Blockchain is quickly becoming a technology that will impact virtually every aspect of our business and personal lives. There seems to be a significant blockchain initiative announced virtually every day, whether it’s IBM’s Batavia platform designed to intelligently streamline buying and selling across markets and continents, or the hype mentioned in a recent CNBC.com article titled Blockchain is so hyped right now and many companies will get burned where companies are simply adding the term blockchain to their initiative – whether there is a real blockchain platform or not. No matter the headline, blockchain news is capturing the attention of technology players across multiple industries, including finance.
While the 10-year old Bitcoin has historically been the attention grabber, the practice of developing blockchain technology for real-world business applications, apart from its pure currency/holder-of-value component, is steadily gaining prominence.
Are there shortcomings?
The answer to the question of whether there are real blockchain shortcomings depends, perhaps, on how you view participation and engagement. There are 3 general areas for potential shortcomings.
Permissioned vs Permissionless
Blockchain technology can usually be configured in two different formats; permissionless or permissioned. With a permissionless format, the information is public and anyone can access it. Although public, it becomes extremely reliable and secure because there are extensive opportunities to verify the data. With a permissioned format, the network owner of the platform can provide a security layer, giving access only to those who are authorized. This approach is also known as a hybrid blockchain or a consortium blockchain and although still secure, it is less so because of the fewer instances of verification of the data.
The implementation of distributed ledgers featured in blockchain technology makes for a very secure platform simply because of the nature of decentralization. Even with decentralization, ensuring the platform and the network it runs on is secure is critically important. Through authentication and authorization, participants in digital environments such as blockchain are able to operate in a trust-less environment. In other words, there is no need to verify other participants, as the verification and authentication process has already been done once access is given. If authentication, in some way, becomes compromised, then the network can become compromised. This notion is why keepers of cryptocurrencies are encouraged to guard with their lives the security keys that provide access to their digital assets. Once these become compromised, all digital information associated with those keys can become corrupted and/or lost forever.
Low transaction throughput
A key feature of blockchain is decentralization, but that can also be a challenge as each node within the network should process and update the entire blockchain. Not only can that can be time consuming, there are other requirements around storage and bandwidth – none of which are standard for each node within the network. In short, the larger and more decentralized the network, the longer it takes for each transaction to process. Some permissionless blockchain networks are attempting to address this shortcoming with the adoption of the Lightning Network, a system that allows for faster transactions in a secure and trust-less fashion (or, without the need to verify). An interesting article on the money visualization website Howmuch.net shows the number of transactions per second for networks such as Bitcoin, Ethereum and Ripple as well the number of transactions per second for the Visa network. While Bitcoin and Ethereum’s number of transactions are 7 and 20 transactions per second, respectively, Visa handles 24,000 transactions per second. Although Ripple records 1,500 transactions per second, all cryptocurrencies residing on blockchain networks have a long way to go to match Visa’s speed and volume.
Blockchain is not considered a stepping stone to a more reliable solution for business and other transactions, it is considered the more reliable solution. With that said, it’s not without its shortcomings. But, with advancements such as the Lightning Network and other innovations developers will discover along the way, we are likely only in the beginning stages of this revolution and the shortcomings mentioned above are only temporary.