Blockchain technology problems
However there appears to be a realisation that technology will have to be shared in order for value to be gained. Equally the unique transparency of transactions on the blockchain is not easily compatible with the privacy needs of the banking sector: In order to prevent this becoming a barrier to take-up, technology-based solutions will need to be found to design privacy-protecting blockchains.
DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain.
Modern legal systems are designed to allow organisations, as well as actual people, to participate. Most legal systems do this by giving organisations some of the legal powers that real people have — e. But what legal status will attach to a DAO?
Are they simple corporations, partnerships, legal entities, legal contracts or something else? What, if, any, is the liability of DAOs and their creators?
Who or what is claimed against in the case of a legal dispute? Courts and regulators are unlikely to allow the wholesale adoption of technology which bypasses established oversight.
Smart contracts are blockchain based contracts which are automatically executed upon certain specified criteria coded into the contract being met. Execution over the blockchain network eliminates the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions.
In addition to the cost and efficiency gains it is hoped this will achieve, this also raises significant legal questions in relation to applicable regulation, leaving a sense of uncertainty as to the legal enforceability of smart contracts.
This is particularly true where smart contracts are built on permissionless blockchains, which do not allow for a central controlling authority. Since the point of such blockchains is to decentralize authority, they might not provision for an arbitrator to resolve any disputes that arise over a contract that is executed automatically.
It remains unclear whether the elements of capacity, including the ability to rely on apparent or ostensible authority would apply and the questions of offer and acceptance, certainty and consideration would also need to be considered. However, there have been advances in many countries regarding the level of acceptability of electronic contracts so it is realistic to hope this is carried over to smart contracts.
In the meantime, customers should ensure that smart contracts include a dispute resolution provision to reduce uncertainty and provide for a mechanism in the event of a dispute. Many sourcing arrangements, including the use of certain technology solutions, require regulated entities to include in the relevant contracts a series of provisions enabling them to exert control, and seek to achieve operational continuity in relation to the services to which the contracts relate.
With blockchain as has been the case with cloud and certain FinTech agreements this may well be more of a challenge. The contracts and overall arrangement will need to be carefully reviewed to ensure compliance, as required. If the customer does not have its own copy of the data, it will require data migration assistance to ensure the vendor is obliged to hand over all such data on expiry or termination of the agreement and a complete record of all transactions stored on the blockchain.
At common law as a general principle there is no property right in information itself, but that while individual items of information do not attract property rights, compilations of data — for example in a database — may be protected by intellectual property rights. Where a database of personal information is sold, if a buyer wants to use the personal information for a new purpose, in order to comply with the Data Protection Act they will have to get consent for this from the individuals concerned.
Public companies and private investors have already begun to make significant capital investments in blockchain technology startups. This trend is likely to accelerate as commercial deployments of blockchain technology become a reality. Traditional due diligence approaches may need to be adapted. For example, there will be unique issues concerning ownership of data residing on decentralised ledgers and intellectual property ownership of blockchain-as-a-service offerings operating on open source blockchain technology platforms.
These issues will need to be considered in the context of the business value proposition and competitive barriers to entry. Blockchain does have the potential to become an integral part of the operation of many businesses, offering scalability, security and computing power at a lower CAPEX and OPEX. As with most things, the problems with blockchain are only problems in context. The original blockchain implementation, Bitcoin, was designed to track a token the Bitcoin , and it does this task well.
Or at least it did in the early days. As businesses have attempted to apply blockchain to larger enterprise class problems, some of the limitations of early blockchain implementations have created perception issues with blockchain, specifically the following:. The first attempts to apply the power of an immutable distributed ledger to solve real world business problems simply started with Bitcoin. Implementation of business use cases were attempted by adding data to the memo field of the coin.
Soon after that, projects began to fail as enthusiasm for the new technology ran aground on the hard rocks of the limitations of the original Bitcoin implementation.
When Bitcoin is used in the context of complex business use cases, problems appear. In the wrong context, blockchain solutions can be slow and the transactions costs can be, at best, unpredictable, and at worse, astronomical.
In essence, many attempts were made to address enterprise problems with first generation blockchains by writing notes into the memo fields of tokens like Bitcoin, then spending the token to make something happen. Simply put, the wrong tool is being used. Something designed to track a coin is not the right tool to implement complex business processes. Bitcoin was implemented to track the ownership of tokens, and as such, one the most fundamental problems Bitcoin addressed was preventing a token from being spent twice.
Bitcoin solves the double spend problem admirably, but to do so requires that each transaction be verified across the entire Bitcoin blockchain. There might be hundreds or thousands of Bitcoin servers, but each is an island to itself and has no way to share the load. Picking out just the blocks that represent the business object, be it a loan, a piece of tangible property, or a medical record, becomes problematic and very unpractical for traditional business adoption. Over time, later Bitcoin copies begin appending functionality to the blockchain but the new functionality has to be paid for, which requires a wallet of coins be attached to fund the execution of the functionality.
This seems simple enough though possibly inconvenient. But, it gets better because all of those queries must be funded in a foreign currency. The exchange rate just changed. Hurry, or it might change again. How in the world can a business build a predictable cost model when the cost of the token swings wildly minute by minute? How can a business build a secure system when a wallet full of tradable tokens must be attached on the internet?
The consequences of trying to duct tape business functionality into coin-centered blockchains are: To increase payments security, it is standard practice to wait 50 minutes more after each new record appears because the records regularly roll back. Now imagine trying to buy a snack using bitcoins. If you consider the entire world, that sounds ludicrous even now, when Bitcoin is used by just one in every thousand people on the planet.
For comparison, Visa processes thousands of transactions per second and, if required, can easily increase its bandwidth. After all, classic banking technologies are scalable. You have certainly heard of miners and giant mining farms built next to power stations. What do they actually do?
The electricity consumed to achieve that is the same as the amount a city with a population of , people would use. This is true, but the problem is that miners are protecting Bitcoin from other miners. If only one-thousandth of the current number of miners existed, and thus one-thousandth of the electric power was consumed, then Bitcoin would be just as good as it is now.
It would still produce one block per 10 minutes, process the same number of transactions, and operate at exactly the same speed. If someone controls more than half of the computing power currently being used for mining, then that person can surreptitiously write an alternative financial history. That version then becomes reality.
Thus, it becomes possible to spend the same money more than once. Traditional payment systems are immune to such an attack. As it turns out, Bitcoin has become a prisoner of its own ideology. Mining is still lucrative, and the network is still stable. That is just an illusion, however. An estimate of computing power distribution among the largest mining pools. Gaining access to just four controlling computers would gain someone the ability to double spend bitcoins. This, as you can imagine, would depreciate bitcoins somewhat, and doing it is actually quite feasible.
But the threat is even more serious than the above might imply, because the majority of pools, along with their computing powers, are located inside one country, which makes it much easier to capture them and gain control over Bitcoin. Distribution of mining by country. Blockchain is open, and everyone sees everything. Thus, blockchain has no real anonymity. It offers pseudonymity instead. I am transferring a few bitcoins to my mother.
Alternatively, if I paid back my friend for some lemonade, I would thus let him know everything about my finances. Would you reveal the financial history of your credit card to everyone you knew?
Keep in mind that this would include not only past but also future transactions.