Five major challenges in the blockchain industry
Blockchain technology has demonstrated tremendous potential when it comes to streamlining conventional validation processes that require scalability and transparency. However, the technology faces a myriad of blockchain adoption challenges, which is the focus of the discussion in this article.
Key challenges for blockchain adoption
The following sections consist of a breakdown of some challenges of blockchain adoption.
Organizations in all industry sectors will face a complicated and potentially contentious array of difficulties, as well as new dependencies, as the blockchain ecosystem matures and additional use-cases arise.
There are numerous problems with blockchain and security issues are among them. So, what are the weaknesses of blockchain in terms of security?
Blockchain technology designs, for example, differ in architecture. Some are more secure than others. Decentralized blockchains are, for example, more susceptible to 51% attacks than centralized ones. This has caused a few problems for crypto enthusiasts who prefer to keep their assets on decentralized chains.
Delving a bit into the details of how 51% attacks work, they exploit an inherent loophole in decentralized systems that allows users to control a chain by wielding over 51% of the processing power. This usually happens on networks utilizing the proof-of-work (PoW) standard.
Permissionless blockchain systems with low hash rates are particularly prone to these types of attacks. Successful 51% attacks allow hackers to reverse transactions, invalidate new transactions and modify new blocks.
In many cases, malicious actors behind the hacker schemes look to cause double-spending. The anomaly allows hackers to siphon funds from a network without having to hack embedded crypto wallets.
That said, some blockchain ecosystems have deployed formidable 51% attack mitigation techniques. This includes the implementation of blind signatures on proof-of-work (PoW) systems. On proof-of-stake (PoS) systems, the problem is countered by locking a certain percentage of funds to prevent majority control and ensure network security.
Flash loan attacks
The other security problem that blockchain networks face is flash loan attacks. These types of attacks are usually leveraged against smart contract DeFi ecosystems because they offer non-collateralized loans. Most networks also have lax Know Your Customer (KYC) requirements. As such, attackers can make use of arbitrage loopholes to manipulate token value and withdraw profits to other networks, effectively laundering the money.
Among the most notable flash loan attacks is the PancakeBunny hack attack that occurred in May 2021. It led to the loss of approximately $200 million in cryptocurrency assets. Alpha Finance and Spartan Protocol also suffered similar attacks that led to tens of millions of dollars in losses.
Besides hack attacks, blockchain systems are also susceptible to coding loopholes. Centralized blockchains are usually more vulnerable as all hackers have to do is undermine specific points of failure. In many instances, entities holding the blockchain keys (such as private keys) are targeted.
Gaining access to the blockchain keys allows hackers to transfer assets from wallets that are native to the system.
Centralization of information
Another security problem that affects blockchain is the centralization of information, especially in blockchain systems that rely on external sources. Some networks, for example, utilize oracle systems to determine pricing on their ecosystems and this has in some cases led to substantial losses.
For instance, in November 2020, users on the Compound DeFi protocol lost a cumulative $103 million due to a DAI (the Compound protocol’s native currency) price discrepancy. The platform had pulled market price data from Coinbase Pro that was incorrect. The mistake caused prices to jump by 30%. As a result, short sellers with highly leveraged positions suffered significant losses.
The other major problem that centralized blockchain systems face is a susceptibility to rug pulls. Rug pulls are manipulative maneuvers that involve publicizing projects to draw investors. Once this is done, the founders abscond with the funds.
These types of incidences are fairly common in the cryptoverse and are likely to continue due to a lack of regulatory oversight. They have caused ethical issues with blockchain technology like tax evasion and money laundering.
Low scalability and interoperability challenges in blockchain technology
Blockchain technology has evolved over the years to become more scalable as use-cases increase. The first blockchain network was developed by Satoshi Nakamoto to underpin the Bitcoin network. The second decentralized network was the Ethereum network founded by Vitalik Buterin.
The Ethereum blockchain was a step ahead of the Bitcoin network because of what experts refer to as programmable money. The network was built to handle a large number of crypto transactions while at the same time supporting decentralized applications.
However, scalability issues are plaguing both the Bitcoin and the Ethereum networks. As things stand, the Ethereum network is the more popular among blockchain developers.
It is estimated that over 80% of blockchain projects are based on the Ethereum blockchain. The explosion of projects on the network in recent years has caused significant scalability problems. They include slow speed and high gas fees.
In August 2021, Ethereum developers implemented the London hard fork to kickstart the transition from a proof-of-work (PoW) protocol to proof-of-stake (PoS). It helped lower network usage, which had reached alarming levels. In the preceding months, the Ethereum network was running at approximately 98% capacity, a situation that threatened to stall the blockchain.
The Ethereum 2.0 upgrade is set to improve scalability by increasing the number of transactions handled per second. This will be done through a technique known as sharding. Sharding will increase processing rates from the current optimal speeds of approximately 30 transactions per second (TPS) to over 100,000 TPS by spreading data loads across the chain.
Presently, slow network speeds and high gas fees have forced some projects to shift to more efficient networks such as the Binance Smart Chain (BSC). The BSC network has a higher transaction throughput and lower gas fees. The BSC network also has Ethereum Virtual Machine (EVM) support. This means that it can handle applications built for the Ethereum chain.
The BSC network has become a formidable competitor to the Ethereum blockchain and has at times surpassed the older cryptographic ledger in some metrics, such as the number of executed transactions.
Side-chains: A solution to blockchain’s scalability issue
Several blockchain projects have been developed to counter the scalability problems on major networks. They include Ethereum side-chains such as the Polygon network. The layer-2 scaling solution has a processing speed of over 1,000 transactions per second (TPS).
It relies on commit chains to bundle together transactions for processing. They are verified en masse before being returned to the main chain. The main purpose of side-chains is to support applications that are compatible with the main chain by providing greater efficiency and lower gas fees.
Side-chains also promote interoperability by supporting data exchange with other blockchains. Other side-chain solutions include Orbs, Ark and the Loom Network.
Energy consumption blockchain challenges
The Bitcoin and Ethereum blockchain systems are among the most popular. They are, however, energy-intensive proof-of-work systems that depend on mining to validate blocks and transactions. The concept is a bit dilapidated, considering the amount of power that they consume.
BTC mining, alone, is estimated to use approximately 100 terawatt-hours of electricity every year. This is more than the amount of energy used in countries such as Finland.
Its carbon footprint is also significant and is estimated to be roughly 97 metric tons of carbon dioxide produced every year. This has become a major cause for concern for regulatory authorities. Consequently, major jurisdictions such as China have banned crypto mining. This is because of the needless and significant environmental damage that the mining activity causes.
Besides China, some nations such as Kazakhstan, a leading data center and crypto mining hotspot, are facing challenges in implementing blockchain regulations as miners from China and surrounding nations flock to the nation because of the cheap power.
Earlier this month, the authorities blamed miners for adversely affecting capacity. They cut power supply to crypto mining operations in an attempt to mitigate the problem. The move led to a clash between the authorities and crypto miners.
Elsewhere in the United States, eight lawmakers have sent letters to crypto mining firms asking them to submit details concerning their operations. They include power consumption, existing agreements with local electricity supply companies, their scaling plans, and the impact in terms of direct and indirect costs to local consumers.
The latest development comes in the wake of an increased debate on the environmental impact of crypto mining. Some legislators have already presented proposals aimed at compelling crypto firms to use renewable energy sources. The strategy would allow the current US administration to meet its climate change goals.
This turn of events has caused some crypto networks to consider shifting to more energy-efficient systems. The Ethereum network already has a planned upgrade to a proof-of-stake protocol to enable this.
Ethereum is estimated to use about 73.2 TWh of power annually. Energy consumption is forecasted to drop by 99.95% once the Eth2 rollout is complete.
Low workforce availability
The blockchain industry has experienced an explosion of nonfungible tokens and DeFi projects over the past year causing problems in the labor market. According to the latest statistics, demand for blockchain talent has increased by over 300% as both established firms and startups scramble for top-tier talent.
Top blue-chip firms such as Google, Amazon, Goldman Sachs, the Bank of New York Mellon Corporation and DBS Group are already hiring blockchain specialists by the hundreds, and this is creating a labor shortage. Other blockchain-centric companies such as Coinbase reportedly hire over 500 people per quarter.
A quick look at LinkedIn’s job post results shows that there are currently over 6,000 listed blockchain and cryptocurrency jobs. This isn’t even scratching the surface because job sites such as Indeed and ZipRecruiter have over 15,000 listed blockchain jobs each.
According to Bloomberg, a sizable number of people lured from their mainstream jobs are reportedly getting pay rises of 50 percent and more. In general, the workforce involved in crypto is getting at least 20 percent higher pay than employees in other asset classes.
The situation has been brought on by competing enterprises that are offering highly competitive remuneration packages to both attract and retain their staff. Subsequently, some companies in the crypto sector are consistently paying over a million dollars per year to workers in some job categories. This is according to statistics published by Team Blind.
The report indicates that software engineers in the industry are getting pay packages that are upwards of $900,000 per year. Their pay structure reportedly includes stock-based compensations as well as cash bonuses.
Among the main reasons why mainstream firms are looking to hire blockchain staff is the rising need to adopt blockchain technology to streamline processes. Walmart, for example, now utilizes blockchain technology to manage invoices and payments to freight carriers.
Tech behemoths such as Google and Amazon have also jumped on the blockchain bandwagon and now have teams that specialize in blockchain development. Google recently announced the unveiling of a team dubbed the Digital Assets Team, which will work with clients utilizing blockchain systems.
Amazon, on the other hand, already offers support for private blockchain networks via its Amazon Managed Blockchain managed service. It supports popular decentralized ledger frameworks such as Ethereum and Hyperledger Fabric.
Auxiliary blockchain use-cases in the mainstream arena include the management of collateral on exchanges, data collection and validation, and supply chain transparency.
The current blockchain workforce shortage highlights a fundamental problem that has gripped the industry. As a result, many blockchain firms are unable to meet their hiring needs. The direct impact of this is the slower development of blockchain projects because of the high number of qualified people locked in job contracts.
The problem is set to continue even as the bearish crypto season drags on. While Bitcoin and other major cryptocurrencies have lost over a third of their value in the past few months, the hiring frenzy is unaffected because of the need to scale blockchain projects that will take advantage of future price uptrends.
Is blockchain difficult to implement?
Presently, major industries have been impacted by blockchain hiring challenges. This has caused implementation challenges of blockchain in banking, healthcare and accounting.
This is because the implementation of blockchain technology requires highly-trained specialists. In contrast, investment in the blockchain industry is increasing. In 2021, development expenditure was reported to have surpassed $16 billion. Capital inflows are bound to increase as more innovative blockchain technologies take center stage.
At the moment, some promising implementations of blockchain technology are still in their early stages. This includes Web3 platforms designed to democratize the internet and devolve monetization.