What Are The Blockchain’s Limitations?

Would-be digital currency traders should keep in mind that while they can generate substantial gains through blockchain-based assets, there are many different factors they should consider before making trades. Failure to conduct thorough due diligence could mean losing all of one's money.

Before delving into the blockchain's limitations, it's important to understand exactly what this technology entails. The blockchain is a distributed ledger system that was originally proposed in October 2008 when the idea of bitcoin was first presented.^[1]

The blockchain was designed to be both decentralised and immutable, meaning that once entries were recorded on the distributed ledger, they could not be erased. The rationale behind including these specific characteristics was preventing problems like fraud and the double-counting of transactions.^[2]

A great deal of hype has surrounded the blockchain, but there is reason to believe that the enthusiasm surrounding this distributed ledger has gotten a bit out of hand.^[3] To that end, individuals interested in the technology may benefit from being aware of the blockchain's limitations.

Blockchain Is Not The Only Solution

Blockchain technology has many applications, but it is certainly not the only option available for executing transactions and managing data.^[4] There are plenty of more traditional technologies that can be used for managing data, such as relational databases like SQL Server and Oracle.

While blockchain has its benefits, this technology also comes with its costs.^[4] Another way of putting this is that blockchain technology, like everything else, comes with its trade-offs.

Throughput Challenges

One major weakness that users and technologists have identified in blockchain technology is its low throughput.^[5] The distributed ledger system can only move information around so quickly. Bitcoin, for example, can process a maximum of seven transactions every second.

However, the bitcoin network's ability to process transactions has become far slower at times, requiring upwards of 45 minutes at one point in early 2016.^[6] In contrast, Visa's network can process more than 50,000 transactions per second.^[5]

Security Concerns

The blockchain is vulnerable to something called a 51% attack, where a single organisation gains control of the majority of a network's mining power, also known as its hash rate.^[7]

For example, bitcoin's network depends on miners confirming transactions and using something called a consensus algorithm to determine which transactions have taken place. Therefore, if an organisation gained control over most of the network's hash rate, it could potentially spend coins more than once, and even prevent certain transactions from being confirmed.

Theoretically, executing a 51% attack would give the attacker the ability to alter blocks that are already part of the blockchain.^[7] While this may sound troubling, there is no straightforward method to prevent one of these attacks from affecting the bitcoin network.^[8] Because this network is decentralised, mining pools could potentially team up, consolidating enough mining power to establish the hash rate they need.

However, it is important to keep in mind that actually executing a 51% attack, and subsequently changing blocks in the blockchain, would require immense resources.^[5]

Who Will Be In Charge?

Thus far, the blockchains for some of the largest (and most highly visible) currencies have run into serious challenges regarding who is actually in charge of the network.^[9] Bitcoin has suffered from scaling problems, in which varying groups have argued over how much to improve the network's ability to process transactions.^[10]

The Ethereum network suffered from similar difficulties, in which the rising popularity of a game called CryptoKitties fueled a surge in pending transactions, as well as the expenses associated with these transactions.^[11]

Companies and other organisations that are considering deploying their own blockchains can benefit from looking into which parties will govern their distributed ledger once it is set up.^[9] These organisations can benefit greatly from figuring out who, exactly, will manage the relevant data, as well as which parties will be responsible for basic maintenance and upgrades.

Transparency Comes With Trade-Offs

While blockchains were designed to provide greater transparency by making information on transactions available to all interested parties, this openness can sometimes cause more problems than it solves. "For most enterprises, transparency is a much of a curse as a blessing," Forrester analysts wrote in a 2018 report. "Aside from solving scale issues, addressing the need for confidentiality is the biggest technical challenge developers need to resolve."

Summary

Would-be digital currency traders should keep in mind that while they can generate substantial gains through blockchain-based assets, there are many different factors they should consider before making trades. Failure to conduct thorough due diligence could mean losing all of one's money.