If you listen to most technology experts, blockchain is an all-powerful, paradigm-shifting technology that will change the world as we know it. Very few talk, however, about blockchain disadvantages. Without honestly and thoroughly considering the potential issues with blockchain, you cannot create successful solutions.
An often overlooked or under-developed part of a blockchain startup’s business plan or white paper is the challenges section. Usually, it focuses on customer acquisition, marketing or development resources — but ignores some of the problems with blockchain that are inherent to the system design.
Let’s take a deeper look at some blockchain issues that businesses are facing yet may not be considering.
Blockchain Security Issues
One of the main features that is touted when it comes to blockchain-based systems is security, due to the hashing algorithms and advanced encryption behind the system architecture. But at the same time, it’s a major blockchain vulnerability, especially given the open-source nature of many development platforms.
Two high-profile examples of security breaches are the Parity Multisig Hack in November 2017, in which one user froze the assets (519k ETH tokens) of 587 users by simply taking ownership of the wallet’s smart contract and executing the command ‘kill.’
Back in 2016, after a successful ICO, a company dubbed ‘The DAO’ was hacked, and over 3.6 million ETH were transferred into a ‘child DAO’ that acted just like the main one. DAO stands for ‘distributed automated organization,’ and by cloning the original, the hackers were able to simply steal tokens by transferring them into the cloned DAO. These kinds of stories highlight potential blockchain technology security issues stemming from the systems that handle our assets autonomously, on code developed by a random group of people.
Blockchain Privacy Issues
Privacy is another feature of blockchain that is universally praised, but it’s also one of the key blockchain risks. Having the entirety of any system’s data on the blockchain for all the nodes of the network (or a certain percentage of nodes) to validate means that if you have the right key, you can unlock the data.
Blockchains relies on hashing algorithms and high-level encryption to ‘hide’ the data unless you have the appropriate key, but if you can get a hold of the key, the data is vulnerable. Again, since many blockchain solutions are developed by a random group of people in an open-source fashion, relying on them for security is a risk.
Blockchain Regulatory Issues
With cryptocurrency and blockchain being traded like securities and ICOs mimicking corporate public offerings, regulators around the world have taken notice and are busy crafting regulations to control blockchain systems. Each country is slightly different, adding to the complexity and risk of designing a system that might not eventually be compliant everywhere.
Countries like Malta, Switzerland and Belarus have been proactive in encouraging blockchain development, while the USA, China and South Korea have been hesitant. Many high-profile thefts, hacks and failed ‘fraud’ ICOs have caused regulators to shut down markets until they can get a handle on regulation.
This spooks investors because sinking money into a project that may eventually hit a regulatory roadblock is a risky investment. The uncertainty surrounding future regulatory action is now one of the bigger blockchain issues and limitations.
Blockchain Ethical Issues
Another of the big blockchain issues has to do with ethics and environmental responsibility. Depending on how the system is designed, the power draw needed to validate transactions through ‘mining’ across the Internet creates a huge power demand. In a time where global warming and energy consumption are hot topics politically, and countries are trying to figure out ways to use less electricity, blockchain systems are gobbling up power to do complex computing.
In fact, to mine bitcoin takes so much computing power that unless you live somewhere with cheap and abundant energy, it costs more to mine than you receive back from the mining activities. This power consumption is a major blockchain criticism and must be addressed before widespread adoption is feasible.
Blockchain User Interface
Another of the major issues in blockchain technology is user-friendliness. Many of these systems are crafted by technically minded developers that lack the UI/UX experience to make them truly user-friendly. They have no problem scanning and sharing key codes to retrieve funds or access systems, and in fact, they enjoy the technical nature — which means they ‘get it’ compared to those less technically savvy.
But for widespread adoption, systems need to have clean, intuitive user interfaces and design. You must be able to use a system for it to take off, and copying/pasting hex keys is not going to cut it for most users. This is one of the blockchain problems that developers need to start paying attention to.
Blockchain Economic Impact
If blockchain becomes as successful as predictions say, it will have some grave economic impacts that must be considered. Automation of auditing processes, the obsolescence of the financial sector, and a transformation of banking services could lead to the loss of millions of jobs.
Many involved in the industry see these as benefits of the technology, and not risks with blockchain systems, but the outcome must be considered. Disruptive technologies are great, but we must balance that with consideration for world economies and employment.
Blockchain Scalability Issues
Similarly, the scalability of blockchain systems is another of the main risks of blockchain technology. As these systems get lagers, they require more and more computing power to do the complex calculations needed to verify the chain.
Tokens like Ripple (XRP) are criticized by die-hard blockchain purists because it uses more centralization to speed transactions and remove scalability limits. But critics say that weakens the decentralized nature of it, and opens up the possibility of centralized control over the tokens just like we have with fiat currency.
For business solutions, similar challenges exist with say 20 or 30 years worth of data on a blockchain for supply chain, for example. After a while, it will become too cumbersome to validate all transactions and a fork or reset of some kind will be necessary — opening up the risk of data fraud or corruption. This is one of the major risks of blockchain-based business solutions.
Focus on Solutions
These are a few of many blockchain vulnerabilities, and until firms get serious about designing solutions for them, widespread adoption of blockchain will be stifled. Firms are working on such solutions, and you can choose which projects to support based on which ones are thinking ahead.
Ignoring the risks in blockchain could lead to a failed company, but properly considering them can contribute to future success. It would do startups well to make blockchain security risks and the issues described above a big part of their white papers, showing potential investors they are serious about developing long-term solutions.