Suggested Report: Five crucial challenges for blockchain to overcome: Deloitte (cnbc.com)
  • Blockchain is touted as a technology that will revolutionize the finance sector.
  • Slow transaction speeds and a lack of standardization threaten to restrict growth.
  • Deloitte has highlighted five hurdles that the technology must overcome to hasten widespread adoption.

Ryan Browne@Ryan_Browne_

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Dong Wenjie | Moment | Getty ImagesArtist's blockchain concept.


Blockchain is perhaps one of the biggest buzzwords in both finance and technology today. Proponents tout it as the technology that will revolutionize the financial services, pointing to its ability to function without a central authority and also store data in a tamper-proof way.

But they also believe it will be beneficial to a variety of industries beyond finance and tech, particularly ones beset by a huge trail of paper records and outdated legacy technology — whether that's healthcare, real estate or law.However slow transaction speeds and a lack of standardization for instance threaten to stunt blockchain's growth.

According to Deloitte, there are five main hurdles the technology needs to overcome to see widespread adoption.

Increased performance


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Paul Ratje | The Washington Post | Getty ImagesA bitcoin mine near Kongyuxiang, Sichuan, China on August 12, 2016.


Blockchain is similar to an accounting ledger, only it records transactions across a vast network and is decentralized, meaning it doesn't require any central authority to oversee it.

Advocates of the technology say that's a huge advantage when it comes to tracking financial transactions and other data.But there's a problem, Deloitte says."Blockchain can be slow," researchers at the consultancy said in a report published on Monday.

"In contrast to some legacy transaction processing systems able to process tens of thousands of transactions per second, the Bitcoin blockchain can handle only three to seven transactions per second; the corresponding figure for Ethereum blockchain is as low as 15 transactions per second.

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It adds: "Because of its relatively poor performance, many observers do not consider blockchain technology to be viable for large-scale applications.

"With bitcoin's blockchain, any number of people can participate in the network, as it is public. So-called miners on the network work out complex mathematical problems to validate transactions.

There needs to be consensus on the network about the validity of the transaction in order for it to go through. While this system reduces the risk of malicious activity being carried out on the network, it can also increase the time it takes for transactions to settle.

However, Deloitte has said work is being done to create a more efficient model that can speed up transaction speeds. Firms in the industry like Hyperledger, Stellar and Ripple are using new consensus mechanisms aimed at accelerating this process.

These new models are called "proof-of-stake" systems, where a cryptocurrency miner is required to have a certain stake in the digital asset in order to participate in the network. "The evolution of consensus mechanisms is improving blockchain speed significantly — good news for applications in trade finance, supply chain traceability, auto leasing, marine insurance, health care, and insurance," the report said.

Interoperability


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Chesnot | Getty Images

Digital cryptocurrencies, Bitcoin, Ripple, Ethernum, Dash, Monero and Litecoin.With an increasing number of players in an ever-expanding industry like blockchain, some worry that with so many different networks, no standard exists to allow them to interact with each other.

This standardization is what the industry calls interoperability. According to Deloitte, the lack of interoperability "grants blockchain coders and developers freedom — and can give IT departments headaches as they discover that platforms can't communicate without translation help.

"The report said that, on coding site GitHub, there was more than 6,500 active blockchain projects using a range of platforms with different coding languages, protocols, consensus mechanisms and privacy measures.

"Standardization could help enterprises collaborate on application development, validate proofs of concept, and share blockchain solutions as well as making it easier to integrate with existing systems," the Deloitte study said.

"Help is on the way as a growing number of industry participants work to enable cross-blockchain transactions, interconnectivity, and standardization.

"Organizations that include hundreds of members focused on creating a standard version of blockchain and encouraging collaboration are lifting hopes of the industry overcoming the interoperability problem. Interledger for instance is a computer protocol designed to enable payments between different distributed ledger networks.

"The efforts we are seeing represent a vector of progress for blockchain technology," the Deloitte report said.

Reduced complexity, cost


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eclipse_images | Getty Images

With venture funding aplenty, numerous blockchain applications have been developed and many more are in the works. Here, a computer programmer sets up a mining rig to mine for bitcoin.

One of the frequently noted criticisms of bitcoin's blockchain network is the fact that it relies on intensive computing power — and hence a lot of electricity — in order to run.Miners use huge computer rigs with multiple servers to keep the network ticking over, and that process certainly doesn't come cheap.

study released by Elite Fixtures earlier this year said that it cost more than $26,000 to mine just one bitcoin in South Korea, which is one of the world's largest markets for cryptocurrency trading.

Although bitcoin miners get paid a sum of bitcoin for their labors, the price tag of validating transactions in the first place could be a problem for the widespread penetration of that technology in commercial activity.

As well as cost issues involved in both creating and maintaining a blockchain network, the Deloitte report says that complexity is another cause for concern.

But a number of firms, including AmazonIBM and Microsoft, are working on ways of improving the cost and complexity involved in creating blockchain networks by using cloud technology. Their work in the field is focused on creating what is known as blockchain-as-a-service, where effective "templates" are offered in order to make it easier for developers to set up and run blockchain networks.

"New cloud offerings have been coming to market at an accelerating pace and have the potential to lower the barriers to developing and operating blockchain networks," the study said.

"Cloud providers are releasing blockchain templates intended to automate the setup of basic blockchain infrastructure; vendors claim this can reduce application development from months to days.

"The report also notes that Hyperledger's open-source platform Sawtooth lets developers build blockchain applications in their preferred coding language, without requiring knowledge of the core system. "There is a clear trend toward easier-to-use blockchain tools and platforms," Deloitte said. "This vector of progress is likely to foster greater adoption of blockchain technology over time."

Supportive regulation


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Patrick T. Fallon | Bloomberg | Getty ImagesSteven Mnuchin, U.S. Treasury secretary

As cryptocurrency prices spiked last year, regulators became increasingly uneasy about the speculative nature of the market.A controversial phenomenon known as an initial coin offering (ICO) for instance was banned in South Korea and China, and the U.S Securities and Exchange Commission earlier this year charged the founders of Floyd Mayweather-backed cryptocurrency firm Centra with carrying out a fraudulent ICO.

In an ICO, blockchain ventures sell new digital tokens in exchange for other cryptocurrencies like bitcoin and ether, or cash.But there are other areas in blockchain where regulation is uncertain, such as smart contracts — self-executing contracts that run on blockchain networks like Ethereum.

Such contracts contain a set of conditions under which a buyer and a seller are in agreement. When those conditions are met, the contract is automatically enforced, something which proponents say is more proficient than paper-based contracts.

But Deloitte highlights that existing regulations don't cover smart contracts, which could inhibit investment in blockchain.However, Deloitte points out that some progress is being made on the regulatory front, with 17 U.S. state legislatures either mulling or passing bills related to blockchain adoption.

And Treasury Secretary Steven Mnuchin said at the start of the year that a working group has been formed to look into cryptocurrencies.
"There is a lot of work still to do before the major regulatory hurdles to blockchain adoption are cleared," says the Deloitte report. "But momentum is building."

More collaboration


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Getty Images North America

And last but not least, the report by Deloitte says that more firms working in the sector need to collaborate in order for the technology to promote both the development of applications and education.

A number of groups have been formed aimed at increasing collaboration in the space and encouraging standardization — something that could help the aforementioned problem of lacking interoperability between networks. "As a technology that facilitates transactions across a network, the value of a blockchain network increases with the number of users," the Deloitte report said.

"That's one reason why the growth of blockchain consortia is a bullish sign. "Such groups, which contain hundreds of member firms, include R3, the RiskBlock Alliance, the Enterprise Ethereum Alliance and Hyperledger.

In March, a study by tech-focused research group Gartner put the number of blockchain-oriented consortia currently in existence at 61, more than doubling the 28 consortia that were around in the previous year.

However, there are reports that some of these working groups, such as R3's and Hyperledger's, could be running out of money.
"Not all consortia are building applications, and not all are equally effective," the report said.

"But growing participation by enterprises, technology providers, regulators, and governments is a vector of progress in the development of blockchain that will help increase adoption of the technology."


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Ryan Browne

News Assistant, CNBC.com