Blockchain technology still hasn’t taken over the world and become the backbone of the global financial system. That’s because there remain enormous challenges that the cryptocurrency businesses and community are yet to solve. Here are 6 of the biggest challenges that blockchain networks like Bitcoin and Ethereum need to solve before they can hit the mainstream.
1. Real World Use Cases
The first is finding concrete use cases for the real world. Since 2008, a lot has been said about how blockchain technology is poised to shake up the way the world manages finance. Now, it needs to deliver on those promises.
This is all about real applications people can use day-to-day with blockchain networks. It could enable the possibility to pay for your coffee with Bitcoin via a cryptocurrency exchange, or using a decentralized Ethereum app. Both of these have proved elusive for the blockchain community. Even the most hardcore crypto fans have difficulty spending their cryptocurrency and using Dapps for day-to-day activities.
The good news is that there is some momentum starting to build. For example, Starbucks has partnered with blockchain investment platform Bakkt to accept Bitcoin as payment in 2020. That will be a huge development for the technology as a whole if they can pull it off.
Scalability has been a big sticking point for blockchain networks. Scalability refers to the ability of a network to continue to function properly as more and more users join the system. If blockchain technology is going to go to the next level, it needs to become highly scalable.
Unfortunately, at times when many users have joined the Bitcoin network, network performance has deteriorated fast. When this happened, transaction fees skyrocket and the network became almost unusable.
In order to solve this, serious technical hurdles need to be overcome. Luckily, there are some great ideas in the pipeline to do just that. So-called “second layer” solutions such as the Bitcoin Lightning Network intend to increase the scalability of blockchain networks to global scales without having to modify the underlying blockchain networks.
Other networks are rethinking how blockchains work altogether. New chains like IOTA and EOS are experimenting with new, more efficient ways of coming to a consensus on a decentralized network.
If either of these solutions can crack the puzzle, it will be a major win for blockchain networks and cryptocurrencies in general.
One of the biggest stumbling blocks for many investors and businesses getting into blockchain-based currencies is their volatility. It’s simply difficult to start accepting payment for goods and services in Bitcoin when the price varies wildly from day-to-day, and transaction costs can soar out of the blue.
The price of Bitcoin continues to shoot up or down by as much as 30% in under 24 hours. If blockchain networks are to start gaining traction in mainstream finance, they need to figure out how to stabilize the prices and operations of the networks.
Of course, this is difficult, because volatility is partly a result of a relatively small market size. The total value of all cryptocurrency is measured in just hundreds of billions, compared to around $80 trillion for United States Dollars. To gain some level of stability, cryptocurrencies will need to get more money into the system. But, in order to attract that money in the first place, they’ll need to prove some level of stability. It’s a very tricky challenge indeed, and one that’s never really been solved before.
Another unanswered question facing blockchain technology is how governments will regulate it in the future. Nobody, from the developers to the investors, or users, knows for sure if blockchain networks will even be legal in 10 years’ time. This has wreaked havoc with the startup and investor community surrounding the technology.
For example, there have been crypto bans in countries like China, and others concerned with thefts, hacks and money laundering have implemented restrictions on the use of decentralized networks and currencies. It’s paramount for the future of these networks that government regulators create an environment where they can flourish, rather than exist in the shadows.
Some in the crypto community are taking matters into their own hands. For example, a Winklevoss-backed group is trying to show regulators that they take best practices seriously and have the interests of their users at heart. Whether regulators believe them or not is still to be seen.
5. Hacks, Thefts, and Scams
Bitcoin exchange hacks, phishing attacks, and scams are all still at large in the wild world of crypto. Blockchain technology’s main selling point is that it puts the control of funds solely in the user’s hands. That’s a huge achievement for privacy and financial freedom, but it opens the door wide open to those who want to take advantage.
A quick Google search of crypto hacks or thefts will show you the magnitude of the problem. Many people are rightfully scared to go anywhere near cryptocurrency in the current hostile environment. To overcome this challenge, blockchain communities will need to figure out how to balance privacy and security in the complex decentralized puzzle.
6. Institutional Investment
The above 5 challenges are the core reasons why institutional investment is yet to pour money into Bitcoin and other cryptocurrencies. Institutional investors are smart and often very cautious. They hold the key to skyrocketing the price of Bitcoin to record levels, but they probably aren’t going to do it until they see major gains in all of the other challenge areas.
One of the stepping stones to attracting institutional investment is building the infrastructure and trading vehicles that large investors prefer to use. More trading platforms like Bakkt are needed for this to happen.
Blockchain developers and users need to come together to refine real-world use cases, build scalable technology, reduce the enormous volatility in price and usability, appease regulators, reduce thefts, and find ways for the financial powerhouses of the world to get into the game.