What are some of the barriers to blockchain adoption?

The main barrier to blockchain adoption is the lack of knowledge about it.

Just like any other new technology, organizations may face challenges when adopting a blockchain. These adoption barriers may be seen as constraints that need to be addressed and explored to improve the way the organization is innovating. For example, suppose a bank is implementing a new blockchain product and needs approval from the local regulator just like he would need to implement any other application but blockchain will probably raise additional concerns. In that case, he just might leverage this engagement with the regulator to lay down some additional bricks to built better innovative products in the future.

The cost barrier

The need to replicate data across many nodes will likely increase the costs of maintaining this data compared to a centralized solution. A centralized database is only replicated for HA/DR purposes (High Availability and Disaster Recovery). The redundancy used for HA/DR aims to ensure that the system is highly available, i.e. that it offers an SLA that is according to the business requirements. A critical system like a payment system may be required, for example, to be available 99.9% of the time. To ensure this, the system will require a certain level of redundancy by duplicating the databases. For instance, suppose one of the databases is not working because of a power shortage, or because it was hacked or simply because the system is being updated. In these cases, the system will automatically read for the replicated database.

On the other hand, a blockchain system is highly redundant by nature. Blockchains are very redundant, and the data is replicated across all the nodes in the blockchain (although some blockchains like Corda and Hyperledger may not have this level of redundancy). Replicating the same data so many times increases costs related to the database storage and bandwidth.

We can probably say that the Bitcoin or Ethereum database has the best SLA ever because it is updated literally 100% of the time and is 100% reliable. Always.

Bitcoin’s fantastic level of reliability can be achieved only because the Bitcoin database/ledger is replicated thousands of times which is expensive to maintain. Not all blockchain applications need such a redundancy level off course, but even permissioned blockchains will have higher storage costs than a single centralized database.

Another factor to consider for the costs when using blockchain is that usually, one entity owns one node compared to a centralized database. If we look at the car merchant example that we have discussed before, adopting a blockchain is more likely to reduce costs considering reducing frictions and manual work.

When deciding whether to use a permissioned or permissionless blockchain, the cost consideration also needs to be brought to the table. Public blockchains such as Ethereum can run applications (or dApps for decentralized applications), but fees, gas fees, are paid every time a smart contract is executed or a new transaction in the network. Depending on how frequent these transactions are, the transaction amount and who is paying, the costs related to transaction fees in public blockchains need to be considered because they can become quite substantial.

Latency and scalability

Again, the need of replicating the data across many nodes brings scalability challenges because all the transactions need to be broadcasted and recorded in all the nodes, which may be a bottleneck in regards to the number of transactions. All blockchains have consensus mechanisms that will ensure that all the nodes are synchronized. When the blockchain needs to be updated with a very large number of transactions, i.e. thousands of transactions per second, the blockchain starts to throttle and will get slow. Bitcoin may be the most secure and decentralized blockchain, but it comes with a price: it can only handle a maximum of 7 transactions per second (tho the Lightning Network can handle more transactions). Other less decentralized public blockchains such as EOS can handle around 1000 transactions per second.

If we are able to compromise decentralization and security, we can get the blockchain system to handle much more transactions. A permissioned blockchain only with a couple of nodes, for example, would be able to handle a huge number of transactions, but a blockchain with a couple of nodes is not a very meaningful blockchain, and it will not bring the benefits that blockchain has like security, decentralization, immutability, network effects, etc.

Regulations and compliance

Financial institutions and banks may be hesitant to adopt blockchain because it’s complex to explain to regulators how data is shared across the blockchain participants. Industries like banking and insurance are more traditional because they have a big fiduciary responsibility. They basically must be traditional. The regulators in these industries are also more risk-averse, and in many countries, regulatory frameworks are lagging many years behind.

Blockchains bring new models of data sharing that may make regulatory institutions confused. Can we use a blockchain to store a hash of private/confidential data? Common sense would say yes because hash algorithms used in blockchains are pre-image resistant, meaning that it’s impossible to convert the hash into its input data. However, sometimes, some regulators see the world with a “one size fits all” lens and will not accept any data shared in a public manner, even if it is a hash that is impossible to crack.

When engaging with regulators, it will be essential to clarify where the blockchain data is stored (on-premise data center or cloud provider), in which countries (in some countries, data cannot be stored cross borders) and how the data is transferred from party to party.

Engaging with regulators may be a lengthy process, but it is improving in some countries via regulatory sandboxes and a common understanding between financial institutions and regulators.

Different parties need to join forces, especially in a private blockchain. To build meaningful blockchain solutions, the participants on a business network need t agree to come together, work on the solution and join the new application. For instance, a trade finance blockchain application is much more useful if a decent number of banks join the application. If one entity builds a trade finance application without the banks’ involvement, it will be very hard to create network effects and attract customers. This would be like building a telephone line where only one person manages and owns the telephone. Not very useful, right?

To overcome the barriers to blockchain adoption, we need to have the entire organization on board. It often means the innovation team, IT teams, cybersecurity, compliance, management, finance, and more, to make sure the barriers and blockers are overcome. Oh, and to decide on blockchain applications, organizations cannot use the HiPPO decision method: Highest Paid Person’s Opinion.

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Disclosure: views expressed are purely personal and do not reflect any organisation’s views or thoughts the writer of this article may be affiliated or associated with. This is NOT financial advice and I’m not recommending anything. This article is only for educational purposes.

What are some of the barriers to blockchain adoption? was originally published in DataDrivenInvestor on Medium, where people are continuing the conversation by highlighting and responding to this story.