Blockchain - Main challenges

Blockchain Startups Technology

Posted by Enrico on Mar 01, 2017 2110

Although Blockchain has the potential to completely revolutionize our societies, it also comes with some major challenges to be solved. Here below, I list what I think are the main challenges of the Blockchain technology.

Scalability issues

Anyone willing to start validating Blockchain transactions (called mining) would need to download the entire ledger. Unfortunately, the “Bitcoin” Blockchain is around 103GB in size (Feb-2017) and is growing at a speed of more than 100MB per day. The manipulation of such a large amount of data is certainly not practical.

Some alternative solutions are being investigated. The large size of the Bitcoin Blockchain is due to the fact that it contains all the transactions since its genesis. An alternative implementation could be requiring the nodes to use the last “x” hundred blocks, instead of the whole ledger. This would make the manipulation of the Blockchain much easier, but would somewhat reduce the security of the technology.

Transaction speed

Let's take the Bitcoin Blockchain as an example. The average number of transactions that it is able to validate is around seven per second.  This is low compared to services such as VISA, which handles peaks of 3M transactions per second. Developers need to increase the Blockchain validation speed (while keeping the same level of security) for this technology to become truly mainstreamed.

In fact, the blockchain is very slow. Experts say that you people executing transactions on the blockchain should wait 6 blocks to make sure that their transaction is legit. This means more than 1 minute in Ethereum and more than 1 hour in Bitcoin compared to 100ms for a traditional transactional server.

Trust at scale

Although the Blockchain core technology itself hasn’t yet been hacked since it was born in 2009, many of the services surrounding it have.

Here below, I list the most mediatized hacks: 

  • The DAO was hacked (due to a bug in a smart contract) and almost lost $50M. The loss was eventually prevented by a hard fork.
  • The world’s largest Bitcoin exchange (MtCox) was hacked and, as a result, $460M disappeared.
  • A Hong Kong-based Bitcoin exchange platform (Bitfinex) also lost $70M.

Although these hacks didn’t actually concern the robust Blockchain cryptography, people have a growing mistrust of the larger Blockchain ecosystem and its services, mainly due to the negative image brought to the public by the above-mentioned hacks.

Furthermore, some of the Blockchain features can be used to power illicit operations. For example, the anonymity brought by the Bitcoin Blockchain cryptocurrency is a powerful tool for financing crime. Shady transactions can be kept secret. The paradox of Blockchain cryptocurrencies is that the associated data create a forensic trail that can suddenly make your entire financial history public information.

Energy consumption and costs

Computers solving complicated cryptographic algorithms perform the validation of transactions (mining). This requires a large amount of computing power, which in turn requires a large amount of electricity. It is estimated that electricity constitutes approximately 90% of the mining cost. By 2020, Bitcoin alone will require the same amount of energy as Denmark.

Energy means money. An average Bitcoin transaction costs a fee of approximately $0.11 and this price is rising. This cost is comparable to a intra-country bank transaction fee. It is clear that new mining techniques will be required to make this technology mainstream.

Governance and accountability

The Blockchain is a fantastic tool whereby the distributed network ensures the enforcement of the rules. The problem is "who makes those rules?" Who makes the rules matters at least as much as how they are enforced. What happens if they need to be changed? This type of rule-making is what is typically referred to as governance. As an example, at this moment, we are experiencing a big disagreement between factions of the Bitcoin community over the future direction of the Bitcoin rules. This is due to different interests. The point is that the Blockchain requires humans to set the rules that the network will subsequently enforce. Without clear governance, the fact that humans compete for their own interests raises the issue of who will be accountable if something goes wrong?

Now, if we establish that Blockchain will still need some kind of governance, you are implicitly saying that you need a trusted central party to enforce the rules, which is contrary to the Blockchain philosophy itself. Here comes the paradox: if you need a centralized trusted body, why would you need the decentralized Blockchain?


Lack of talent

The development of new technologies requires a pool of talented engineers ready to work on challenging issues. Universities are updating their courses to adapt to the new demand but, as was seen in the past with emerging technologies, this takes time and slows down the development of new Blockchain applications.

The issue is that current blockchain framworks are very complicated. Developing blockchain apps requires the understanding of many complicated concepts for an average developer to grasp. My opinion is that the current blockchain playground is not mature enough for this technology to bring the revolution it promised.

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    Enrico Tam

    MBA, PhD, tech entrepreneur, maker

    Hi, I’m Enrico and I started hacking at 9 years old back when it was Visual Basic. After trying to become a professional tennis player I somehow got entangled in a PhD in engineering, an MBA programme and a big consulting fir... (continued)

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