularity. With Ethereum, users are able to implement smart contracts that allow the performance of credible transactions without third parties. In Proof of Work (PoW), a single node has access to a full client ledger that is constantly updating and expanding — the bigger the ledger the longer the verification. Ethereum runs roughly 7 transactions per second per node. Let’s think of a blockchain as a public data structure, any changes made to the data will be stored on the public ledger. For instance, if Youtube ran on the Ethereum network, the ledger would have to account for all the millions of likes, comments, views, up-votes, etc.., and with less than 14,000 active nodes to verify the validity of each ‘transaction’ on the network, Youtube would undoubtedly fail (and that’s just only one application). With over 1,500 DApps built on the Ethereum network the PoW system that both Bitcoin and Ethereum rely on, will ultimately clog and render itself useless.
EOS — or otherwise known as, Delegated Proof of Stake (DPos) builds on the original Proof of Stake consensus mechanism and drastically increases speed and scalability. Transactions are processed by block producers (instead of nodes) which proves to be a more efficient consensus model.
Volatility — One of the biggest of barriers to main adoption is volatility. With high daily price fluctuations using Bitcoin or Ethereum as a medium of exchange is considered risky. But why is the market so volatile? Price Manipulation. Manipulation is mostly executed on exchanges using “pump-and-dumps” and “sell walls” which drastically change the market price of a coin or token in a small period of time.
Stablecoins — The solution to volatility lies within stable coins. A stable coin is a cryptocurrency that is pegged to a less volatile or ‘stable’ asset. Cryptocurrencies have not yet been adopted as reliable medium of exchange because merchants aren’t willing to take on the risk of its’ inherent volatility. By pegging a cryptocurrency to an asset like gold or the US Dollar, it allows for more practical day to day transactions.
Some examples of stable coins include Tether, Dai, and PEGUSD. Each stablecoin is holds a 1:1 ratio to US dollar using different mechanisms.
Tether which is backed by the US dollar and is said to hold a 1:1 ratio due its’ US dollar reserves, which are held in a privately owned bank account. MakerDAO is a decentralized autonomous organization within the Ethereum blockchain that works to minimize the volatility of DAI (its stable token). An emerging project, PEG Network allows for tokenization; or the ability to peg a cryptocurrency to any currency, commodity, or asset using over collateralized vaults as a stability mechanism.
Blockchain may be facing some preliminary challenges, but similar to the early days of the internet, innovative teams and projects are working to resolve each issue.