The rise of cryptocurrencies and their underlying technology – blockchain – are projected to transform and disrupt many industries.
Since the advent of Bitcoin in 2009 as a potential way of exchanging value in peer-to-peer networks, blockchain has rapidly accelerated as individuals and businesses strive to use it as a transaction-based value exchange.
However, with technological industry disruption comes both advocates and sceptics. Weighing up the pros and cons may help you to understand it and look into with greater depth.
The benefits and challenges of blockchain technology
The biggest benefit of blockchain technology is that it allows anyone to transact securely and transparently on a highly distributed network.
Andrew Milroy, Head of Consulting at Oven, says: “In this way, it’s the opposite of cloud computing. If somebody transforms an item in the blockchain, everyone else can see what has happened. So, if I buy a bitcoin, I know that it’s genuine.
“Blockchain makes items tamperproof. That’s why it’s appealing as a technology behind cryptocurrencies.”
Bitcoin was designed to create trust in a completely trust-free environment, and thus had its origins formed from an onerous consensus algorithm. “Bitcoin is computationally onerous by design,” says Gilder. “When you look at applications for financial services, we often need to be able to process transactions extremely rapidly – thousands, if not millions, per second.”
Legal, regulatory compliance and risk
Part of Bitcoin’s appeal for many of its users is the lack of centralised control or regulation. However, this benefit can also be its biggest challenge, as there needs to be an entirely new governance structure to allow it to fit with the current legal and regulatory mechanisms.
Sophie Gilder, Head of Blockchain at CBA, says: “Our research indicates that more than 50 per cent of participants would prefer blockchain’s transactions to be regulated and identifiable, so that transactions can be either reversed or the dishonest trader legally sanctioned.”
Privacy and confidentiality
For the first time, blockchain can deliver massive transparency – sometimes too much, according to Gilder. “Sometimes we need to consider who should see what and how to develop appropriate granular permissions to ensure the optimal level of visibility is provided, depending on the blockchain participants’ role.”
There is a new area of mathematics that is currently being developed to address confidentiality. There are also structures that may be used to mitigate this risk, for example, blockchains of blockchains where only the hash (or, encryption) is used.
Large energy consumption
According to Deloitte, the bitcoin blockchain network’s miners are attempting 450 thousand trillion solutions per second in efforts to validate transactions, using substantial amounts of computer power.
Blockchain applications offer solutions that require significant changes to, or complete replacement of, existing systems. Companies that want to make the switch will need to consider strategies for this transition.
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