by Michael Hiles on November 5, 2018
While 10XTS sees significant market growth opportunities, there are obstacles for blockchain to become fully adopted as a mainstream technology.
We have identified many of the barriers that must be addressed and overcome for blockchain technology to be able to move beyond the innovation phases into early adoption by mainstream enterprises and capital markets.
1. Regulatory Complexity
One of the major obstacles to enterprise blockchain adoption is regulatory complexity. This is due to the lack of clearly-defined regulations set out by various state and national regulatory agencies.
For example, the U.S. Securities and Exchange Commission (SEC) regulatory regime does not specifically contemplate blockchain tokens. In 2017, there were 873 ICO’s completed that raised over $7 billion through Initial Coin Offerings (ICOs). By March of 2018, over 80 of those firms receive subpoenas from the SEC. While some of these issues are being resolved, there is still an atmosphere of uncertainty, which is causing financial services organizations to slow down adoption until there is more regulatory clarity.
2. Legacy Enterprise Technology
For organizations to really benefit from blockchain, they need new DLT enabled infrastructure. Industries like payments, insurance, real estate, and banking all operate on legacy systems. There is a significant investment of both time and capital to create new infrastructure.
What’s missing are the software tools and ecosystem for building enterprise blockchain applications, and API’s that integrate with legacy systems, and a blockchain platform that meets the transactional speed requirements for financial applications.
Business, governance and operating models, and designed and implemented pre-digital business will take time to re-engineer. This is because of the ramifications blockchain has concerning control and economics.
3. Credibility of Blockchain (“Crypto Madness”)
The current cryptocurrency landscape has created a lot of confusion and mistrust. The sheer number of cryptocurrencies, ICOs and scams have eroded the credibility of potential blockchain solutions. While the understanding of the difference between blockchain as a potential enterprise data utility and Bitcoin itself is growing, the hype cycle has hurt the underlying legitimacy of the technology.
4. Skills Gap & Talent Scarcity
Per the 2018 Gartner CIO Survey, among 293 CIOs of organizations that are in short-term planning or have already invested in blockchain initiatives, 23% of CIOs stated that blockchain requires the most new skills to implement of any technology area, while 18% said that blockchain skills are the most difficult to find. A further 14% indicated that blockchain requires the greatest change in the culture of the IT department, and 13% believed that the structure of the IT department had to change in order to implement blockchain.
The challenge for CIOs is not just finding and retaining qualified engineers, but finding DLT-capable, qualified engineers that can fully utilize or exploit DLT growth and development. Qualified engineers may be cautious due to the historically libertarian and maverick nature of the blockchain developer community. Many blockchain enthusiasts and developers typically skew younger in age, and do not have the enterprise IT leadership experience necessary to navigate the strategic challenges within organizations.
5. Vulnerabilities of Public Networks
The “51% attack scenario” implies that if more than half of the mining hash rate (computing power) of a blockchain is controlled by a malicious party, they get to choose which transactions go through. For hackers, the key beauty of permission-less blockchains is anyone can run a node, small cryptocurrencies can be brought down with adequate manpower and financial resources. Small cryptocurrencies like ZenCash and Bitcoin Private have already been successfully attacked, allowing wallets to double spend transactions.
This is partly the reason behind the Bitcoin community’s worry about China’s domination, (they control 53% of hash power) along with mining companies like Bitmain and Nicehash, in the Bitcoin mining space.
6. Network Scaling & Transaction Throughput
Blockchain offers a wealth of potential, but it finds itself challenged most heavily by scaling issues that are not unlike the early days of the internet.
The most obvious current limitation of blockchains is their limited throughput. The more decentralized a blockchain is, the more its transactions per second (TPS) typically suffer.
For app developers looking to build on top of an existing public blockchain, they’re unlikely to find one that’s sufficiently decentralized and can also handle their long-term throughput needs. Current blockchain implementations resemble the engines found in the Model-T Ford, which was 20 horsepower.
For example, Bitcoin takes about 10 minutes to create a block, which equates to about 7 transactions a second. Ethereum can achieve 20 transactions a second, and Apache Hyperledger Fabric can process up to 1,000 per second. Visa & Mastercard presently process 8,000-12,000 transactions per second.
Distributed systems are inherently unwieldy at scale, creating several new issues that can offset the solutions promised by the new tech. While tech often progresses at exponential rates, consumer appreciation for emerging solutions can lag, creating a bad market-fit.
Various proposals and efforts have been undertaken to expand the transaction throughput of public blockchains, but the results may not be seen for years into the future.
7. Status Quo Mindset
There are a lot of third parties making significant amounts of money from the current infrastructure in place. Asking people to change the way they do business and cut out their trusted advisor is a big ask. These middle men include, credit bureaus, banks, processors, security services, consultants, associations, etc. Entire industries are built around the need to provide guidance and assurance for the largest service based industries.
Much like the internet itself, there will be winners and losers in the intermediary spaces. E-commerce changed the retail landscape. Information searches replaced travel agents. Some intermediaries will embrace the technology shift early, becoming the trusted provider of the technology services. Some will move to use regulatory frameworks to push back on the use of the technology through lobbying and legislative efforts. Disruption is messy and takes a long time.
8. Illegal Content On Public Blockchain Networks
Another limitation of public blockchain networks is that inclusion of embedded illegal materials (a copy of which all node operators are forced to keep) creates potential liability for blockchain node operators and threatens blockchain integrity. Node operators are faced with the choice of being subject to liability or forced to delete the unlawful content.
Owning an Ethereum wallet may present a risk of receiving a random distribution of an unregistered security token from a blockchain project engaging in what is known as an “air drop”. The rationale is to provide free tokens to people in hopes of creating a viable market. However, this presents risks for those in regulatory jurisdictions prohibiting these types of transactions.
How does one dispose of the unwanted, unregistered security without violating the law while also violating the law by holding it?
Also, there are links to child pornography stored in the Bitcoin ledger itself. This puts any node operator having a full copy of the ledger at potential legal risk.
The questionable content creates a situation for enterprise IT leaders regarding the data utility framework of the blockchain itself. What corporate risks exist for critical information systems when other users of the same data utility are polluting it with other content that puts the entire ledger at risk?
This is obviously a challenge, especially for users contemplating a solution based on a fully anonymous, public network.
9. Lack Of Understanding of Blockchain Technology
For the past few years, people have been increasingly excited about the possibilities of blockchain technology. However, the excitement is more the result of the logarithmic rise in cryptocurrency investments and potential for return as opposed to interest in the underlying technology itself. While most are aware that blockchain is what makes the cryptocurrencies possible, there is very little understanding of how it works or its other benefits beyond managing cryptocurrencies.
Blockchain technology implementation will change the operating and business model of the organizations and there exists a challenge in being ready and able to accommodate this requirement. Blockchain technology requires understanding of, at a fundamental level, aspects of security, law, value exchange, decentralized protocol governance, process and commercial architectures. Moving towards a decentralized protocol and data approaches means traditional lines of business and organization silos can no longer operate under their historical structures.
10. Governance Issues
Public networks have faced many challenges over how the ledger itself is managed. In Proof-of-Work models, which version of mining software is being run by how many node operators constitutes the consensus. Disputes over the parameters of a given blockchain have resulted in splits in the community, even forking the blockchain itself as factions of miners stop supporting the original blockchain and create their own new protocol with parameters that better suit their own opinion.
Case in point, Bitcoin and Bitcoin Cash. When the Bitcoin miners ended up in a dispute over parameters of the blockchain, some decided to create their own, new blockchain with different parameters.
Should any enterprise wish to explore the use of a public blockchain network for use as a data utility or transactional platform, they face significant obstacles when casting a voice in how that utility is managed.
From the CIO view, the following questions remain.:
- Who is managing the ledger?
- How do the node operators come to agreement on how the chain is managed?
- What inherent risks exist for the organization considering using a particular chain with regard to data governance and compliance?
- Will the infrastructure and data pass a comprehensive audit?
For reporting companies, the bar is much higher, including questions about ISO data and Sarbanes-Oxley compliance.
11. Lack Of Standards
Blockchain suffers from a general lack of standards, even in the vocabulary and terminology used to describe the technology itself. Again, similar to the internet in previous eras, industry consortia and associations struggle with normalization and seamless definitions.
With blockchain technology still being in such a nascent state, the various technology industry verticals have yet to even consider the implications and efforts to define an accepted standard for transactions and related metadata.
Within most legal jurisdictions, no codified taxonomy exists to interpret various situations for resolution. This makes compliance very difficult, especially for regulated industries.
Using a historical lens, the technology will continue to emerge as a patchwork of disconnected, platform-specific attributes and definitions for years before concrete standards emerge.
12. Security Issues
Due to the decentralized computing architecture inherent to blockchain technology, a security hole in a single blockchain node can compromise the whole network. A DoS (Denial of Service) attack that is generally considered to have limited impact in software industry can be huge in the blockchain ecosystem since everything in the system is connected and self-replicating.
While blockchain algorithms are generally more secure because of the inherent nature of the consensus models and methods for deriving truth, how nodes are architected and managed becomes a fundamental risk, no different than any other IT infrastructure server framework.
Most hacks have occurred at layers above the blockchain itself. Whether it be code flaws in wallets or the security architecture of a trading exchange’s internal network, the security risks remain.
13. Secure Data Storage
One of the major limitations of public ledger systems are certain applications with private data that users and participants do not want shared on a public blockchain. This is ironic because data is more secure on a distributed storage system with respect to any unauthorized manipulation.
However, consumers are not comfortable with this application yet, and laws prevent this for certain types of data such as financial or health data, or any personal data that could be subject to GDPR in Europe. Thus, many companies use blockchain just for hashing the location of the data and then store the actual data on centralized servers.
14. Lack Of Stable Development Tools
While many cloud services providers like Microsoft, Oracle, and Amazon have started to offer blockchain services, nearly all of the current offerings involve the traditional management of the server infrastructure for hosting a ledger node.
There exists a significant gap in the actual development layer for tools to easily connect and build against the lower level communication protocol layers. While many developers are familiar with web services and related frameworks, only a small percentage can actually architect and build applications at a communication protocol layer. This refers back to the lack of developer talent and skills gap discussed earlier.
A lack of stable developer tools to consume and manipulate blockchain services within other applications increases the cost of development and maintenance. Furthermore, most tools that do exist are only able to support a single blockchain protocol instead of being adaptable to connect multiple ledgers with different consensus models.
15. Poor User Experience
Similar to the emergence of email and the internet, the early stage of blockchain makes usage cumbersome and limited only to those who are able and willing to experiment and learn. Only when companies like AOL started shipping CD-ROMs with easy to use client applications did internet technology start to experience a rise in usage by the masses.
This is attached to the specific application use case and developer tool frameworks to connect blockchains to front-end client applications that make connectivity seamless. Blockchain adoption is directly tied to the actual use case and the viability of a seamless experience for end users to easily connect and do something useful in an easy-to-use manner.
16. Smart Contracts
Smart contracts are programs that distribute transactions according to a predetermined set of rules. They allow for capital or data to be distributed across parties in a manner that none of them can renege on.
Currently, smart contracts added to the blockchain are immutable. And if there are flaws in the code that may be exploited by hackers, they will remain unless migrated to a new contract, which is a painstaking process. Major hacks — including the DAO hack and the Parity multi-signature wallet attack — have proven difficult to recover from, resulting in huge losses for Ethereum.
17. Lack of Rule-based Transactional Constraints
Currently, blockchains and coins/tokens are largely unmanaged and uncontrolled from a regulatory standpoint. If an Ethereum-based ERC-20 token is issued with security attributes of a privately-placed security, once that Ethereum-based token hits the open market, most controls necessary to assuring compliance with applicable U.S. statutory and regulatory exemptions and restrictions are lost. This opens the issuer, exchanges, and buyers to significant legal risk.
Existing cryptocurrency exchanges do not limit or control trading of tokens carrying security attributes. Buyers can use VPNs (virtual private networks) to appear as if they are not within restricted geographic locations, thus circumventing the buying and selling of these securities tokens on centralized exchanges around the world – even in the instance of known identities.
This applies to many contextual use cases beyond securities.
18. Blockchain Startups Not Enterprise Focused
Many of the new startup companies in the blockchain space are not focused on the needs of enterprise. While being visionary in their solutions, the practical reality of enterprises already having significant investment in IT and line of business applications dictates a very long road for those companies wishing to replace current workflows and applications with blockchain-based versions.
As we can see, there are significant issues that must be addressed for distributed ledger blockchain technology to make its way into the enterprise IT stack. This is why we’ve worked to build XDEX, our flagship product. XDEX resolves many of these issues.
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- Public Finance, the Next Fintech Frontier - April 24, 2019
- What is Market Liquidity? - March 24, 2019
- 18 Barriers to Enterprise Blockchain Adoption - November 5, 2018
- Why is Startup Capital Disappearing in the U.S.? - October 13, 2018
- It’s the transaction that matters, not the token - September 10, 2018
- What are some of the regulatory challenges for blockchain tokens in the Financial Services Industry? - September 3, 2018
- 10XTS “Tokenizing” its Traditional Corporate Shares as Security Tokens - September 3, 2018
- Why Blockchain Will Disrupt Financial Services - July 2, 2018
- Governance, Cryptocurrency’s Big Problem - June 9, 2018