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Blockchain: Background, Barriers and Challenges

Beyond just facilitating electronic payments, Blockchain can offer a number enterprise-level efficiency improvements.

Person Looking At Blockchain Concept On Screen, Cryptocurrency, Business, Fintech 849253650 4500x3000

The use of Blockchain has evolved from its Bitcoin origin a decade ago and moved beyond being solely a cryptocurrency for digital payments. Now, business logic can be programmed through smart contracts and contractual agreements that can be automatically executed peer-to-peer or machine to machine.

Blockchain is essentially a ledger technology that uses cryptography to provide an authoritative record of secure transactions. By doing away with a centralized middle man responsible for the ledger, blockchain allows for a “trustless trust.” The three primary transformative features are immutability, transparency, and autonomy.

These transactions, once verified and accepted, are cemented into blocks and then appended to the chain. The synchronized replication across all distributed nodes and the use of cryptographic hashing is what provides the transparency of transactions, with the data viewable to all the participants.

This provides a new level of autonomy. Smart contracts can be programmed to release funds, communicate information and record and embed data, all in a preprogrammed, self-executing, and autonomous manner. Furthermore, digital identities can be created for physical properties and intangible assets with their ownership controlled through smart contracts.

Moving beyond smart contracts is the idea of decentralized autonomous organizations (DAOs). At their core, they are AI-based autonomous agents. DAOs are best defined as a set of long-lasting smart contracts. They can be a party to a smart contract, but they can also be used to implement more complex elements like ownership, exchanging and trading resources, interacting with other parties (human and machine), and executing pre-defined tasks.

The Challenges

Despite its potential, blockchain does face some challenges and barriers to growth. It is still a nascent technology, despite bitcoin and cryptocurrency being a decade old. The focus on blockchain now centers around how to commercialize a 2.0 version, with smart contracts and decentralized autonomous organizations (DAOs).

The key takeaway to remember is trustless trust and breaking down barriers that have formed around centralized systems. Blockchain will not stick in areas that are controlled end-to-end by one entity, and there is already trust in the process. Blockchain for the sake of blockchain is simply not a good business model.

For participants, a big questions will be around cost:

  • What is it going to cost to implement and deploy?
  • What is it going to cost to replace, especially where some costs are already sunk for existing infrastructure?
  • What kind of resources are needed to keep it up and running?

The point to consider about blockchain is you don’t need substantial investment or change to integrate it. It’s not about sharing everything you have in your database or replacing it completely with blockchain. It’s about selecting what you want to share from your own data so the blockchain can abstract it and share on a new ledger that’s accessible to other participants.

Of course, there will be a need for integration, but it’s about leveraging the tools already in place. Another concern will be around scale: How quickly and cost-effectively can the solution scale?

When you’re a small manufacturer with one product, that may be less of an issue, but how will that work out on a global scale? We know that there are scale and energy consumption issues with cryptocurrencies and mining. These may not always be necessary for smart contracts and DAOs, but they can be used. With the decreasing cost of cloud storage, this could become less of an issue, but implementors still need to consider that they may have hundreds of participant nodes, each with a copy of a ledger that will grow incrementally over time and have real-time requirements.

This may be difficult to achieve with synchronized replication across hundreds of participants of a large ledger. The questions to consider are:

  • How fast can this replication be done?
  • How fast can the smart contract be executed?
  • Will all the participants have the bandwidth to integrate with blockchain, without creating new friction or excluding other players that are enabled to participate?

These are elements to consider in the complex supply chain that may have dozens or hundreds of different parties to it.

There are also still many unknowns to consider. Smart contracts and DAOs have been hacked in the past, many fraudulent ICOs (initial coin offerings) still exist, and even where they are considered legitimate, blockchain sits in a regulatory gray area.

  • How will blockchain affect data retention or data deletion regulation?
  • What about data protection or privacy laws? After all, there’s often a good reason data isn’t shared among all participants.

Perhaps this is also where the cryptography features of the block can provide some security — but to what extent? These are questions that have to be asked and need to be addressed. Beyond that, there could still be resistance to adoption.

In an optimistic scenario, we could see tech and market maturity of Blockchain 2.0 by 2025. This realization will only be possible if we can positively answer these two questions:

  1. What can blockchain solve in industrial applications?
  2. How can blockchain enhance Industry 4.0?

In the latter scenario, if blockchain can increase automation, efficiently leverage machine intelligence, streamline processes and logistics, then we have a good shot at having a successful technology being used in Industry 4.0.

Michela Menting is a Research Director at ABI Research, a market-foresight advisory firm providing strategic guidance on transformative technologies. 

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