Legal & Economic Issues
- Is Bitcoin legal?
- Crypto taxes explained (U.S. specific)
- Is cryptocurrency regulated by consumer protection?
- What are the advantages of cryptocurrency?
- What are the limitations of cryptocurrency and the blockchain?
- Is Bitcoin a bubble? Is it too late to invest?
- Is Bitcoin a Ponzi scheme?
- Thoughts on BitConnect, USI-Tech, and similar programs
What Are the Limitations of Cryptocurrency and the Blockchain?
The massive bull-run of late 2017 threw cryptocurrency and blockchain technology into the vernacular of the young and the old alike. Buzz words like decentralization, innovation and revolution quickly gained prominence. But is blockchain really all that it’s promoted to be? Will it emerge as the savior of man from the evils of the opportunistic capitalistic society? Does it solve problems faced by multiple industries? Are cryptocurrencies safe and will they displace fiat currencies? What are their limitations, weaknesses, potential pitfalls, and threats?
At the very root of all problems faced by blockchain-based applications is the scalability trilemma, as explained by Ethereum founder Vitalik Buterin. The trilemma claims that blockchain systems can only at most have two of the following three properties: decentralization, scalability, and security.
According to this law, only a partial sacrifice of one of these attributes can allow for the benefits of higher performance of the other two. This trade-off is what marketers of new cryptocurrencies fail to shed light on when they market their shiny ‘revolutionary’ new features.
Scalability refers to the ability to cope with an increased demand to accommodate growth. It indicates competitiveness in the marketplace as well as the ability to perform under ever-changing needs. With most first generation blockchain systems choosing to prioritize security and decentralization features, the lack of scalability has become the biggest thing issue standing in the way of widespread adoption.
Decentralization makes it tough to reach consensus on the way forward. Issues such as high transaction fees, network congestions, mempool delays, and endless debates resulting in forks and community divisions are all centered around scalability.
Bitcoin fails as a currency because of high transaction costs and delays. No one wants to buy coffee and then pay more than the price of coffee for the transaction and have to wait all day for it to get confirmed. Hardware scalability is also an issue. A rise in demand of mining hardware has seen its price skyrocket. Not only does that increase barriers to entry, it also results in centralization of miners.
In order to verify transaction details, blockchains require every connected node on the network to maintain a copy of the complete blockchain ledger. While this process ensures safety and security, it comes with drawbacks related to scalability and speed. A growth in the size of the blockchain results in a decrease in average computational performance.
Blockchains such as Bitcoin and Ethereum, for example, have extreme performance limitations since they can only process a maximum of 7 TPS (transactions/second) and 15 TPS respectively. While other blockchain based solutions do offer higher speeds, they lag miles behind legacy payment solutions like Visa (45000 TPS). Better solutions regarding usage of block confirmations and consensus mechanisms need to be explored. As the Ethereum development community turns to sharding (a solution which doesn’t require full nodes) to achieve over 1000 TPS, we see a gradual shift towards sacrificing security for better scalability and speed. An ability to handle high volumes of transactions without choking is crucial for blockchain applications whose goal is mass adoption.
Media outlets love to cover news of crypto-related hacks as it propagates the narrative of cryptocurrencies being highly risky and unsafe. This is a very surface-level view and lacks understanding of this nascent technology. The entire purpose of blockchains is to allow for a trustless, non-tamperable and safe way of sharing data through the use of extremely sophisticated mathematical algorithms and complex software rules.
As explained previously, blockchains require complete local copies of the entire ledger to be stored on every node. The security mechanism has two integral components: hash (cryptographic fingerprint unique to ) and consensus protocol (rules by which nodes abide in order to verify and approve a common history.)
While this generally brings about blockchain’s immutability, two important exceptions are noteworthy: the infamous 51% hack and the growth of quantum computing. The former happens when the majority of network nodes lie and turn the lie into a truth. Communities thus keep a close eye on their mining pools to prevent undue centralized network influence. Progress in quantum computing will result in advanced hardware that has the power to solve cryptographic algorithms in ridiculously short times. Worry not though, for that possibility isn’t in the near future.
User Friendliness and Complexity
Although cryptocurrency and blockchain technology are steadily gaining mainstream popularity, the steep learning curve to their understanding, usage, and implementation presents a significant hurdle for novices. While educational resources such as ours try to make this technology easier to understand, the technical side poses major barriers for many. Various protocols, including Bitcoin and Ethereum, utilize completely novel programming languages (Ivy and Solidity respectively.) Developers who have spent numerous years familiarizing themselves with and gaining industry experience in legacy coding languages are hesitant to put in the time needed to gain expertise in these new blockchain centric languages.
The lack of well-built, secure, efficient, feature-rich developer tools and programming environments have come in the way of building complex blockchain systems. The present smartphone-centric era also calls for a greater presence of blockchain applications on mobile platforms.
Regulation and Politics
Let us first discuss divisive issues that have cropped up within the blockchain industry. Bitcoin ‘forking’ and scaling debates have been hotly contested issues in the absence of a central party to decide on the path ahead. Reaching a consensus is time and resource consuming as it requires a certain level of technical expertise which most community members lack. There have also been public disagreements and standoffs between different community sectors, such as miners and users as both seek to maximize their respective incentives. Since most governments in the world are still mulling over regulation of cryptocurrency, a lot of organizations refrain from adopting this new technology for fear of litigation and liabilities.
Blockchains are not called disruptive technologies for nothing. They have the ability to cut out the middlemen, streamline various industries, and even render legacy banking and government systems obsolete. Fearful of such a technology which they fail to grasp at a technical level due to their old age, politicians have utilized their nexus to spread propaganda in order to hurt blockchain applications and stifle their adoption in lots of countries. Although they are usually revoked, many governments go through the sham process of declaring short-term bans on cryptocurrencies.
A myriad of new projects floods the crypto-market every day claiming they will dethrone the status quo due to their superior features/architectures. It is important to be wary of and to meticulously investigate these ‘do-it-all’ solutions. Newbies usually fall for the ‘superior performance’ gimmick without understanding the importance of decentralization – which allows anyone to use the network as well as build on top of it. In certain cases where public accountability is desired, it is good practice to be cynical towards projects that use private networks as fewer independent nodes are always more liable to come under ulterior influence.
We hope taking you through a recap of the story thus far has helped you gain a better understanding of the challenges facing the crypto/blockchain community. As with every novel technology, it has to either adapt to its challenges and evolve or face the risk of becoming obsolete.
This article was written to the best of our knowledge with the information available to us. We do not guarantee that every bit of information is completely accurate or up-to-date. Please use this information as a complement to your own research. Nothing we write in any of our articles is intended as investment advice nor as an endorsement to buy/sell/hold anything. Cryptocurrency investments are inherently risky so you should never invest more than you can afford to lose.