Blockchain Disadvantages
While there are significant upsides to the blockchain, there are also significant challenges to its adoption. The roadblocks to the application of blockchain technology today are not just technical.
Potential Disadvantages
Gaining user trust
Defining tokens
Technology cost
Speed efficiency
Illegal Activity
Regulation
I. Gaining User Trust
Consumers are still warming up to the idea of blockchain. There's an element of trust that decade old technologies like bitcoin are still trying to earn. I think trust needs to happen from two important users. First, trust needs to happen from a government standpoint. Slowly, we have began to see organizations like the SEC release updates to their requirements regarding digital assets [1]. However, this acceptance needs to follow through to the state level. One example of this was a small county in Wyoming, that has implemented blockchain as part of their land registry [2]. The second user is the retail investor. Many blockchain applications that offer incredible services are too confusing for regular users. People aren't sure about tokenization, cryptocurrencies, hashes, nodes, sharding, etc. Too many blockchain applications are built to only be used by those heavily involved in the blockchain space. As blockchain becomes more widely adopted by governments and retail investors, it will be a powerful tool in the development of new technologies.
II. Defining Tokens
One of the main advantages of security tokens is the fact that they can be programmed. This means that smart contracts can be constructed to meet the legal needs of compliance and that security can we programmed into the architecture of the token. However, this also means that these tokens cannot be changed. If there are security flaws within the tokens, or if sufficient testing is not done prior to the release of the tokens, vulnerabilities in the application could be exploited by malicious attackers. In the planning on a blockchain application, security needs to be one of the top priorities considered [3]. This requires sufficient testing and security audits before launch to determine that the application is producing a token that will be an asset, not a liability of risk.
III. Cost to Operate
Although blockchain has the potential to save users money, the technology is expensive to deploy. In blockchain applications, the transactions are validated by an independent network on miners or validators. These independent entities compete for small crypto rewards as they validate the transactions added to a blockchain. The cost of operating these mining machines has been adding up quickly. Bitcoin, for example, consumes a lot of computer power because it is based on proof of work. Meaning that the entire node needs to be verified requiring significant computational power. The mining of Bitcoin consumes the same energy as the entire country of Argentina [4]. Avalanche provides a less computational intensive consensus through their novel proof of stake, making mining not as costly. However, the increase in demand for cryptocurrency mining to validate transactions has caused a significant increase in electricity consumption.
IV. Transaction Frequency
Transaction frequency refers to the number of transactions per second an application is able to perform. In the use case of blockchain, this specifically refers to when a transaction is considered ‘final’ and cannot be undone. Much thought has been put into the potential application of blockchain technologies. However, many of these technologies end up falling short of their uses cases because of their inability to operate at scale. Bitcoin is an ideal case study for the shortcomings of blockchain technology. Bitcoin's "Proof of Work" system for adding new blocks takes about ten minutes. Other cryptocurrencies, including Ethereum, still fall short of bitcoin, because they are limited by their blockchain infrastructure. With legacy brands like Visa able to process 24,000 transaction per second, it seems unlikely that blockchain will be able to operate at the same transactional frequency.
V. Illegal Activity
While confidentiality on the blockchain network guarantees safety and preserves privacy, it also provides a pathway for illegal activity. The most famous use of blockchain is still for nefarious purposes such as Silk Road [5], which is an online “dark web” drug marketplace. The anonymity provided by this technology is both an advantage and a detriment. This connotation of blockchain associated with illegal activity also reduces user trust. Many have argued that the benefits of using cryptocurrency outweigh its negative uses, especially when most illegal activity and money laundering is still accomplished through untraceable cash.
VI. Regulation
Regulations vary based on attributes such as asset type, investor type, buying jurisdiction, and selling jurisdiction. Each of these dimensions has numerous legal requirements and an overarching regulatory body to oversee them all. Many in the crypto space perceive regulators as a looming threat. In the event that Bitcoin's decentralized network grows more difficult and near impossible to end, governments could theoretically make it illegal to own cryptocurrencies and participate in their networks. Over time this concern has dissipated over large technology corporations like PayPal and Square [6] allowing the use of cryptocurrencies on their platforms. While technology develops and evolves very quickly over time, regulation does not.
Footnotes:
| # | Source |
|---|---|
[1] | |
[2] | |
[3] | Mohanta, Bhabendu Kumar, et al. "Blockchain technology: A survey on applications and security privacy challenges." Internet of Things 8 (2019): 100107. |
[4] | |
[5] | DiPiero, Carmine. "Deciphering cryptocurrency: Shining a light on the deep dark web." U. Ill. L. Rev. (2017): 1267. |
[6] |
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