BLOCKCHAIN is touted as the next step in the digital revolution, a technology that will change every industry from music to waste. There are many versions of public blockchains in existence, but the majority of them share a basic premise: they offer a secure, decentralised infrastructure to maintain a "single version of the truth", recording all changes made on the blockchain database since its formation.
A lot of banks and fintechs started experimenting with blockchain in 2015, trying to capitalise on the speed and transparency it offers. But four years later, the idea that blockchain will remove banks as intermediaries in our payments system still seems a long way off. That's because there are five basic challenges that the technology has to overcome if it is to be accepted as part of the financial system.
Different blockchains organise information in a plethora of ways. This means feeding information from one to another is not always easy.
There is no agreed universal layout of the transaction data structure. In a financial payment, a block will hold the person or company's name, account information, payment, location address and any other relevant factors. But crypto currencies all do this differently, so it would be difficult to move from one currency to another. They need to create standards for the information they contain and how it is systematically laid out.
There is no liability for the platforms when things go wrong at the moment. For instance, in 2017, Canadian digital currency exchange QuadrigaCX announced that a computer error had led to losses of ether worth US$14 million. Surely, liability will need to be cleared up before the public can trust blockchains with their money. For this, we need more regulation in the space of crypto and blockchain in general.
Blockchain is still at a very small scale compared to everyday electronic payments. Bitcoin's blockchain does 2,000 transactions every 10 minutes, whereas Visa handles more than 65,000 transaction messages every second; Swift, the global messaging system used by banks and financial institutions to transfer payments, deals with 24 million messages a day.
The "block size debate" over how many transactions each block of a blockchain should handle has raged since the early days of bitcoin in 2009. This must be resolved for blockchain platforms to grow big enough to become part of the world's financial plumbing.
Blockchain's strength is it has no central authority, but this is also its weakness. Who makes the decisions about how the technology works or when it needs updating?
Public blockchains operate more like communities. There is no systematic way to decide on updates or improvements. Sometimes this can result in a split.
Blockchains haven't figured out how to effectively govern yet. Often, simple majority voting mechanisms are used to make decisions, which means issues are vulnerable to lobbyists or active contributors seizing control.
5. TRANSPARENCY AND IDENTITY
Blockchain payments mean all users can see all the transactions, making them easy to audit and trace. Users are pseudo-anonymous, in that they are not obliged to identify themselves in any way, but they can still be traced through their alphanumeric address and use of tokens on the network. This transparency is part of the blockchain's strength. It means other users can see the amount of bitcoins going from one address to another, but no name is linked to that address. This can be regarded as both a strength and a weakness, and has to be adressed.
Eventually, blockchain's lack of an identification framework will be problematic for many users and investors, as it is a fundamental premise on which the financial system is built.
But when these issues are addressed, it is almost inevitable that blockchains become the new foundation of our financial system.