The Massive Challenges Blockchain Needs To Overcome
The Intelligent Blockchain Investor
The Massive Challenges Blockchain Needs To Overcome
Welcome back!
In our Intelligent Blockchain Investor series, we’ve been diving into the blockchain universe to identify if there’s a systematic way to analyse the opportunity.
Our analysis started with The Game Being Played, and it’s where we’ll continue our series.
The Game Being Played
Like any other opportunity, blockchain is an investing universe with its own rules and ideas. There’s things which ‘just make sense’ in the context of blockchain, and there’s other things which ‘just don’t work’.
To help explain some of the larger concepts in this unique and exciting investing universe, I’ve broken the analysis of The Game Being Played into four components, spread across two articles. The four components are:
- Blockchain Technology Basics
- Opportunities Promised by Blockchain
- Blockchain Challenges to Overcome (This Article)
- Future Moves in Blockchain
Quick Note. This information should not be considered investing recommendations or investment advice. It is simply a mental model which I’ve used in my own life and desire to share with others. Consider your own circumstances and do your own research :)
With that out the way, let’s keep going ❤
The Challenge
Innovation is neither straightforward or linear. There’s always something challenging/difficult/unexpected about it — if there wasn’t it wouldn’t really have the potential to change the world.
Blockchain is no different. For all the lofty promises of change and idealistic visions of a blockchain centric future, there’s some cold, hard challenges which must be overcome.
In this section we’re going to dive into some of them and explore. I’ve broken them into two sections:
- Technology
- Impact
Technology
Spend a bit of time in the blockchain universe, and you’ll quickly come across some of the challenges being faced by this emergent technology. In this article, we’re going to explore three of them.
Transaction Speed
For blockchain to reach its full potential, it’s got to be fast. Blazingly fast. To reach the lofty goals promised in the area’s of automation, smart contracts and NFTs a blockchain network needs to be several orders of magnitude faster than our current systems.
Let me break out some statistics for you.
For the 12 months ending June 30, 2021, Visa processed 206 Billion Payment Transactions. That works out at 6532.22 transactions per second (TPS) on average every second of every minute, of every hour, of every day. Put another way, one (admittedly one of the largest) payment provider needed to effectively and efficiently process > 6500 transactions every second non stop. These transactions were largely monetary transfers — Bob sent Jane $100.00 USD. No complex computations required.
Blockchain promises to go far beyond monetary transfers. It promises to enable ecosystems built upon the concept of contracts which automatically execute once preconditions are met. This means we need systems which are:
- Receiving the inbound information
- Matching the inbound information against stated conditions
- Executing the smart contract
- Redistributing the outcomes
Achieving these outcomes demands an ecosystem which blows Visa’s transaction speed out of the water.
Here’s the transaction speed of the top two blockchains:
- Bitcoin: 3–7
- Ethereum: 15–25
Wait. What!?!
Yup.
That’s a problem.
The good news is that there’s extensive research going into solving this problem. Recently there’s been projects with claimed transaction speeds of 50,000 tps and a variety of ecosystem upgrades are underway to meet this existential challenge. Rarely does a blockchain project get released with a transaction speed below 1000 TPS.
However brings us to the next challenge.
The Blockchain Trilemma: Decentralised, Scaleable and Secure
The blockchain trilemma was coined to describe a central technical tension within blockchain development.
It’s very difficult for a blockchain project to be simultaneously decentralised, scaleable and secure. Inevitably, one or more of these aspects must be compromised to achieve increase in another area.
For instance, one project, EOS sacrificed decentralisation to increase their TPS throughput. This meant that they used a more centralised model which provided a better guarantee of TPS — but that gets us a bit closer to a Visa type entity.
In contrast, Ethereum is very decentralised. I, and many of my friends, ran an Ethereum node out of my home for several years. But a transaction speed of 15–25 TPS just doesn’t cut it in the real world.
The challenge is that any compromise of the trilemma dilutes the core value proposition of blockchain.
If we use a more centralised blockchain, why bother moving away from a centralised entity? Visa might charge a percentage fee on transactions, and I might have to wait a few days to see my money, but at least there’s someone to call.
If the blockchain project isn’t scaleable, then all of the new economic models promised aren’t viable. The network simply can’t handle them.
If the blockchain project isn’t secure, then I can’t trust it, and I’m back to square one again.
The good news is that this kind of problem is almost exactly what The Innovators Dilemma talks about. Innovations by their very nature tend to start off being ‘less effective’ than current systems, but contain within them the possibility of significantly more (seriously, read the book. It’s amazing!)
These days there are huge teams of devoted engineers and technologists working to solve the trilemma. While it remains to be seen if they’re successful, a positive outcome is at the very least likely.
Consistency
Blockchain needs to become consistent. Even better — consistently consistent.
Imagine what would happen if Visa went offline for 17 hours. Not just reduced but completely, utterly and globally offline. What if it was a large ecommerce retailer?
There would be outrage. There would be inquiries (or for my US colleagues, Senate Hearings).
Also, Mastercards market cap would 🚀
What if a mission critical software update was delayed by 2 months? Six months? Two years?
However this is a common occurrence in blockchain. Sometimes it’s a result of the sheer complexity of the problem being faced. Sometimes it’s because the teams lose interested (I mean pivot 🙃). Sometimes it’s the result of the very decentralisation which holds so much promise for blockchain.
The reality is that any of these issues impacts trust. After all, if I’m building my business on a decentralised, autonomous system, I need to trust that it’s going to keep developing. To keep updating. To stay relevant.
The good news here is that as blockchain developers gain experience, the consistency of the best teams is becoming more consistent. As a result, they are gaining real operational credibility trust capital with the business looking to revolutionise the world.
Impact
Blockchain currently has an impact problem. Despite its incredible breakthroughs and astonishing technical accomplishments, it continues to remain on the fringes of society. For instance, at the time of writing, the market cap of the worlds largest company briefly breached $3 Trillion USD. Yup. With a T.
The market cap of the entire crypto market is $2.88 Trillion USD.
There’s three area’s of impact I believe are necessary for blockchain.
Legislative
Legislation of some kind is almost inevitable for blockchain. Just like the internet started off with very libertarian ideals, governments had to step in to provide legislative guidance for a variety of reasons.
Blockchain is in a similar position. Whatever your position on governments, at some point blockchain is likely to become an area of interest for legislators and they will need to address it. There’s evidence of this in many countries around the world, including the USA and Australia.
The impact of this legislation remains to be seen. Legislation of the internet shows us that when it is done effectively, there is enormous amounts of wealth generated as systems become more trusted and dependable.
One can imagine that if blockchain was legislated in a way which removed some of the investor uncertainty, the impact would be an unprecedented flow of investment. The opposite is also true.
The good news is that many governments seem to be taking a positive approach to blockchain (although this could change at any moment).
Consumers
For blockchain to succeed, it needs mainstream adoption. By this I mean it must solve problems for people in a way which can’t be replicated by competing models.
This needs to transcend things like gaming and penetrate into the world of real economic incentive and value. Arguing about the excellent benefits of Solana and its use of the Rust programming language to make it highly scaleable is interesting from a technical investing perspective, but doesn’t really solve problems for a consumer.
Few people I’ve met really understand how banking finance works and their ability to multiply money — but almost everyone appreciates not having to carry their wealth around in heavily guarded boxes of gold.
B2B
For blockchain to revolutionise the world, it must capture the B2B market. Blockchain needs to become the default technology of choice for businesses to run their everything on.
Their CRM. Their logistics. Their (automated) stock ordering systems. Their transaction systems.
The challenge for this aspect is that it’s completely reliant on solving the technical challenges outlined earlier. Few businesses are willing to take a risk on technology which is unreliable or doesn’t offer much in the way of benefit.
The best we can say here is that the amount of work being invested in solving the previous challenges is more likely than not to result in a positive outcome.
Next Stop: The Future
The next stop in The Game Being Played is to take a peak at the future of what blockchain may offer us.
As always, if you’re enjoying this series, take time to interact. Comments, claps, tweet mentions, LinkedIn mentions and sharing is a great way to interact with a community of people who can add to our exploration. A great way to stay up to date with this series as it comes out is by following me or signing up to our email distribution. A word of caution though — please keep it respectful, fun and polite. We want a safe place to learn and grow ❤
Articles in the Series so Far:
- Hello World ❤
- The Intelligent Investors Dilemma
- Blockchain Technology Basics
- Opportunities Promised by Blockchain
