Blockchain seems to be a promising breakthrough innovation which solves a vast array of problems and applications. It spans from financial to non-financial applications, most of which are radical in nature. The use of radical innovations implies a number of risks and disadvantages that lower significantly blockchain effectiveness.
Blockchain adoption signifies a complete shift to a network which is decentralized and needs the buy-in of its operation and users. People may resist to adopt this change as they should get accustomed to completeness, security, and safeness of their transactions (Crosby, Verma, & Kalyanaraman, 2012). In this case, innovativeness appears to be the first pitfall of blockchain technology. People need time to get through the cultural adoption. Otherwise, blockchain will not grow into highly demanding technology. The significant changes are required to replace the existing systems with blockchain innovation. Companies are obliged to spend a considerable amount of money to strategize this transition. Since many of them introduce reluctantly this innovation, blockchain may not become widely applicable.
Many researchers report that scalability is the second and the greatest challenge of the blockchain. Bitcoin shows a slowdown in transaction time (Boersma & Bulters, 2016). It means that this various does not meet the requirements of public markets. On the average, verification process takes 43-45 minutes. The slowdown stems from the fact that other users may add a fee to any of bitcoin transaction. Those users who pay fee bump their transactions up in the queue. It means that the users who do not pay the fee can wait hours or even days before the transaction is completed (Quinlivan, 2016). The slowdown in transaction processing is the biggest problem that blockchain users may face.
However, transaction processing is not the only pitfall of blockchain technology. Allison (2016) specifies that the transparency of transactions may cause information leakage. It happens if there is a change in registration from a “street name” to a shared ledger, requiring the customer name to be on the transaction record. The information leakage also takes place when investors lend out the securities to cover short position (Allison, 2016). Ali, Nelson, Shea, and Freedman (2016) state that poorly developed blockchain systems are subject to security flaws. It provides the users with a global publicly writeable log. The writes to this log are called transactions. The transactions are the blocks that package transactions into a single write. Payment (transaction fee) is required to write to the global log. Those nodes that participate in the blockchain follow leader-election protocol. Not all nodes take part in leader elections. Those nodes that compete to become the leader are called miners. In the beginning, miners are solving a computation problem. The miner that is the first to succeed is eligible to write the next block.
Miners can create a mining pool by pooling their resources. It is a super node within the network. If a single miner controls more than the rest of the blockchain network (51%), a miner can attack the network, rewrite the blockchain history, steal cryptocurrency, censor any transactions (Quinlivan, 2016). Hence, the transparency entails several risks to users` security and doubt the effectiveness of blockchain system.
A considerable number of cons can be named among others. Blockchain system is known to be energy-consuming technology. In an attempt to validate the transaction, network miners are making 450 thousand trillion operations per second. Although blockchain gives its users to save tremendously on transaction time and cost, it requires enormously high initial capital (Boersma & Bulters, 2016). Evidently, blockchain technology has a wide array of vulnerabilities and obstacles that make it less alluring to the users and operators.
- Ali, M., Nelson, J., Shea, R., & Freedman, M. (2016). Blockstack: A global naming and storage system secured by blockchains. USENIX: The Advanced Computing Systems Association. Retrieved from https://blockstack.org/blockstack.pdf
- Allison, I. (2016). How will blockchains cross the clearing and settlement chasm? International Business Times. Retrieved from http://www.ibtimes.co.uk/how-will-blockchain-overcome-apparently-insurmountable-problems-clearing-settlement-1546943
- Boersma, J. & Bulters, J. (2016). Blockchain technology: 9 benefits & 7 challenges. Deloitte.com. Retrieved from https://www2.deloitte.com/nl/nl/pages/innovatie/artikelen/blockchain-technology-9-benefits-and-7-challenges.html
- Crosby, M., Pattanayak, P., Verma, S., & Kalyanaraman, V. (2015). Blockchain technology. The Sutardja Center for Entrepreneurship & Technology. Retrieved from http://scet.berkeley.edu/wp-content/uploads/BlockchainPaper.pdf
- Quinlivan, S. (2016). Limitations on blockchain technology. Stinson Leonard Street LLP. Retrieved from http://dodd-frank.com/limitations-on-blockchain-technology/