Depending on who you ask, blockchain is either the future saviour of financial services or a new internet waiting in the wings.
There’s no doubting that blockchain has the potential to be an incredibly transformative technology, but it is also important to separate fact from hype before you consider investing time, resources and money in developing any blockchain application.
The beauty of blockchain is that it allows multiple parties to have simultaneous access to a constantly updated digital ledger that cannot be altered. Its power comes from its widely distributed nature, where anyone can verify transactions and trust is not invested in just a single organisation or system.
This may be music to the ears of a financial sector heavily reliant on antiquated, global processes to serve billions of individuals and businesses, moving trillions of dollars daily. These systems are still heavily reliant on paper, prone to added expense and delay, while being vulnerable to fraud and crime.
Blockchain certainly has the potential to help in some of these areas but, when you look beyond the hype, it is unlikely to be the one-stop panacea that many are hoping for.
Here are some of blockchain’s biggest limitations:
Faster transactions are not necessarily guaranteed
Many of today’s public blockchains running Proof of Work (PoW) or Proof of Stake (PoS) consensus schemes, such as the cryptocurrencies Bitcoin or Ethereum, support far fewer transactions per second than existing legacy financial systems. Permissioned / private blockchains may be faster than public options, but they are still often slower than enterprise databases.
However, blockchain’s architecture could speed up complex, multi-stakeholder transactions, such as real estate transfers, because changes do not necessarily need to be signed-off by lots of different parties across siloed systems.
Question marks over support and maintenance
Public blockchain systems, such as those used to run Bitcoin, rely on a network of servers operated and maintained by volunteers. This fragmented platform landscape means there is limited support for any particular platform, and no guarantee that the provider will even exist in the future.
There has also been less time for a support landscape to develop, including strategic advisors, systems integrators, and managed service providers.
In-house talent to manage blockchain will also be hard to find, and all the more important given blockchain’s complexity. Compare this with the decades of experience of traditional database vendors such as Oracle and Microsoft.
Questions over scalability
Today’s centralised databases can scale almost limitlessly thanks to cloud computing and virtualization. For many blockchain platforms, scaling remains a big challenge.
The energy needs of Bitcoin have been grabbing headlines recently and the energy requirement would be even bigger if data blocks included more complex data types, such as images. This would also mean bigger storage and networking requirements.
It’s important to remember that the blockchain powering Bitcoin processes significantly fewer transactions per second than any legacy financial system.
These concerns over energy usage, data storage, networking and transaction levels raise serious questions over scalability.
Costs are unknown at best
Some industry experts have claimed blockchain can cut costs compared to the licensing and support fees charged by leading database providers.
However, a business case for blockchain must include a long list of potential costs beyond hosting, licensing and implementation. Recruiting or outsourcing talent to run a blockchain solution could be significant, electricity consumption could increase dramatically once transaction volumes ramp up. On top of this, organisations should factor in a contingency fund to cover unexpected costs.
Separating fact from hype is an invaluable exercise when weighing up the value of an emerging technology. By actively playing devil’s advocate and searching for limitations you reach a more balanced assessment.
Blockchain is without doubt an exciting technology, but big questions remain unanswered. In fact sector leaders are investing many millions of pounds on proof of concept projects to see exactly how blockchain can benefit their organisations.
Financial institutions are taking a cautious approach, working in partnerships, testing prototypes and duplicating existing systems, so they can measure the benefits without putting critical data, or their budgets, at risk.
It is likely blockchain will emerge as a powerful tool for financial services but some serious challenges need to be met first.