Blockchain technology has found numerous applications within the short time that it has existed; making some commentators to conclude that it is the future of transactions. Some have even suggested that blockchain is the new internet. The append-only data structure of blockchain where new data can be added to the blockchain but old data cannot be deleted makes it an accurate record of transactions between parties. This can increase transparency and accountability, therefore, enhancing economic systems.
Immutable Record of Transactions
Keeping records is an important function in any business organization because it gives an indication of past performance which is then used to forecast future performance. Records of transactions between parties also act as evidence of the transaction and reduce misunderstanding. Current methods of creating and storing records are slow, prone to error and insecure as the records could be altered or otherwise damaged.
Elimination of Intermediaries Increases Speed of Transactions
In buying a house, for example, parties can negotiate and sign a contract within a short time. However, it will take days for the house to be legally transferred to the buyer because the parties have to involve the government department that is responsible for registration of property transfers. With blockchain, the transaction is recorded on the distributed ledger immediately.
Deloitte observes that blockchain faces some challenges which may prevent businesses from reaping the full benefits that should come with it. Some of them are:
Centralization of Blockchains
One factor that threatens to defeat the essence of blockchain is the creation of private blockchains with specific use cases. Rich corporations such as banks may end up owning blockchains and private keys effectively maintaining their status as intermediaries in transactions.
Lack of Understanding
Deloitte further identifies the lack of understanding of how blockchain works as a major challenge. There is inadequate awareness of the technology outside the banking industry. This hampers investment and exploration of ideas.
Lack of Co-ordination
To get the best out of blockchain technology, organisations should work together in solving problems specific to each sector. Unfortunately, many current approaches are stove-piped. Each organization is developing its own blockchain with applications to run on it. This defeats the essence of a distributed ledger and may turn out to be less efficient than current approaches.
Cost of Validating Transactions Diminishes Efficiency
The total running cost of validating and sharing transactions on the Bitcoin public ledger is approximately $600 million and the figure continues rising. This does not include the cost of buying the powerful computer hardware and software used by each node. Every node performs the same work on its own copy of the data in an attempt to be the first to find a solution. If the cost of labour is factored, blockchains may end up being less efficient for businesses.
The importance of centralization in sectors such as banking is that regulatory authorities can exercise oversight and enforce regulations. Centralization also creates shock absorber effects in times of crises. If decentralized networks are not carefully thought out, they can be less resilient to shock and affect participants directly.
Having considered these points, do you think blockchain technology is the future of transactions? No doubt the technology carries great potential but unless used appropriately, it may not lead to the anticipated economic benefits.