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KNOWLEDGE HUB

A blockchain is a list of records, or ‘blocks’, linked using cryptography that are automatically assigned timestamps and transaction data that cannot be tampered with. Its ability to store sensitive information in a decentralised, distributed form has made it useful in the finance sector but increasingly, it is being used across a number of other sectors within applications for supply chains, logistics and smart contracts.

Despite its benefits, however, blockchain technology currently holds a number of challenges that prevent it from reaching its full potential across the global economy. Here are the five main hurdles the technology needs to jump to achieve widespread adoption;

  1. Regulatory Gaps
    The current regulatory landscape assumes a centralised system and therefore there is a lack of legal precedent for distributed systems such as blockchain. Also, due to the very nature of joining blocks that relate to many different stakeholders, writing regulation that covers all parties, relationships and contracts is highly complex. On top of this is the speculative nature of the market, something that concerned regulators when cryptocurrencies based on blockchain technology spiked 18 months ago. As a result, legislating to cover both the user and the technology is very difficult and leaves several areas exposed.

    However, progress is being made on the regulatory front. The U.S seems to be blazing the trail in this area, having passed 17 state legislatures related to blockchain adoption already. The utilities sector has emerged as the sectoral pioneer of blockchain having used the technology for energy projects  such as LO3 Energy’s Brooklyn Microgrid project, Power Ledger’s peer-to-peer renewable energy marketplaces and the International Energy Research Center’s EnerPort project in Ireland16)- all hold examples of regulatory approaches for pilot projects run in multiple geographies. These projects could eventually form case studies for other sectors to follow.

  2. Improving Effectiveness – Scalability, Latency and Energy Intensiveness

    Blockchain transactions must be verified by establishing consensus. The speed of consensus can be affected by the design of the mechanism, or as a result of a rapidly scaling transaction. For example, the public blockchain Bitcoin has historically experienced issues with transaction rates as the consensus mechanism varies in speed and efficiency causing latency issues and demanding high energy levels. This is because traditional blockchains are essentially a vertical line of bricks that fall down when the tower gets too high. ‘Block-thrashing’ is the term used for when the tower topples, or when a network becomes too big for the software – making it impossible to sync all the blocks across the network quickly enough before the next block is produced.

    DLTs are the next generation of blockchain, formed of horizontal networks that are more stable and therefore more scalable and allow for faster movement of information than traditional blockchains. These DLTs can process thousands of transactions per second, while decentralized blockchains such as Bitcoin, struggle to achieve seven transactions per second.

    For example, the new generation DLT – Iota, uses the “Tangle”17 consensus mechanism allows improvements in scalability, even in blockchains with very high transaction volumes (such as in retail), as well as the potential to address quantum resistance, a leap in scale of a network enabled by quantum computing. Although work is being done to alleviate latency issues, to allow blockchain technology to reach its full potential, it needs to keep up with the pace of demand.

  3. High Investment and the Productivity Paradox

    Although blockchain represents significant potential for industry, its ability must be measured against the investment needed to implement and run such a system. For example, a study released by Elite Fixtures found that it cost more than $26,000 to mine just one bitcoin in South Korea, which is one of the world’s largest markets for cryptocurrency trading. In addition, there are several layers of costs as bitcoin miners get paid in bitcoin for their work, but the price of validating transactions in the first place must also be considered. The mounting costs therefore present a challenge that could prevent widespread penetration of commercial blockchain technology.

    As well as requiring a high level of investment to create and maintain a blockchain network, a report by Deloitte says blockchains create a ‘productivity paradox’ that must be closely considered before investment is made. Here, whilst the scale of an entire network may significantly enhance productivity, there is a ‘critical mass’ of nodes needed to achieve enhanced productivity. Therefore, decisions about investing in blockchain applications need to be carefully thought through to find this balance. As the report states: “The returns to individual processing nodes – either individuals in a public blockchain or organisations in a sector-wide blockchain – may diminish as the network grows in size.” This means that blockchain applications must harness network effects to deliver value to consumers or to sectors at large.

    This challenge is being considered by a number of firms, including Amazon, IBM and Microsoft, each working on ways to reduce the cost and complexity involved in blockchain networks using cloud technology. This essentially means creating ‘templates’ for developers, to make it easier to set up and run blockchain networks. “New cloud offerings have been coming to market at an accelerating pace and have the potential to lower barriers to developing and operating blockchain networks,” the study said.

  4. Transparency, Privacy and Exploitation

    As blockchain’s power comes from being a distributed network with visibility of the ledger across all participants. This is key to ensuring a balance is struck between transparency and privacy. This balance is usually dictated by the ecosystem in which the blockchain is operating but until now, there have been limited parameters.

    New code bases and consensus mechanisms are being created which seek to address the privacy and transparency balance, related directly to the requirements of specific transactions and participants. This development is crucial for blockchain to become embedded in all types of sectors.

  5. Public Sentiment

    If blockchain is to penetrate all markets to achieve its potential, for customer-facing applications in particular, public adoption is key. Efforts need to be made to educate the population about how blockchain works and its benefit in order to evoke understanding and a preparedness to engage with the new business models and technologies.

    In industry, more is known about the potential of blockchain and sentiment towards the technology is rising. For example, Deloitte found of the 1,386 senior executives in a dozen countries at companies with US $500 million or more in annual revenues they surveyed, 83% saw a compelling business case for the use of blockchain technology, and 87% believed blockchain would “enhance further integration towards ‘touchless’ business processes.

    Blockchain is a revolutionary technology that is changing the way value chains operate and information is shared. Having evolved as part of the fourth industrial revolution, it marks the beginning of a world operated through digital means. Whilst challenges in the implementation and effectiveness of the technology remain, it is clear that the potential of the technology cannot be ignored.

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