Largest Challenges Encountered in Blockchain Implementation
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Blockchain technology was invented as a tool to resolve issues related to virtual currencies. A blockchain is a permanent ledger of transactions connected through digital encryption and typically shared publicly on numerous computers worldwide.
Blockchain technology has significant potential for enhancing security and accessibility for numerous products and services across multiple industries. Nevertheless, despite its numerous benefits, blockchain still faces several issues that developers are attempting to address.
Five challenges with blockchain technology
Scalability
Scalability
A lengthy blockchain can cause difficulties for an organization due to scalability concerns. Several factors contribute to this issue.
First, every computer on the network responsible for verifying transactions and updating the blockchain records must store data from the initial block to the most recent block. These computers, known as nodes, must possess sufficient storage capacity for this data. The redundancy increases the system's security but becomes less efficient as the network and blockchain grow.
Next, when creating a new block on the blockchain, the node responsible for confirming transactions must broadcast the new block to every node on the network. They can then verify the transactions and add the block to the blockchain. This process uses substantial network resources as the network expands in size.
In large public blockchains like Bitcoin and Ethereum, the scalability issue can result in nodes suggesting higher transaction fees to process transactions on the blockchain. They need to recover their investment in computing resources.
Energy consumption
Energy consumption
Blockchains that rely on a proof-of-work system to determine which node can confirm the next block in the chain can become highly energy-intensive. Nodes contend to solve a complex equation first. As the network grows, the number of competitors increases, and there's a struggle for more computer power, which consumes energy. The energy consumption is highly inefficient as only one node eventually wins the right to confirm the next block.
The proof-of-stake model is presented as a solution to the energy consumption issue faced by blockchains. However, this method also presents challenges. For instance, creating a robust proof-of-stake system requires intricate coding, which can lead to more bugs and vulnerabilities.
Second, it may be easier for a single party to control a majority of the staked cryptocurrency, allowing it to exercise excessive control over the blockchain. This vulnerability is less likely in a proof-of-work model since a single party would need to amass a majority of computer power on the network. Other parties could acquire additional computer power to wrest away control and maintain the blockchain's decentralization.
Despite the drawbacks, Ethereum migrated from a proof-of-work model to a proof-of-stake model in 2022.
Speed
Speed
Blockchain transactions are relatively fast for peer-to-peer transfers but can be an inadequate tool for everyday transactions due to the decentralized nature of blockchain.
When you use a debit or credit card at a store, the transaction takes several seconds to process behind the scenes, but the funds may not be fully transferred for a day or two. In the interim, merchants trust that the issuing bank will honor the payment. This trust enables payment card networks to handle thousands of transactions per second.
Since a blockchain like Bitcoin's is fully decentralized, there are no guarantees on a transaction until it's confirmed on the blockchain. This can take a long time since the Bitcoin blockchain can only process a few transactions per second. Merchants may not know whether a transaction was completed for an hour, making it impractical for most retail transactions despite the various useful blockchain applications in the financial sector.
No universal standards
No universal standards
Almost every type of blockchain technology implementation is unique. This presents a few challenges for businesses and developers operating within various applications.
First, it complicates interoperability between blockchains. If one company wishes to share data with another company's blockchain, it may need to create additional tools to facilitate data transfer between the two blockchains. While several blockchain interoperability solutions are already in use, the fact that no single solution fits all highlights the disjointed standards of blockchain implementations.
The second challenge arises when developers create something on a blockchain (such as a smart contract or decentralized finance app). Since there are no universal standards, a developer must adapt their creation to offer the same product on another blockchain. The lack of standards may also introduce vulnerabilities in coding as developers work with less familiar platforms.
Privacy
Privacy
Blockchain was designed to be a publicly distributed ledger, meaning anyone can see the data added to the blockchain. Although the information is anonymized using blockchain wallet addresses as identifiers, other transaction details are visible. While trivial transactions, like sending $20 worth of Bitcoin to a friend, may not attract attention, some data and transactions require more privacy.
Private blockchains, which restrict participation as a node and transaction viewing, are one way for businesses to implement blockchain technology without fear of exposing sensitive information. However, this approach results in a loss of public trust in the blockchain-based product.
The privacy issue highlights some of the trade-offs associated with blockchain technology.
Investing in the digital currency sphere can offer significant profits for some, but it's also laced with potential risks.##### Is Cryptocurrency a Wise Investment?
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The Advancements of Blockchain Technology
While blockchain technology does face some challenges, countless individuals are working tirelessly to overcome these obstacles. The solutions currently in use tend to make subtle compromises on the original concept of blockchain, as outlined in the Bitcoin whitepaper published over ten years ago. As the industry and technology progress, developers are likely to discover countless applications for blockchain technology.
In essence, blockchain technology is poised to speed up and secure numerous processes involving data transfer and storage. Given our lives are becoming increasingly digital, it's logical to anticipate even more incentives to utilize blockchain as a solution, despite its current drawbacks.
Adam Levy holds positions in Bitcoin and Ethereum. Our Site advocates for Bitcoin and Ethereum investments. Our Site has a disclosure policy.
Investing in the digital currency sphere can be lucrative, but it also carries potential risks. For instance, the energy consumption of some blockchain technologies, such as those relying on proof-of-work, can be quite high.
Given the numerous benefits of blockchain technology, such as enhanced security and accessibility, finance professionals might consider investing in companies that are working on solving its challenges, including scalability, energy consumption, speed, lack of universal standards, and privacy issues.
