The Challenges of Blockchain

With the array of potential benefits and opportunities put forward in adopting the emerging innovative technology, Blockchain distributed ledgers are an offset with several key challenges. These of which include issues on performance and scalability, privacy and security, and infrastructure-related costs. An overview of some of the challenges/limitations within blockchain would include:

Irreversibility–> Storage Limits–> Risk of cyberattacks–> Adaptability Challenges –> High Operation Costs –> Blockchain Literacy

The 3 main challenges/limitations that this article seeks to cover include: Performance & Scalability Issues, Privacy & Security Issues and Infrastructure Related Costs.

Performance And Scalability

As blockchain are built around the adoption of using cryptocurrencies such as Bitcoin, this has raised concerns from the public community about whether the level of scalability is sufficient in supporting the increases of its operations. As the number of transactions grows, so does the size number of blockchain transactions. With a maximum size limit of ‘1MB’ as of 2017, this has brought forward the issue that transactions are being limited to a ‘through-put [of] 2–4 transaction/sec”. Thus, observing this restriction to the current number of Blockchain wallet users, as of the 1st of September 2018 to be around “28.1 million users” (Blockchain, 2018) — reveals that each user is only given the capability to send around “10 transactions every year”.

This poses a major concern for any adoption in the financial services industry, if the size of current wallet users were to exceed 100 million users. Not all transactions will be accommodated and will not be a sustainable option bounded by the limitation that each user may only send one transaction per year. Thus, this illustrates an overcrowding blockchain problem that transactions on the blockchain will be delayed, in conjunction to increased transaction fees, due to the actuality that the scale of blockchain transactions would never overreach the capacity that of the network’s nodes.

Each block size is capped at 1MB, and the time period of producing new blocks into the network takes around 10 minutes. Therefore, solutions to increase the block size has been put forward, this of which include the use of the “linear” approach through a hardfork and softfork. Hardfork and softfork are both terms that explains the “open-source code modifications” made to the network, where hardfork examines the need to change the Bitcoin protocol “[when the] older version [becomes] invalid”, requiring “every miner, merchant and user to upgrade or be left behind”. Whereas, softfork works the opposite in still being compatible with the older version, requiring only a majority of the consensus to enforce and upgrade to the new rules. Another potential solution proposed to overcome the scalability problem is SegWit, which is a process aimed at increasing the block size limit by removing the signature data from Bitocin transactions, freeing up space/capacity to add more transactions to the chain. However, SegWit could make it very difficult for parties to a transaction or electronic contract to later prove its authenticity, thus still presenting a scalability issue for blockchain technology.

In general, a simple analogy can be given to illustrate the dilemma of requiring blockchain protocols to limit the number of participating odes required to validate each transaction, without losing the network’s level of trust, whilst still ensuring each transaction is valid. For example, a consensus occurs in a linear manner, given 3 nodes, ordered accordingly A, B and C. In order for a consensus algorithm to happen, A would firstly have to do the calculations and verify, in which the similar process is followed through by B, and then C respectively. If a new node in the system called D is created, that would result in the addition of one more node to the entire consensus system, thus increasing the overall time period.

A stark example of limitations due to the scalability of blockchain would be cryptocurrencies, which runs on the blockchain technology. Despite headlines of cryptocurrencies on a daily basis, their lack of ability to compete with companies such as Visa and Paypal is evident in terms of transactions per second. Visa, known as the fastest measured payment network is capable of processing 24000 payments per second while Paypal process an approximate 193 transactions per second. In contrast, Bitcoin can only process a mere 7 transactions per second Ethereum has a slight improvement of 20 transactions per second. As apparent, this issue inhibits the likelihood of either becoming mainstream payment solutions in the future.

Thus, as observed, it is evident how the issue of scalability poses as a major challenge when it comes to implementing blockchain technology in our world today due to its inherent characteristics and the way it is being structured and programmed so. In one way, its nature of being a decentralized network offers critical benefits such as political neutrality and authenticity, but in another, it comes inevitably at the cost of scalability.

Privacy and Security

Driven by the ideology that blockchain is a database of information, similar to the cloud technology, where information stored is no longer in a single location, when compared to using a third-party financial intermediary, but across an array of data servers and Internet of Things (IoT). This has sparked particular interest and concern from organisations and individuals about the loss of control of their data they have provided, which are stored on, and accessible on the public ledger.

Due to the way in which blockchain is structured and programmed, it is immutable, decentralized, public and distributed. A transaction once recorded, remains there forever, and this is where the problem lies. Many potential applicants of the blockchain require smart transactions and contracts to be linked indisputably to known identities and thus raising the issue of privacy and unauthorized accessibility .

For example, recent studies conducted has shown that a user’s Bitcoin transactions can be linked to reveal the user’s information. This is due to the fact that blockchain at this stage, cannot guarantee the transactional privacy, as the values of all transactions and balances for each public key are publicly visible. Moreover, researchers have experimented and discovered that there are methods that link user pseudonyms to IP addresses even if they are behind network address translation (NAT) or firewalls. Each client can then be uniquely identified by a set of nodes it connects to which can be learned and used to find the origin of the transaction.

Despite privacy preserving protocols options made available to mitigate these issues, the process of implementation would leave behind some amount of metadata that is not subject to privacy. Statistical analysis can figure out something by fishing for patterns of when transactions take place and, in many cases, able to narrow down identities and figure out who interacts with whom (Vitalik Buterin, Co-Founder of Ethereum, 2016).

Any data, transactions or payments a user makes is recorded on the blockchain and can undoubtedly be information that could be potentially be used to trace the identity of the user and ‘exposing’ his/her financial life. Therefore, it is apparent, how blockchain currently faces the issue of privacy, which truly acts a hindrance for future implementation of it to potential problems.

Infrastructure Related Costs

Despite adopting blockchain technology which brings about long-term benefits with regard to productivity, efficiency, timeliness and reduced costs, it involves high initial costs while putting it in place. This is due to the fact that the software required to run the blockchain technology in organisations must typically be developed for the specific firm. This software happens to be expensive to purchase, acquire or to develop in-house, resulting in increased costs.

In addition to that, organizations may have to obtain specialized hardware to be used in conjunction with the software. Apart from all the software and hardware costs associated with the establishment of blockchain, organizations must also find qualified personnel to work in tandem with the technology. This poses a challenge as the blockchain technology space is new and growing at a rapid rate that professionals proficient in this field are few and far between. Given large demand with limited supply, organizations must be willing to offer large salaries to individuals qualified for these positions. This is demonstrated through how blockchain expertise captured the №1 position on the latest skills index by Upwork for being the hottest in the US Job Market. This would potentially pose as a barrier for most small-and medium-sized business whom wish to implement blockchain-based systems for their business due to the high setup costs involved.

And There you have it, some of the current challenges associated with blockchain. Hopefully in the coming years, we are able to overcome them to progress on enhancing the adaptability of blockchain technology in all aspects of its feasibility.