“Crypto exchange Blockchain announces move to Miami, with plans to create 300 jobs” – a headline from Miami herald. “Bitcoin, banks and blockchain: Here’s what Goldman Sachs, JPMorgan, and others are planning” – a headline from Financial News London. In 2008 Nakamoto conceptualized the first blockchain where the technology came to life in 2011. Since then there are many debates if cryptocurrency is the future.
There are many challenges with the blockchain but many researchers have made the time to come up with conceptual solutions. Three main challenges are scalability, security, and high energy consumption. Each of these challenges is slowing down the application of the blockchain so let’s take a look at how to address these challenges.
1. Scalability
For just a single transaction, the blockchain undergoes several complex algorithms. To manage more users, scalability becomes a challenge for the blockchain industry. According to Brian Dean at BackLinko, coinbase has 56 million verified users. 6.1 million coinbase users make at least one transaction per month. As more people become familiar with the blockchain, the transactions will increase. There is only so much bandwidth available to handle multiple transactions being done in one place.
Not only that, but the blockchain validates each transaction by looking through records that require storage space. If too many people start making transactions, there becomes a longer wait time and an increase in every transaction fee. Only so many transactions can occur, so if the demand is overflowing, it slows the process.
1.2 Layer-two Scalability Solution
There are many solutions to address the scalability concern. The current and most promising set of solutions is the ‘layer-two solutions’ or L2. The L2 is a second protocol that is built on top of an existing blockchain. L2 is a collective term for solutions that are designed to solve transaction speed and scaling difficulties. Layer 2 solutions are typically in the form of sidechains and state channels. For clarity, there is no one solution meant to solve the scalability concern, but many solutions are working together. For example, with bitcoin, the lightning network is a payment protocol designed to be used on top of the blockchain.
The Lightning Network allows participants to transfer bitcoins between different users without fees. The payment channels are created for the transaction between the users, and this creates off-chain transactions. Essential the lighting network is another layer on the bitcoins blockchain so that micropayments can be processed. The lightning network is just one example of an L2 solution. The Layer two collective term is growing solutions that can potentially tackle the scalability issue, but as of right now, the blockchain is not prepared to take on a global level.
2.Security
Another main challenge that holds a lot of people back from entering the blockchain is security. The blockchain itself is portrayed as “unhackable,” while the digital wallet may not be. The process of blockchain transactions comes in contact with third-party vendors. These vendors could have weak security on their apps and website. The weak security leaves a door open for hackers to enter. Knowing this is very upsetting to users in the blockchain industry since it is obvious where the weak spot is, there is a very high chance that hackers know too. Let’s compare blockchain security to banks where most people hold their money.
In 2018 there were over 2.5 billion accounts hacked. In the US, it is normalized to get your account hacked, a credit card is stolen, etc. Yet with the blockchain, getting hacked seems a lot scarier. Could the blockchain be a place to reduce the number of hacked accounts or increase the number? Researchers are in the debate with this subject but ideally, the blockchain is supposed to be the future of exchange. If the blockchain is the future then the security needs to be improved in order to be applied globally.
2.1 Thales Hardware Security Modules
It is assumed that many companies are working to develop security solutions, but Thales has current solutions to address these problems. Thales's Hardware Security Modules (HSMs) and Authentication services are striving to strengthen the security of the blockchain by addressing the following: “Provide strong identities and authentication to gain access to the blockchain; Secure core blockchain technologies; and Secure communications across the blockchain network.” The Thales Luna Network HSMs are designed to store the private keys used by blockchain.
The keys cannot be used by unauthorized devices or people, which prevents hackers from obtaining your digital wallet. Cryptographic keys that are within the software are at risk of theft but private keys are designed to prevent that. The Thales ProtectServer HSMs, are designed to protect cryptographic keys by providing signing and authentication services. Lastly, Thales Authentication Service (SAS) will reduce your total operation cost and focus on authentication services.
3.High energy consumption
The last challenge is high energy consumption which involves the Proof-of-Work. Investopedia best defines it as “a system that requires a not-insignificant but feasible amount of effort to deter frivolous or malicious uses of computing power, such as sending spam emails or launching denial of service attacks.” The PoW blockchain determines the level of their energy consumption. To examine the case with Bitcoin, it is a decentralized payment system where all participating computers store a copy of the associated ledger.
Unfortunately, as stated in the security section, blockchains allow unrestricted access or a permissionless system. Sedlmeir, buhl, Fridgen, and Keller states “Since, on a permissionless blockchain, the inclusion of a distinct entity to provide accounts and passwords is not viable, authentication based on a public key infrastructure is highly suitable.” Meaning that a potential attacker could simply create multiple accounts and take control of the system; this is called a Sybil attack (Douceur 2002) Recognizing this, Bitcoin formed the Pow from cryptography. This refers to the right to create a new block from a subset of transactions when “One finds a solution to the cryptographic puzzle” The process of searching for a solution is called “mining.” The result is to reduce the voting weight by computing power and essentially prevent Sybil attacks. The mining process is an incentive technique where participants are rewarded. Since participants utilized this incentive it led to mass-energy consumption.
The high energy consumption currently protects PoW blockchains from attacks where “an attacker must bear at least 25 to 50% of the total computing power that participating miners use for mining.” (Eyal and Sirer 2014).
3.1 Walk away from the proof-of- work method
Many researchers believe that energy consumption is not a priority right now while others worry that if it is not treated as a priority then it might be to late to apply a solution. There are several ways to combat this problem but here is a solution researched and supported by Alex de Vries The PoW is a validation method that contains computing power and resource usage. “When people solve the mathematical challenges that allow them to validate blockchain transactions through proof of work, they get rewarded with more cryptocurrency.” (Mathews, 2019 ) When a reward occurs energy consumption goes up with the mining power.
An alternative to the PoW is the Proof-of-stake method. The Proof-of-Stake method involves surrendering cryptocurrency. If people fraudulently validate a transaction then they lose the staked cryptocurrency coins and can not approve future blockchains. Followed by the Proof of stake method is the proof of authority where a selected number of people validate blockchain transactions. People put their reputations on the line and are seen as trustworthy. Similar to the way we trust accountants with our money. Both the proof-of-stake and proof-of authority are less energy-intensive than the proof of work validation.
Final Thoughts
The blockchain is unlike any other technology where it could possibly be the future of exchanging currency. Since the possibility has been a topic of discussion it is important to examine all challenges and flaws. The challenges listed were security, scalability, and energy consumption. Each had its own solutions but is it enough/ These challenges could essentially be the reason why the blockchain is not adopted globally.
