5 Problems With Blockchain Technology – The Motley Fool

Returns as of 03/01/2022
Returns as of 03/01/2022
Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
Blockchain technology was developed as a way to solve problems associated with digital currencies. A blockchain is an immutable ledger of transactions linked through digital cryptography and usually shared publicly across multiple computers around the world.
Blockchain technology holds a lot of promise for improving the security and accessibility of many products and services across various industries. But for all its potential benefits, there are still several problems with blockchain that many developers are working to solve. 
The fact that a copy of a blockchain is typically held on multiple computers creates a scalability problem as the blockchain grows larger. That’s just one of the many challenges facing blockchain technology and the developers working to develop enterprise solutions.
Image source: Getty Images.
A long blockchain can produce challenges for an organization as it runs into trouble with scalability. There are several factors at play here.
First, each computer on the network working to confirm transactions and keep accurate records of the blockchain must store data starting from the genesis block to the most recent block. These computers — called nodes — must have the capacity to store that data. The redundancy creates a more secure system, but it also becomes increasingly inefficient as the network and blockchain grow.
Next, when creating a new block on the blockchain, the node that confirms the transactions must broadcast the new block to every other node on the network. They can then verify the transactions and add the block to the blockchain. This can use substantial network resources as the network grows in size.
In big public blockchains such as Bitcoin (CRYPTO:BTC) and Ethereum (CRYPTO:ETH), the scaling issue can translate into nodes demanding higher transaction fees to process transactions on the blockchain. They need to see an adequate return on their investment into computing resources.
Blockchains that use a proof-of-work system to determine which node wins the right to confirm the next block in the chain can become extremely energy-intensive. Both Bitcoin and Ethereum use the proof-of-work model where nodes compete to solve a complex equation fastest. As the network grows, the number of competitors increases, and there’s a fight for more computer power, which consumes energy. The energy consumption is extremely inefficient because ultimately just one node will win the right to confirm the next block.
The proof-of-stake model is held up as a solution to the energy consumption problem faced by blockchains. However, such a system poses challenges in itself. For one, the code required to put together a good proof-of-stake system is much more complex than a proof-of-work system. That can lead to more bugs and vulnerabilities.
Second, it may be easier for a single party to take control of a majority of the staked cryptocurrency, allowing it to exercise too much control over the blockchain. The latter vulnerability is less likely in a proof-of-work model since a single party would need to obtain a majority of computer power on the network. Additional computer power could be obtained by other parties to wrest away control and ensure that the blockchain remains decentralized.
Despite those drawbacks, Ethereum is migrating from a proof-of-work model to a proof-of-stake model.
Blockchain transactions are relatively fast for account-to-account transfers, but the decentralized nature of blockchain can make it a poor tool for everyday transactions.
When you swipe your debit or credit card at a store, you can confirm the transaction in a matter of seconds. Behind the scenes, a network of payment processors works to move money from your account to the merchant’s account, but the whole process can actually take a day or two. In the meantime, the merchant can trust that the issuing bank of the payment card will make good on the payment. This trust allows payment card networks to process thousands of transactions per second.
Since a blockchain like Bitcoin’s is fully decentralized, there are no guarantees on a transaction until it’s confirmed on the blockchain. That can take a long time since the Bitcoin blockchain can only process a handful of transactions per second. A merchant might not know whether a transaction really went through for an hour. That makes it impractical for most retail transactions even if there are plenty of useful blockchain applications in the financial sector.
Almost every implementation of blockchain technology is unique. That creates a couple of challenges for businesses and developers working on various applications.
First, it makes interoperability between blockchains difficult. If one company wants to share data with another company’s blockchain, they’ll likely need to develop additional tools to allow data to flow between the two blockchains. There are dozens of blockchain interoperability solutions already in use, but the fact that no one solution fits all highlights the fragmented standards of blockchain implementations.
The second challenge comes about when developers create something on a blockchain (for example, a smart contract or a decentralized finance app). Since there are no universal standards, a developer will have to rework everything to offer the same product on another blockchain. The lack of standards may also open up vulnerabilities in code as developers work with less familiar platforms.
Blockchain was designed to be publicly distributed. That means anyone can see the data written to the blockchain. Although the information is anonymized using blockchain wallet addresses as identifiers, the other details of a transaction are plain to see. Nobody’s going to care about the $20 worth of Bitcoin you send to a friend, but some data and transactions require a greater level of privacy.
There are private blockchains, which restrict who can participate as a node and who can view transactions. A private blockchain is one way for a business to implement blockchain technology without fear of leaking any information to the public, but it has its disadvantages. Since a private blockchain has an authority that delegates who can and cannot participate, it’s not truly decentralized. That can reduce trust from the public in a blockchain-based product.
The privacy problem highlights some of the trade-offs that must be made with blockchain technology.
While blockchain technology has its problems, there are thousands of people working on solutions. The solutions in place today look to make small compromises on the original vision of blockchain as laid out in the Bitcoin white paper published more than a decade ago. As the industry and technology evolve, developers will find dozens of applications for blockchain technology
Ultimately, blockchain promises to improve the speed and security of many processes involving the transfer and storage of data. Considering that our lives are becoming increasingly digital, there are bound to be more reasons to use blockchain as a solution, despite the problems it may currently present.

Discounted offers are only available to new members. Stock Advisor will renew at the then current list price. Stock Advisor list price is $199 per year.
Stock Advisor launched in February of 2002. Returns as of 03/01/2022.
Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Making the world smarter, happier, and richer.

Market data powered by Xignite.