Blockchain tech will inevitably fail, too many obstacles

From examining the above three potential applications of blockchain technology, four main obstacles to wider adoption are identified.

a. Redundancy: Having every transaction recorded with every member of the network is a very costly redundancy whose only purpose it to remove intermediation. For any intermediary, whether financial or legal, there is no sense in adding this redundancy while remaining an intermediary. There is no good reason for a bank to share a record of all its transactions with all banks. There is also no legitimate reason for any bank to want to have complete records of other banks’ dealings with one another. This redundancy offers increased costs for no conceivable benefit.

b. Scaling: a distributed network where all nodes record all transactions will have its common transaction ledger grow exponentially faster than the number of network members. Thus the storage and computational burden on network members will eventually become too large for network members to handle as the network size grows. Blockchains will always face this barrier to effective scaling, and this explains why as bitcoin developers search for solutions for scaling, they are moving away from the pure decentralized blockchain model towards having payments cleared by intermediaries off the blockchain. There is a clear trade-off between scale and decentralization. Should a blockchain be made to accommodate larger volumes of transactions, the blocks need to be made larger, which would raise the cost of joining the network, and result in fewer nodes, making the network more centralized. The most cost-effective way to have a large volume of transactions is centralization in one node.

c. Regulatory Compliance: Blockchains with their own currency, such as Bitcoin, exist orthogonally to the law, as there is nothing that any government authority can do to affect or alter their operation, and the Federal Reserve chair has said it has no authority to regulate Bitcoin. Transactions will clear if valid, and will not clear if not valid, and there is nothing that regulators can do to overturn the consensus of the network processing power. Applying blockchain technology in heavily regulated industries such as law or finance, with currencies other than Bitcoin will result in regulatory problems and legal complications. Regulations were designed for an infrastructure very different from that of blockchain and the rules cannot be easily tailored to fit blockchain operation, with the radical openness of having all records distributed to all network members. Further, blockchains operate online across jurisdictions with different regulatory rules, making it difficult to ensure compliance with all rules.

d. Irreversibility: With payments via intermediaries, human or software errors can be easily reversed by appealing to the intermediary. In a blockchain, things are infinitely more complicated. Once a block has been confirmed and new blocks are being attached to it, it is only possible to reverse any of its transactions by marshalling 51% of the processing power of the network to engage in a ‘hard fork’ of the network, where all these nodes agree to move simultaneously to an amended blockchain. Blockchain technology, after all, is meant to replicate cash transactions online, and they will thus replicate the irreversibility of cash transactions, and not carry any of the benefits of custodial intermediation.

In most likelihood, such a fork will never succeed if tried with Bitcoin, as it would require far too many disparate actors to agree and expend resources for no gain. After the DAO incident, it has become apparent that for any blockchain other than bitcoin, the network hashrate is small enough, and the designers of the currency influential enough, to overturn parts of the blockchain that they do not like. This means that blockchain technology’s claim to ‘immutability’ is only really valid in the case of Bitcoin. For any other blockchain, the operators of the blockchain, or a regulatory authority, could in fact change the record. A blockchain that is alterable is a completely pointless exercise in engineering sophistry: it uses a very complex and expensive method for clearance to remove intermediaries and establish immutability, but then grants an intermediary the ability to overturn that immutability. Current best practice in these fields contains reversibility and supervision by legal and regulatory authorities, but employs cheaper, faster, and more efficient methods.

e. Security: The security of a blockchain database is entirely reliant on the expenditure of processing power on verification of transactions and proof-of-work. Blockchain technology can best be understood as the conversion of electric power to verifiable undisputed records of ownership and transactions. For this system to be secure, the verifiers who expend the processing power have to be compensated in the currency of the payment system itself, to align their incentive with the health and longevity of the network. Should payment for the processing power be made in any other currency, then the blockchain is essentially a private record maintained by whoever pays for the processing power. The security of the system rests on the security of the central party funding the miners, but it is compromised by operating on a shared ledger which opens up many possibilities for security breaches to take place. A decentralized system built on verification by processing power is more secure the more open the system, and the larger the number of network members expending processing power on verification. A centralized system reliant on a single point of failure is less secure with a larger number of network members able to write to the blockchain, as each added network member is a potential security threat.