Blockchain technology has the potential to disrupt many industries and bring new innovations in areas like finance, supply chain management, voting, real estate, healthcare, and more. However, there are some key challenges that need to be addressed for blockchains to reach mainstream adoption. The three main challenges are scalability, energy consumption, and regulation.
Scalability
What is blockchain scalability?
Blockchain scalability refers to the ability of a blockchain network to handle increasing transaction volumes and data while maintaining performance. As more users join a blockchain network, there will naturally be more transactions submitted to the network. This leads to challenges in processing higher transaction speeds, ensuring low latency, and storing the growing data from those transactions.
For blockchains to support entire economies, they need to achieve transaction speeds and throughput rates comparable to major payment processors like Visa and Mastercard. Visa can handle up to 65,000 transactions per second (TPS), while Bitcoin maxes out at around 7 TPS and Ethereum at 15-20 TPS currently. So blockchain scalability is about increasing network capacity through technological improvements.
Why does scalability matter?
Scalability is crucial for the mainstream adoption of blockchains. If a blockchain cannot efficiently process high transaction volumes, then congestion occurs, transaction fees spike, and users experience long processing times. This leads to a poor user experience that prevents blockchains from being used for everyday payments and applications.
Here are some scenarios where scalability becomes a major limitation:
- Payments: For consumers to use crypto for buying coffee or groceries, tens of thousands of payments need to settle quickly with negligible fees. Slow transaction speeds or volatile fees make it impractical.
- Decentralized apps: dApps like games and social networks need to support millions of active users. Poor scalability means elevated latencies, downtime, and costs.
- Enterprise adoption: Corporations have high throughput needs also. If blockchains can’t match database speeds at scale, they won’t be adopted to replace legacy systems.
- Micropayments: Use cases like paying per website view require processing millions of tiny transactions. Slow speeds and high fees render micropayments unviable.
Essentially, for blockchain to unlock its true potential, it must scale to meet user demands for faster and cheaper transactions. Otherwise, adoption will hit a ceiling.
Technical approaches to improving scalability
There are a variety of technical approaches that aim to improve blockchain scalability:
On-chain scaling
- Increasing block size: This involves allowing more transactions per block. However, too large blocks can lead to slower propagation speeds and more centralization.
- Shorter block times: This allows more frequent confirmation but can increase the rate of stale blocks and forks. There are also speed limits on how fast new blocks can propagate safely.
- Sharding: This involves splitting the blockchain network into shards each handling transactions for a subset of users. This parallelizes transaction processing across shards.
Off-chain scaling
- Payment channels: Transactions occur off-chain and only final settlement is batched on-chain. For example, the Lightning Network uses payment channels for faster bitcoin transfers.
- Sidechains: Transactions are processed on separate chains then data is settled to the main chain. This relieves the main chain of transaction load.
- Plasma chains: Sidechains that use fraud proofs to only sporadically commit data to the main chain. This enables greater transaction capacity.
- State channels: Like payment channels using multi-party off-chain consensus to update contract state then settle on-chain. Used for things like gaming apps.
Hybrid scaling
Layer-2 scaling solutions like Plasma and payment channels can be used in conjunction with Layer-1 improvements like sharding and block size increases to multiply scalability. For example, Ethereum 2.0 will incorporate sharding and Plasma.
Case studies: Bitcoin vs Ethereum scalability
The two largest blockchain networks, Bitcoin and Ethereum, both face scalability challenges today. Let’s compare their current transaction capacities and efforts to improve scalability:
Bitcoin
- Max TPS: 7
- Scalability approach: Lightning Network for off-chain scaling. Also SegWit block size increase.
Lightning Network provides a layer-2 network of payment channels that enable fast and cheap bitcoin transfers off-chain. It promises to scale to over 1 million TPS while settling to the main bitcoin blockchain. Over 10,000 nodes are already running Lightning software and hundreds of merchants accept Lightning payments.
SegWit increased the block size limit through a “soft fork” change while fixing malleability issues. This temporarily increased throughput to ~14 TPS but gains are limited. Further increases to block size are debated in the community.
Ethereum
- Max TPS: 15-20
- Scalability approach: Sharding on Ethereum 2.0, Plasma and state channels for L2 scaling.
Ethereum’s roadmap involves a long-planned upgrade called Ethereum 2.0. This implements sharding to split the network into 64 shards each handling transactions for a subset of accounts in parallel. This promises 100,000+ TPS throughput.
For off-chain scaling, solutions like Plasma chains and state channels (e.g. Polygon’s ZK-Rollups) already provide faster and cheaper transactions. These leverage Ethereum for security while handling volume off-chain.
Ethereum 2.0 with sharding and layer-2 solutions offer a hybrid approach that aims to achieve Visa-like scalability. But the upgrade has seen lengthy delays.
Current state of blockchain scalability
In summary, blockchain scalability is still a work in progress. Considering current transaction speeds:
- Bitcoin still handles under 10 TPS although Lightning offers higher speeds for microtransactions.
- Ethereum does 15-30 TPS but new L2 solutions like Optimistic and ZK Rollups achieve up to 2,000+ TPS.
- Other chains like Solana and Polygon using PoS and sharding achieve 1,000 – 10,000 TPS.
Most networks are still far from reaching Visa’s 65,000 TPS speeds, but scalability is rapidly improving. Layer-2 solutions currently seem to offer the fastest way to scale while retaining decentralization.
With breakthroughs in sharding, Plasma, state channels, etc. blockchains are positioned to reach the scalability necessary for widespread adoption in the coming years. But further real-world testing is needed for these new technologies.
Energy Consumption
The energy consumption problem
Blockchain platforms based on proof-of-work consensus have attracted criticism for excessive energy usage. For example, the Bitcoin network currently consumes around 91 terawatt-hours per year – more than some entire countries! This is clearly not sustainable as cryptocurrency gains mainstream adoption.
The culprit is the competitive mining process required to mint new blocks. Miners race to solve cryptographic puzzles that require specialized machines running almost continuously. These mining rigs require enormous amounts of electricity to run at scale.
As the Bitcoin price rises, more miners join the network driving the collective hashrate and energy demands higher. Some estimates suggest Bitcoin mining alone could produce enough CO2 emissions to raise global temperatures 2°C in just decades if adoption continues growing.
While Bitcoin is the biggest energy consumer due to its size, other PoW chains like Ethereum face similar issues. So addressing energy consumption is crucial for blockchain sustainability.
How energy usage can be reduced
There are two primary solutions to the blockchain energy problem – both with tradeoffs:
1. Transition to Proof-of-Stake
Proof-of-stake (PoS) offers an energy efficient alternative to PoW mining for block creation and consensus. Instead of mining rigs, PoS uses validators who stake currency on the network. The algorithm pseudo-randomly selects validators based on staked amounts for submitting the next block.
PoS avoids competitive computation, meaning vastly reduced energy needs. Ethereum is transitioning to PoS which is estimated to reduce its energy demands by ~99.95%. However, PoS is still a nascent technology requiring further testing to match PoW security.
2. Use renewable energy
Bitcoin could transition toward renewable energy sources to reduce environmental impact. Mining is location agnostic, so mines can be situated where clean energy is abundant. Data centers next to hydroelectric dams or wind farms are viable.
This doesn’t eliminate energy usage but does make it greener. On the downside, renewables have less reliable uptime than fossil fuels. Outages could disrupt mining operations. Renewable energy infrastructure also needs to scale to meet mining demands.
A balanced approach
The best approach is likely a combination of transitioning key networks to PoS while also utilizing more renewables for those sticking with PoW.
Ethereum’s shift to PoS will be a major test case for energy efficiency claims. For Bitcoin, more mines powered by solar, wind, hydro, and other renewables can offer sustainability.
Either way, energy usage cannot be disregarded. If blockchains are to be the foundation for an equitable and environmentally-friendly economy, they must minimize ecological impact.
Regulation & Legality
Why blockchain faces regulatory uncertainty
Blockchain technology has innovative uses in finance, banking, supply chains, voting, and more. But regulatory uncertainty casts a shadow over mainstream adoption. Blockchain’s decentralized and transnational nature makes it not easily conform to traditional regulations. Issues like data privacy, tax compliance, KYC/AML, and illicit usage introduce challenges.
Key reasons blockchains face regulatory uncertainty:
- No borders: Blockchains are globally distributed with unclear jurisdiction. This fragments regulatory authority.
- Anonymity: Pseudonymous crypto addresses allow anonymous transactions. This enables illegal activities and money laundering.
- Data leaks: Immutable records raise GDPR compliance issues around right-to-erase and data privacy.
- Systemic risk: Financial regulators warn blockchains could impact monetary policy, banking stability, and markets if widely adopted.
- Tax evasion: It’s easy to conceal crypto profits. But unclear reporting requirements undermine tax collection.
Essentially, regulators struggle to map outdated rules onto a borderless blockchain economy. New frameworks are required.
Responding to regulatory uncertainty
Blockchain projects have a few options to proactively address regulatory uncertainty:
- Proactive compliance: Projects can get licensed, create compliance procedures, and voluntarily report to regulators like the SEC. This increases legitimacy.
- Geographic specificity: Targeting specific jurisdictions with clear regulations can reduce uncertainty. For example, focusing on pro-crypto nations like Switzerland.
- Self-regulation: The crypto community can self-impose standards like KYC requirements. This can preempt government imposition of stricter external regulations.
- Legal entities: Projects can create corporate entities tied to real-world identities. This provides accountability and meets KYC requirements.
- Lobbying: Industry groups can lobby governments directly to advocate for favorable regulations. Accommodative laws in places like Wyoming demonstrate blockchain’s impact.
Striking the right balance between decentralization and necessary regulation is key. Companies willing to work openly with regulators and lawmakers will drive more mainstream adoption.
Case study: The EU blockchain regulation
The European Union provides an illustrative case study in proactive blockchain regulation. While complex to implement across its member states, the EU takes a relatively progressive approach:
- Openness to crypto: The EU’s proposed Markets in Crypto-Assets (MiCA) regulations aim to provide legal clarity for cryptocurrencies and stablecoins. This will integrate crypto markets under financial oversight.
- Protecting anonymity: A recent vote rejected a provision to link crypto wallets to user identities. Preserving anonymity supports innovation but raises money laundering concerns.
- Right to privacy: The EU aggressively enforces GDPR privacy rights around blockchain applications related to identity, payments, and finance.
- Environmental impact: Some EU regulators have proposed banning energy-intensive PoW mining. But sustainable mining is still under consideration.
- Oversight, not ban: The EU prefers regulating crypto to stimulate the industry rather than prohibiting it. But laws are still being actively drafted.
The EU exemplifies the regulatory tightrope that governments worldwide traverse around blockchains – balancing innovation against risks. The blockchain industry’s engagement here is critical to shaping a rulebook for the future.
Conclusion
Realizing the true transformational potential of blockchain requires overcoming key challenges around scalability, energy usage, and regulation. There are promising directions like layer-2 scaling, PoS security models, renewable mining, and proactive compliance that can enable blockchains to scale sustainably while integrating with the global economy.
With continued technological progress and an openness to new ideas by developers, companies, regulators, and society – blockchains are poised to move past these early roadblocks. Widespread adoption just requires more evolution, execution, and real-world validation. As solutions emerge, blockchains can begin transforming how value and data flows through industries and the internet itself – unlocking a more decentralized future aligned with our shared values.
Frequently Asked Questions (FAQs)
Here are 5 frequently asked questions about the challenges of using blockchain technology:
How does blockchain scalability limit adoption?
Scalability refers to the ability to handle high transaction volumes. Current blockchain networks max out at 10-50 transactions per second, far below payment processors like Visa. This limits everyday use cases. Slow speeds and high fees during congestion also hinder adoption.
What is the main cause of blockchain’s energy consumption problem?
Proof-of-work mining is energy intensive due to the computational power needed to solve cryptographic puzzles and mint new blocks. As more miners join the network, energy demands rise. Bitcoin mining alone uses over 90 TWh annually.
How can blockchains transition to more sustainable energy sources?
Two options are shifting to proof-of-stake consensus and siting mining operations next to renewable energy like hydroelectric dams or wind farms. PoS eliminates mining, cutting energy needs by over 99%. Renewables make mining greener but less reliable.
Why do governments struggle to regulate blockchain technology?
Decentralization defies jurisdictional boundaries. Anonymity enables illicit usage. Immutability raises data privacy concerns. Systemic impacts to finance and policy are poorly understood. New frameworks are needed to apply old regulations to blockchain.
What proactive approaches can blockchain projects take on regulation?
Options include voluntary compliance procedures, targeting specific jurisdictions, self-regulation by the crypto community, legal entity creation for accountability, and lobbying governments for favorable laws. A balanced approach is required.
