Five Major Challenges in the Blockchain Industry
Blockchain is frequently hailed as a game-changing technology in healthcare, supply chain, cross-border trade, etc. However, many blockchain evangelists would have you believe that it is not the remedy for all of the world's problems due to its limitations. As a result, many companies are currently focusing on the hurdles and bottlenecks inhibiting the broader adoption of blockchain in various domains, portraying that blockchain technology still has a long way to go.
We've all heard a lot about what blockchain is and how it's affecting market patterns. This article will look at the significant issues that the blockchain sector faces.
1. 'Complexity' hides the benefits of blockchain technology
Although its potentially revolutionary applications are apparent once one understands the principles of encryption and distributed ledger technology that underpin blockchain, it takes time and a lot of reading before the "layman" understands what makes blockchains so valuable for various industries. For example, the conventional middle-man services offered by the financial services industry are being discussed by tech experts. Many people believe that banks provide this service adequately at a low cost to the end customer. On the contrary, according to the Modigliani–Miller theorem, the financial intermediaries do not produce value: households can build portfolios that counteract any position an intermediary takes.
The following evidence supports the theory that financial structures are unreliable. Banks are entrusted with maintaining the value of the nation's currency and safeguarding their funds. Nonetheless, several banks and other financial institutions failed worldwide between 2008 and 2009, requiring governments to bail them out at taxpayers' expense. The failure of banks (as custodians of public monies) demonstrated how vulnerable the modern financial system might be and the necessity to decentralize financial services to improve the consumer experience.
As a result, the first blockchain, Bitcoin, made headlines just after the 2008 financial crisis. The media and public opinion reflected broad unhappiness and growing suspicion of existing financial institutions and products. Thirteen years later and with no apparent danger of quick repeat, is there still an appetite for total ripping down financial services and reconstructing it from scratch? Of course, the past crisis was utterly unforeseeable, and no one knows what is next. Global events may spark the desire for change, but many people may find blockchain challenging to accept owing to its complexity.
2. Limited interoperability
Another significant issue is the lack of compatibility across the numerous blockchain networks. Over 6,500 projects use a range of — primarily independent — blockchain platforms and solutions, each with its own set of protocols, consensus methods, code languages, and privacy protections. For instance, Ethereum supports Solidity, Serpent, and Mutan. In contrast, Corda uses Java and Kotlin. As a result, the blockchain ecosystem is in a "state of disorder" due to the absence of common standards restricting different networks from connecting. Also, essential procedures like security suffer because of the inconsistency among blockchain protocols, making mass adoption nearly tricky. Establishing industry-wide standards for multiple blockchain protocols could make it easier for businesses to collaborate on proofs of concept, validate application development, share blockchain solutions, and connect them with current systems.
Several projects are claiming to enable interoperability between different blockchain networks, such as the BSN, an all-in-one platform for DApp developers that want to install and manage permissioned or permissionless blockchain apps. No matter what frameworks they use, all DApps deployed on the BSN will be able to call each other with a few lines of code via the BSN's interchain communication hub. As a result, it is significantly easier to achieve interoperability among all DApps installed on the BSN in such an environment.
3. Possibility of being slow and cumbersome
Blockchain transactions can take more than the required time to process because of their complexity and distributed, encrypted nature, especially when contrasted to "conventional" payment systems like cash or debit cards. Because Bitcoin transactions might take several hours to complete (average confirmation time= 10 minutes), there are inherent challenges with the idea of using them to pay for a cup of tea or sausage during your lunch break unless the vendor is prepared to take a risk. Doesn't blockchains' "trustless" feature sounds insignificant in this aspect?
The notion, in theory, applies to blockchain networks that are used for purposes other than storing currency, such as logging transactions or interactions in an IoT setting. As the number of computers accessing and writing to the network rises, these chains — which are essentially simply computer files — have the potential to become cumbersome and slow. However, with developments in engineering and processing speeds, the efficiency of blockchain will improve, but for the time being, it remains a big problem, especially in retailment.
4. Absence of good governance and lack of regulatory guidance
There's also a lack of legislative certainty surrounding the underlying blockchain technology, which is a major impediment to widespread use. Regulations have never been able to keep up with technological advancements. One of the drawbacks of the blockchain approach is the reduction of oversight. Many businesses are adopting blockchain technology as a transactional tool. However, there is a lack of regulations in this space at the moment. As a result, there is still no security because no one follows any set guidelines for the blockchain. Smart contracts, for example, are a field that needs regulatory backing. If rules do not cover smart contracts, adoption and investment in the blockchain business would be hampered.
Despite their limitations and inefficiencies, centralized systems help identify and cure crisis-related issues, notably financial services. Unless careful consideration is given to the architecture of decentralized networks, they can be far less resilient to shocks that can directly affect participants. As a result, the blockchain applications are forced to operate within existing regulatory frameworks rather than following the newly developed rules (because there isn't any or there is a lack of clarity!). Therefore, the government and regulatory bodies may need to enact blockchain legislation to overcome these obstacles. However, it is difficult for regulators in all industries to be aware and understand this emerging technology and its implications for firms and consumers in a short period.
5. Environmental cost
Finally, massive energy consumption is another barrier to blockchain adoption. The bulk of blockchains now on the market use a lot of power. Blockchain technology is based on Bitcoin's architecture, which uses Proof of Work (PoW) as a consensus mechanism for transaction validation. Users must solve complicated mathematical riddles to utilize these protocols, and they demand a lot of processing power to validate and execute transactions and secure the network. The act of producing Bitcoin to spend or trade uses roughly 91 terawatt-hours of electricity each year, which is more than Finland's population of 5.5 million people. In March 2021, Elon Musk announced that his firm, Tesla, would no longer accept BTC as payment for its vehicles due to its energy-intensive nature.
Many proponents of blockchain technology are working on more energy-efficient consensus methods to address this problem. Proof-of-stake (PoS) protocols were established, which combine a participant's stake in the network with an approach that assigns the validation duty to a node at random. These technologies considerably cut energy use because participants are not required to solve complicated riddles. For instance, Ethereum is switching from a PoW consensus method to a PoS consensus mechanism, an essential aspect of the community's goal to scale Ethereum via the Eth2 upgrades. Furthermore, permissioned blockchains are ideal for serving enterprise interests from a business standpoint. They allow restricted access, an extra layer of secrecy to protect trade secrets, and are more energy-efficient.
The road ahead
In general, technical breakthroughs require a long time to mature and reach a stable state toward widespread commercialization. Like any other technological innovation, blockchain will experience a modest adoption rate in the following years. Even if there are numerous options, it will take time to overcome all obstacles and utilize all advantages.
Now, the industry is working hard to solve these. Things will undoubtedly become more comfortable and trigger mass adoption if we can improve these and remove the numerous obstacles.