Every technology has its challenges. Blockchain is no exception!

Blockchain technology can be used in various fields (like logistics, legal sector, auctions, banks, etc.). Besides, blockchain has a potential to disrupt existing disciplines. Some people think that blockchain will change the society as internet did. I think this is an interesting thought, but I do not know if blockchain will change society as internet did. But I am sure that blockchain has the potential to be as disruptive as internet.

The difference between blockchain and internet is that blockchain is the technology where use cases are built on. Blockchain is the underlying technology where certain use cases can exist. In short, you cannot 'see' blockchain on your computer screen as you can with internet (browser, domain names etc.). But you can find some transactions in a blockchain via certain websites.
Like the internet has its challenges, the same exists for blockchain. In this article, I will discuss some challenges of blockchain technology. I will also discuss the question if these challenges will block the development of blockchain technology and the most recent developments on OECD and EU level concerning virtual currencies/blockchain (tax related).

Blockchain use a lot of energy
Depending on the consensus protocol a blockchain system uses, the energy usage is huge. The consensus protocol that uses the most energy is the proof of work consensus protocol. Miners compete with each other to validate transactions on the blockchain. The miner who has the most computing power (and thus solves the hashing puzzle the quickest) is the miner who can validate the transaction on the blockchain. An Apple Macbook is not sufficient to solve the hashing puzzle. Instead, miners invest in 'mining farms' where there are a lot of CPU that solve hashing puzzles. But all these CPU's need energy. The energy usage is equivalent to the Chilean annual energy usage.

Miners can combine

Miners can combine to rewrite or alter the blockchain record. If this is possible, the security of data disappears (50%+1). However, there is no economic incentive to alter the blockchain ledger. But there could be political reasons to rewrite or alter the blockchain ledger.

Private key

Blockchain uses asymmetric cryptography where there are public and private keys. Asymmetric cryptography gives the users ownership of their data. Each blockchain address has their own private key. The user is the only one who has the private key. If the user loses his private key, other users can access his data. That is because the private key acts as a key to their own bank.

Storage

If a new user enters the blockchain network, the new user has to download the whole blockchain ledger from begin to end. The blockchain ledger can grow very large over time (when there are more and more transactions carried out on the blockchain). In the future, there could be a problem with downloading the ledger, because the ledger has grown too large to download.

Cost of implementing and managing blockchain

The cost of implementing blockchain technology is huge. Although Hyperledger is open source, you still require a lot of investment if you want to pursue your own blockchain system. There are costs associated with hiring developers, managing a team that excels at different aspects of blockchain technology, licensing costs if you opt for a paid blockchain solution, and so on. You also need to take care of the maintenance costs. For enterprise blockchain projects, the costs can be more than a million dollars.

Knowledge of blockchain
Not only does the company pursuing blockchain have to know about blockchain in theory, you also need people who know how to code. And people who know how to act if the technology doesn't work properly.

Scalability

Centralized companies, like Visa, can process approximately 1700 transactions per second. The bitcoin blockchain on the other hand, only can process around 7 transactions per second. Visa (or another centralized authority) decides the flow. They control the whole system. They do not have to notify other nodes (peers) in the system. This saves time and speed. In the blockchain system, it takes a few minutes to verify a transaction, because the ledger of the individual node in the bitcoin blockchain system has to be updated. There are projects (like MATIC) that are seeking to increase scalability.

Knowledge drain

Blockchain developers or highly skilled workers in the IT sector move abroad in search of better opportunities. Developers say that the knowledge (or brain drain) happens due to the lack of a robust regulatory framework. A report suggests that developers are moving to Singapore, UAE, Estonia and Switzerland which offer tax breaks and e-residency for startups.

Lack of awareness

There is a lot of discussion about blockchain technology, but not a lot of people know the potential advantages and true value of blockchain. Besides, a lot of people do not know how to implement blockchain in different real life use cases.

Will these challenges block the development of blockchain?

I think the answer should be no. These challenges can be solved and are momentary issues (except for probably the knowledge drain). Blockchain technology is evolving and needs time to develop. I do believe countries need to regulate blockchain (use cases), but I do not think that regulators have to make blockchain developers that hard to start a blockchain start up. This will slow down the development. Many of these challenges are already sorted out in different protocols or will be managed in the near future (like scalability and energy usage). Also, there is no one form of blockchain. There are multiple forms of blockchain. Like public permissionless blockchain, private permissioned blockchain, and other hybrid forms. You can adopt any blockchain form that suit your needs. You are not bound to 1 or 2 forms of blockchain systems. The speed of development of blockchain depends on regulators. If regulators give blockchain start ups enough room to manoeuvre, I am sure that great initiatives will arise (for example improving the sharing and using of patient data).

Most recent regulatory developments in the tax world 

The OECD has published a report on how countries tax virtual currencies, the mechanics of blockchain technology and a first step towards policy options for countries. The EU has also started to work on ''DAC8'', which will introduce legislation on virtual currency to tackle tax evasion and more transparency. A legislative proposal is expected in the third quarter of 2021.

On September 10-11, 2021, ECOFIN discussed the applicability of blockchain technology and its contribution to Digital Europe. It will be interesting to see if Europe is willing to implement blockchain in different sectors. I hope that Europe gives blockchain startups enough room to innovate.

I will write a separate article on these topics if new developments arise (so keep an eye out on my blog!)

To conclude

In this article, I discussed challenges that blockchain faces. Like the internet in the early days, blockchain has its challenges. But these challenges aren't challenges that could not be solved. If legislators give blockchain start-ups enough room to develop, I am sure blockchain is here to stay. There are already countries who see the potential of the technology, like Estonia and Switzerland. The OECD and EU are following.

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