Blockchain is Not a Panacea—Limitations of Blockchain Technology

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“Some people in the blockchain industry have pointed out that blockchain has become overhyped, when, in reality, the technology has limitations and is inappropriate for many digital interactions.”—Nolan Bauerle

The successes of Bitcoin has created significant amount of technical and innovative excitement since 2009. Some have described the technology as disruptive, a game change, or revolutionary. Indeed, with the introduction of cryptocurrency it clearly has a positive affect for many on the world scene, and not just for investors. Unbanked people can now have access to services otherwise reserved for those with complete bank access, and for Venezuelans, faced with hyperinflation and corruption—cryptocurrency is seen as a substitute for government controlled money.

It is not surprising that industry began to look at blockchain—the underlying technology of Bitcoin—as having application beyond a substitute currency. Vinay Gupta, writing for Harvard Business, characterized the state of the blockchain industry as being revolutionary. A significant innovation for blockchain—was Bitcoin. Currently used by millions of people around the globe for payments with many institutions and retail establishment now looking at ways to accept Bitcoin.

Next Innovation—Blockchain

The next innovation of blockchain—simply, referred to as blockchain.  According to Gupta, this phase of blockchain innovation is “essentially the realization that the underlying technology that operated bitcoin could be separated from the currency and used for all kinds of other interorganizational cooperation.” Indeed, major financial institutions throughout the globe are researching or are at some phase of blockchain proof of concept and use case implementation.

Moreover—with the development of smart contracts, the application of Internet of Things, and supply chain applications—blockchain use cases have gone well beyond the domain of fintech. As one looks at articles and papers, it would seem that blockchain is the panacea for all that ails industry and commerce.

However, while blockchain clearly has tremendous applications, it is not without limitations.

The Sky is Not the Limit

There are a number of limitations—that for those considering using blockchain should consider and weigh as a part of their analysis. Nolan Bauerle (Coindesk) cautions that blockchain as a technology is limited and is “inappropriate for many digital interactions.”   The following are examples of a few of the limitations.

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Network size: Blockchain is a system with a distributed ledger. As “blocks” of data are added, it continues to grow and get stronger. The outcome is the continued need for more processing power. Blockchain requires a large network of users. To get the full benefit of blockchain, a robust network “with a widely distributed grid of nodes” is required. More easily achieved for public networks, this may be a “fatal flaw for some permissioned blockchain projects,” says Bauerle.

Transaction costs, network speed: There is a cost associated with processing data. As more and more demand on processing data increases, there are correlated costs with scaling and the use of electricity. Moreover, there is always a cost concerns for data storage.

Human Error: This limitation isn’t unique to blockchain, and nor does blockchain remove the reality of human error. In my early days of learning computer code, an axiom that is still just as relevant: GIGO! Garbage in, garbage out. Regardless of how robust to error a system is, there is always the risk of human error. “If a blockchain is used as a database, the information going into the database needs to be of high quality.” (Bauerle)

Data stored on a blockchain is only as good as those who enter it. It isn’t inherently trustworthy. That places a burden on the point of entry to be developed in a way to ensure accurate data entry in the first place.

Lack of Regulation:  Bernard Marr, provided some insight on blockchain limitations. (Forbes)  There is a lack of appropriate regulation that creates a risky environment. This limitation is mostly an issue with Bitcoin and cryptocurrency, or other blockchain token and value-based blockchain networks.

However, governments are addressing these concerns in their respective legislative bodies. Some blockchain projects may involve the use of cryptocurrency, or they may involve development of value-based tokens. Blockchain development teams will need to aware of scams and market manipulation.  According to Marr, one high profile case involved Oncecoin which was “recently revealed as a Ponzi scheme which is believed to have robbed millions from investors.”

Blockchain Complexity: Blockchain’s potential for “revolutionary applications” become apparent, but not until one has taken the effort to fully understand the basis of the encryption and distributed ledger technology behind blockchain.  It will take some time and diving into the technical books, in order for the average person to see “what makes blockchains potentially so useful.”

Thus the end user will find it hard to appreciate the benefits, and may be resistant to adopting the new technology.

Conclusion

While the opportunities for blockchain to solve industry issues, or improve industry efficiencies are real, having an appreciation for its limitations is critical. A sober view of blockchain will certainly help IT managers and executives more realistically position blockchain within their organizations.

 

Samuel H. is an author, writer and speaker with over twenty years in the educational technology sector.

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