Challenges of the Blockchain Technology
The blockchain technology may have numerous benefits, but it also has its own share of challenges. The path to blockchain isn’t as smooth as expected. There are barriers that industries have to break to implement the blockchain technology.
Large Consumption of Energy
The bitcoin miners aim to perform roughly 450 thousand trillion solutions for every second just to validate transactions, and so this illustrates substantial amounts of power consumed by the computers.
Studies show that the energy consumed by blockchains are quite capable of supplying power to around 135,000 households in the United States.
The blockchain technology also faces various integration concerns. For example, financial institutions require multiple blockchains to serve different purposes. And so, these institutions will have to create an access layer to make it work not only with the blockchain but also with the existing applications.
To address this concern, software developers are creating an access layer that makes the blockchain work with current enterprises. Applications will then function seamlessly either on its own or with other applications.
One of the main challenges blockchains face is data storage. In a typical public blockchain, a block requires a huge amount of data, and each block can be quite costly to store.
A workaround being considered for this challenge is data compression. Doing so will reduce data storage costs, and will give better chances of implementing the blockchain technology.
Lack of Applications
The usefulness of bitcoins and the blockchain technology is still unknown to most. There are those who have utilized the technology for illegal transactions, but what’s more important is to find uses for it that will benefit the common good.
Applications must be developed that will reveal how beneficial it is; applications for international money transfers, micropayment transfers, fundraising campaigns, electronic contracts and other related tasks must be discovered. This is for the majority to realize how good this technology is.
Blockchains are believed to hasten financial transactions, but faster transactions don’t always mean more profit is to follow. Building blockchain systems come with high costs, so it’s expected to bring in more capital to at least break even.
Perhaps it could lead to various benefits, but it’s also important to produce profits, especially that it’s all about the financial industry.
Blockchains need a governing body to control and to maneuver the system. This is to ensure smoothness in its processes as well as understand who gets to manage its maintenance.
With governance comes simplicity; a group that will monitor the blockchain should be established to ensure everyone’s security. More stringent regulations should be released to ensure it wouldn’t be used in crimes or money laundering schemes, otherwise, it’ll affect the cryptocurrency and diminish its value.
As it’s still in the early stages of development, there are potential limitations to the blockchain. The limitations come in different kinds and cover different issues.
Developers have different plans on how they’re going to develop this technology. Some choose to create new and separate ones, while some use the bitcoin as a model.
If the bitcoin is to be adopted completely, then they’d have to address the transaction speed and limit. The bitcoin handles around 7 transactions/second, whereas Visa handles around 2000 transactions/second.
Every bitcoin transaction requires 10 minutes processing time; you’d have to wait this long for your transaction to be confirmed. You’d have to wait longer if you wanted to be more assured, and even longer for amounts with bigger amounts.
Mining uses a lot of energy, and all of it is considered wasted. However, this “wasting” of energy is believed as what makes the technology trustworthy, even if there are no other uses for this energy.
The API used to work with bitcoins is not as user-friendly compared to other modern APIs. It could require a lot of effort to work with these APIs – it can be done, but it’ll take time.
Of course, there are solutions being planned to address these barriers, especially that industries are planning to use the blockchain technology without any issues or hindrances. Alternatives are being worked on to determine solutions regarding these issues and concerns.
Where is Blockchain Not Needed?
Yes, there are a lot of potential uses for blockchain, but there are areas wherein it’s not as in demand or even appropriate. Not all processes require a peer-to-peer exchange, decentralization or a payments system. Not every microtransaction has to be recorded in public blockchains.
It may not be applicable now, but in the future, different blockchain classes for various applications can be optimized – there could be blockchain uses for coffee shop purchases or for the grocery stores, or even for automobiles and for real estate.
Different functions are required for notary services, record keeping, science activities or for intellectual property registration. Blockchain can still be used for these – it’s just that you have to identify the areas on where blockchain could be useful for them.
Not all functions require blockchain as its basic framework – some of them are good with cloud storage or other computing models – but will still benefit from blockchain through providing different functionalities.
Dealing with the Issues
One great challenge the blockchain has to face is the scandals related to it. You might have heard of the issues it has faced – being involved in the illicit activity such as drugs and money laundering – giving it a negative name especially in the financial industry.
The Bitcoin – and the blockchain – can be used with good intentions and are by nature neutral. Too bad it’s been in a negative light because of these scandals, however, upon further investigation, you’ll see how its benefits can outshine the downsides and negative issues of the blockchain.
Making the Most of Blockchain
Thinking of revamping the current financial system is a noble idea, but let’s be realistic, the financial industry is a world that’s difficult to change. It’s not impossible, but the path to blockchain will be a long and dark road to take.
How will industries make the most of this technology?
Right now, companies are already working on ways where they can use blockchains. A lot of ways have come up, and virtually all industries can find ways on how they can use it. A single company can arrive at numerous ways on how they can use blockchains.
To maximize the blockchain technology, a lot of studies have to be made. Financial institutions are doing their own share of research and development regarding the blockchain technology.
It’s not yet implemented and a lot of improvements can still be done, but one thing’s for sure: it’s an innovative technology that everyone must take advantage of.
Blockchain and Financing
Utilizing the Technology
It has already been mentioned that the finance departments are the pioneer in discovering the blockchain technology, as well as finding out what it’s capable of. On that note, financial institutions have already expressed intent on this promising technology and have taken steps about it.
Here are some of those financial institutions:
- NASDAQ – In May 2015, NASDAQ has expressed their intent to utilize the blockchain technology for the improvement of their ‘Private Market Platform’, i.e. an initiative launched by NASDAQ to allow pre-IPO trading within private companies.
- Deutsche Bank – According to Deutsche Bank, it has considered the possibility of the blockchain in different areas such as asset registries, regulatory reporting, payments, KYC processes, clearing derivative contracts, settlement of fiat currencies, post-trade processing services, and AML registries.
- Standard Chartered Bank – Anju Patwardhan, SCB’s Chief Innovation Officer, has mentioned in a LinkedIn post that the blockchain technology can be used to make financial transactions more transparent and less costly.
- Euro Banking Association – The EBA has once discussed how crypto technologies e.g. the bitcoin can affect transaction banking in the years to come. It believes that technologies like such can be used by banks to lessen audit and governance costs, which soon will lead to faster product marketing and production.
- Citibank – Three separate systems have been established within Citi that utilize technologies based on the blockchain system. More so, an equivalent to the bitcoin has been made – the ‘Citicoin’ – and is being used to further study and understand the digital currency trading system.
- US Federal Reserve – There have been reports in March 2015 about the Federal Reserve collaborating with IBM to develop a digital payment system that’s tied to the blockchain.
How Blockchain Affects Banking
So how exactly does the blockchain technology affect the banking industry?
According to recent studies, this technology is starting to penetrate the banking industry but the actual effects could only be felt in the next few years, most likely 2020 onwards.
Here’s a short timeline of blockchain’s development:
For the past few years, it’s all about assessing blockchain’s value if used with financial assets. Banks and other financial institutions create groups and discuss other opportunities that blockchain can present.
Afterward, the goal is going to focus on blockchain’s capability to scale and lessen costs. Financial institutions could have used certain assets to see how blockchain actually works and try to validate transactions with as less human intervention as possible.
Blockchain trials and startups have been created to further strengthen the grasp of the technology in finance. Other industries such as healthcare have joined in too, and have found ways to utilize the blockchain technology as well.
The timeline just keeps on growing as the research about blockchain is still ongoing. This is definitely just the beginning of a much promising venture.
Banks vs Blockchains
Banks comprise a huge chunk of the financing world. There are a lot of talks discussing why blockchain will be good for them. There are doubts, however; there are talks about banks not implementing this technology – well, not now, at least.
What’s stopping them from having their own blockchain-run transactions?
There are banks that still have huge infrastructure debts related to their current financial processing systems. To add, these systems have been with these banks for perhaps a decade or two; disrupting them even just for a while will have tremendous effects, especially that these banks have transactions with governments and businesses.
Trying to overhaul or create major improvements will also be challenging and risky. Not a lot of financial institutions will be willing to take the leap, especially that it’s quite different from what they’ve gotten used to.
The banks’ main priority is to stay updated with the financial world’s rules and regulations. This is already a field that requires a lot of attention, energy, and budget; neglecting even just a simple rule will be a costly mistake.
Should they choose to implement the blockchain technology through a startup, they’d still have to deal with integrating it with the existing systems… and dealing with the investors at the same time.
Banks’ profits come from their financial transactions. If transfers and other related financial transactions become instant and worry-free, then who else would require the services of a bank? Antagonistic as it may seem, the banks would wish to exert and to maintain their control.
As you can see, there are clear challenges that banks face that’s why implementing the blockchain technology is somewhat an unsure step for them. These days they have to prepare even when taking calculated risks. Once all issues have been addressed, that’s the only time when they’ll be willing to go for the blockchain technology.