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Constraints and challenges

With present technology, there are some barriers to blockchain becoming a central element of the financial system.

There are some key guidelines for assessing whether a particular project should use blockchain. Virtually any activity that would otherwise run on a database could be on a blockchain platform, but whether this is actually beneficial will depend on the circumstances. Many proposed blockchain applications could use a shared traditional database hosted by a trusted central party and would provide nearly identical results.

A problem where blockchain might be an appropriate solution is one that has:

  • a number of participants who don’t have institutional trust in one another;
  • a desire to work without an intermediary (either because of cost or because one isn’t
    available); and
  • a need for a complete definitive log of transactions.

With present technology, there are some barriers to blockchain becoming a central element of the financial system. For example, with bitcoin three issues can be identified:

  • The fee per transaction posted has historically averaged US$5 to US$8 (currently over US$40 due to the strong BTC); most of this cost is met with new bitcoins and not passed on to those transacting.
  • It takes a minimum of between four to five minutes between a transaction being initiated and officially recorded.
  • The maximum capacity for transactions is around seven transactions per second for the smallest possible transactions, or around three transactions per second for the average actual transaction size (compared to thousands or tens of thousands of transactions per second for Visa).

Additionally, blockchain requires each participant to be furnished with a full copy of the ledger to operate. If the ledger is commercially sensitive, this would require the data to be encrypted. Furthermore, for a large or active ledger, there could be a barrier for new participants, who would need to download very large historic data files before being able to join in.

How could blockchain overcome barriers?

The answer is two-fold. First, the more immediate applications will be in areas where these figures are better than existing alternatives, and blockchain can be of use in its current state. Second, the transformational applications of blockchain to areas such as payments or inter-bank reconciliation, will come only after R&D and innovation are applied to reach a point where the technology’s limitations have been greatly reduced.

A final area of challenge is getting an appropriate legal framework into place. An entry created on a blockchain ledger has to gain full legal recognition as a proper transfer of value between parties, with courts having the ability to enforce this if appropriate. With no central location, it is unclear which jurisdiction(s) even would have to rule on such matters. The legalisation of blockchain is a substantial challenge. It is unlikely that specific legislation will be written for blockchain while there are so many competing approaches and standards in the marketplace. Standardisation on both the technological elements of blockchain and the use standards for areas such as asset ownership and transfer will need significant development. Only after this can the legal problem be truly tackled.

Legal recognition will also have to deal with smart contracts, which differ significantly from the form of traditional legal contracts. Not only do smart contracts self-execute, they are autonomous, and thus restrict the control that parties have once the contract is initiated. This could be particularly difficult if a smart contract does not operate as a party in good faith believed it would. There are also issues with recourse – due to the records propagating across many users, it could be impossible to enact a court’s judgment to remove a transaction or take down data stored on a blockchain.