Disadvantages of Blockchain

The roadblocks to the application of blockchain technology today are not just technical. The real challenges are political and regulatory, for the most part, to say nothing of the thousands of hours of custom software design and back-end programming required to integrate blockchain to current business networks.

Here are some of the challenges standing in the way of widespread blockchain adoption.

Cost of Technology

Although blockchain can save users money on transaction fees, the technology is far from free. The “proof of work” system that bitcoin uses to validate transactions, for example, consumes vast amounts of computational power. In the real world, the power from the millions of computers on the bitcoin network is close to what Denmark consumes annually. All of that energy costs money and according to a recent study from research company Elite Fixtures, the cost of mining a single bitcoin varies drastically by location.

Despite the costs of mining bitcoin, users continue to drive up their electricity bills in order to validate transactions on the blockchain. That’s because when miners add a block to the bitcoin blockchain, they are rewarded with enough bitcoin to make their time and energy worthwhile. When it comes to blockchains that do not use cryptocurrency, however, miners will need to be paid or otherwise incentivised to validate transactions.

Speed Inefficiency

Bitcoin is a perfect case study for the possible inefficiencies of blockchain. Bitcoin’s “proof of work” system takes about ten minutes to add a new block to the blockchain. At that rate, it’s estimated that the blockchain network can only manage seven transactions per second (TPS). Although other cryptocurrencies like Ethereum (20 TPS) and Bitcoin Cash (60 TPS) perform better than bitcoin, they are still limited by blockchain. In comparrison to an established financial brand Visa, can process 24,000 TPS.

Illegal Activity

While confidentiality on the blockchain network protects users from hacks and preserves privacy, it also allows for illegal trading and activity on the blockchain network. The most cited example of blockchain being used for illicit transactions is probably Silk Road, an online “dark web” marketplace operating from Feb. 2011 until Oct. 2013 when it was shut down by the FBI.

The website allowed users to browse the website without being tracked and make illegal purchases in bitcoins. Current U.S. regulation prevents users of online exchanges, like those built on blockchain, from full anonymity. In the United States, online exchanges must obtain information about their customers when they open an account, verify the identity of each customer, and confirm that customers do not appear on any list of known or suspected terrorist organisations.

Banking Concerns

Several central banks, including the Federal Reserve, the Bank of Canada and the Bank of England, have launched investigations into digital currencies. According to a Feb. 2015 Bank of England research report, “Further research would also be required to devise a system which could utilise distributed ledger technology without compromising a central bank’s ability to control its currency and secure the system against systemic attack.”

Banking Concerns

Several central banks, including the Federal Reserve, the Bank of Canada and the Bank of England, have launched investigations into digital currencies. According to a Feb. 2015 Bank of England research report, “Further research would also be required to devise a system which could utilise distributed ledger technology without compromising a central bank’s ability to control its currency and secure the system against systemic attack.”

Susceptibility to Hacking

Newer cryptocurrencies and blockchain networks are susceptible to 51% attacks. These attacks are extremely difficult to execute due to the computational power required to gain majority control of a blockchain network, but NYU computer science researcher Joseph Bonneau said that might change. Bonneau released a report last year estimating that 51% attacks were likely to increase, as hackers can now simply rent computational power, rather than buying all of the equipment.

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