Like any other industry, the tech sector isn’t immune to falling victim to hype from time-to-time.
The reception to the first blockchain application in 2008 was modest, but by the time bitcoin blew up, business leaders started to become mesmerized by distributed ledger technology.
Overnight, blockchain emerged as a mysterious entity that promised to change enterprise technology beyond recognition. Many support present decentralized global transactions and on-demand contract fulfillment as the answer to identity management and online banking.
CEOs and stakeholders alike lauded blockchain as the next disruptive influence and rushed to invest in new pilot initiatives. Despite all this investment, few can point to a successful pilot. Distributed ledger technology has made steady progress with bitcoin, but it doesn’t appear ready to achieve mainstream adoption anytime soon.
Though blockchain has already made vast contributions to digital transactions, it isn't likely to become part of must businesses' daily operations. But why?
The state of blockchain in 2019
On the surface it appears that blockchain is still doing very well in 2019.
Research has shown that:
84% of executives say their organizations have at least some involvement with blockchain technology (PWC 2018 Survey)
These statistics present a bright future for blockchain adoption, but if we evaluate of blockchain so far, we find some substantial red flags. Many researchers have found that investment in blockchain hasn’t culminated in any tangible returns so far.
In 2018, a report for Monitoring, Evaluation, Research, and Learning (MERL) Technology, documented 43 blockchain use cases and found "no documentation or evidence" that blockchain achieved the claims suggested by the companies in the study. The track record of blockchain pilots as a whole is also questionable.
Many companies have invested in blockchain pilots over the past few years. More than 80,000 projects claiming to use blockchain have been launched, but only 8% are still active, and the average lifespan of a project is 1.22 years. The short lifespan of these products suggests that companies struggle to develop a market-ready application.
Even in the finance industry, blockchain’s disruptive potential appears uncertain. In a report earlier this year, J.P. Morgan Managing Director and Analyst Jan Loeys was less than optimistic about blockchain’s disruptive potential in the finance industry.
“Blockchain is unlikely to reinvent the global payments system, but instead can provide marginal improvements to various parts of the process."
Elaborating further, he explained that:
“...progress has been made to move blockchain adoption beyond experimentation and use in payments, but development has been largely confined to use cases like smart contracts, record keeping and decentralized applications rather than an institutionalized approach.”
So what’s holding blockchain back from mainstream adoption? Well, there are many key challenges facing distributed ledger technology that are keeping it out of reach for most business owners.
Reason #1: Cost – blockchain applications are expensive
Cost is perhaps the most significant barrier restricting the growth of blockchain. Creating a working application is complex and requires a substantial investment to get off the ground. In 2016, Bundesbank and Deutsche Boerse launched a blockchain project to manage financial transactions and reported limited success.
Jens Weidmann, President of Deutsche Bundesbank, stated that “blockchain solutions did not fare better in every way; the process took a bit longer and resulted in relatively high computational costs.”
Bitcoin also faces similar challenges. Bitcoin mining is so energy-intensive that it consumes more electricity than 159 different countries. To effectively mine for cryptocurrency users need specialized hardware to have any success. The inherent complexity of the technology makes blockchain resource intensive.
The complexity also pushes up the cost of release cycles. Blockchain expertise is at a premium, and talented developers don’t come cheap. Blockchain developers demand salaries of up to $175,000, which is far beyond the budget of many organizations.
It takes an exceptional amount of time and money to build a working blockchain application. Even companies that have the funds to kickstart a project can end up falling down the development rabbit hole without having a finished product to show for their trouble. The high cost forces companies to evaluate whether they have a specific use case in mind and tells them not to bother if they don't.
Reason #2: scalability and slow transaction speeds
Blockchain also faces challenges at the architectural level. From a practical standpoint, the architecture of blockchain fails to deliver scalability. Scalability is a prime concern in banking, where thousands of transfers must be processed simultaneously.
The size of Bitcoin blocks is capped at just 1MB, meaning that the cryptocurrency can only process a handful of transactions per second. Bitcoin averages 7 transactions per second, and Ethereum manages 15. In comparison, Visa can handle 24,000 transactions per second.
To have any hope of displacing financial applications blockchain would have to do the job more efficiently. At the moment, many companies and financial institutions who have experimented with blockchain have raised scalability as a key issue.
“If you have every bank on the platform and all the payments need to be updated, the system will slow down.”
In Treacher's opinion, lack of scalability and low speed was a deal-breaker:
"My personal view is blockchain is wrong for transactional banking. It's great for other things, I am not knocking it. But in relation to really high-speed transaction banking, it's the wrong technology because it's written multiple times all over the place. It's slow."
Reason #3: Understanding – and trust
Understanding what a piece of technology does is a prerequisite to onboarding a new solution. Unfortunately, the complexity of blockchain means that many people don't know how it works. Intangible concepts like verification and the consensus protocol aren't easy to grasp.
You can't trust something you don't understand. In the finance industry, consumers and institutions struggle to believe in blockchain's mysterious algorithms. People don't want to put their money at risk using technology that they don't know is secure.
In the Asia-Pacific, 68 percent of companies cited a lack of understanding and education as the reason why their executives haven’t adopted blockchain. Similarly, 35 percent of Brits say they don’t trust blockchain with their personal information, because they don’t know what it actually is.
Consumers and companies need to be able to understand how blockchain works before they can trust in distributed ledger technology. Increasing awareness and educating people about blockchain is essential for driving long-term adoption.
Reason #4: regulation
Regulation has been a substantial challenge from the beginning. Decentralized technology had the potential to help consumers move away from the centralized control of information.
Cryptocurrency, in particular, was presented as a technology that liberated consumers from the control of banks. However, the anonymity of blockchain transactions has been a double-edged sword. Many companies are unwilling to embrace blockchain until it is regulated.
Many consumers are hesitant to trust in algorithms and seek the comfort of regulations to verify that their money and data is safe. There are security risks that need to be regulated. For example, in 2016, someone found a flaw in the coding of a decentralized application called The DAO and stole $70 million USD. The absence of universal standards represents a security risk.
Fraud is also a significant problem for Initial Coin Offerings (ICOs). There is a lack of regulation for ICOs than three is in most financial markets. Fraudsters can launch bogus coins and defraud investors out of thousands.
Earlier this year a the CEO of an online adult website was charged with ICO fraud for giving investors misleading information. Regulating blockchain eliminate cases like this and help to turn blockchain from wild-wild-west solution into a more reliable service.
Will blockchain fail to achieve mainstream adoption?
There are steep barriers on the road ahead for blockchain. Blockchain needs to start showing a clear ROI before it becomes relevant to most companies. Though a minority of companies may have the funds to launch experimental pilots, the vast majority don't. Those with lower budgets won't be able to pull the trigger on technology that doesn't have a clear use case in their environment.
Blockchain technology has already made vast contributions to the tech world but doesn't appear the all-powerful disruptive force it was claimed to be. Until we see more successful pilots, it's difficult to say that we will see mainstream adoption anytime soon.
Want to learn more information about blockchain? See what current blockchain software platforms currently exist and how they can help bring the global adoption of this technology to light.