Blockchain is becoming more prevalent in the modern world. Many blockchain app development companies offer products based on this technology and promote its advantages, including exceptional security, transparency, and decentralization. However, the technology’s drawbacks are often overlooked.
Blockchain is a distributed ledger technology that moves from centralized data storage and transaction control to a decentralized model. In this system, automated validation methods like smart contracts replace the need for a central authority to validate transactions.
The entire database is distributed to all network participants instead of stored in a central server. In blockchain, each participant in the network is a node that has a copy of the entire database. This ensures access to the database even if some nodes fail.
Consensus mechanisms synchronize the copies of the database among the nodes. Information about any transaction is sent synchronously to all other nodes. Therefore, network participants must approve any changes made by individual nodes.
Traditional blockchains (Bitcoin and Ethereum) can handle only a limited number of transactions per second, significantly lower than traditional financial systems like credit card networks. This limitation stems from the size of blocks and the time it takes to add a new block to the blockchain.
The network can become congested as the number of users and transactions on a blockchain increases. This decreases transaction times and higher transaction fees, reducing the system’s efficiency and user experience.
Blockchains that use PoW, like Bitcoin, require significant computational power to solve complex mathematical problems. This process, known as mining, consumes a substantial amount of electricity, leading to environmental concerns and sustainability questions.
Theoretically, if a single entity gains over 50% of a blockchain network’s computing power, it can manipulate the network and double-spend coins. While this is difficult to achieve, especially in larger networks, it remains a theoretical risk.
The code’s quality directly affects security on blockchains that support smart contracts, like Ethereum. Poorly written smart contracts can have vulnerabilities that hackers can exploit.
The lack of regulatory frameworks for blockchain and cryptocurrencies can lead to uncertainty and risk for users and investors. It also poses challenges for integrating blockchain into mainstream financial systems.
The decentralized nature of blockchain makes it challenging to fit within traditional legal frameworks, leading to uncertainties regarding jurisdiction and legal responsibility.
Integrating blockchain technology with financial and data systems can be complex and costly, limiting widespread adoption. Misconceptions and a lack of understanding about blockchain technology can hinder its acceptance and adoption among the general public and industries.
The most promising way to solve the scalability problem is to implement layer 1 and layer 2 solutions. In this case, the first layer is the main blockchain itself, and the second layer is the superstructure over it.
The second layer can be a software solution or an additional blockchain. If we compare layer 1 vs layer 2 blockchain solutions, the difference in the approach of these two types becomes clear. Layer 1 solutions modify the blockchain itself by adding various mechanisms to control traffic and efficiently allocate processing power:
- Modifying the consensus mechanism
- Increasing block capacity
Layer 2 solutions involve keeping the underlying network unchanged and transferring some of the computations from it to the superstructure, which can be:
- Nested Blockchains
- State channels
Moving away from energy-intensive models like Proof of Work (PoW) to more efficient ones (Proof of Stake (PoS), Delegated Proof of Stake (DPoS)) is a good practice in the long run.
However, despite providers’ assurances of the transition’s simplicity and safety, it should be noted that changing the consensus mechanism involves altering the network architecture. This can be costly and risky for application performance due to potential bugs and vulnerabilities resulting from deep code changes.
It is proposed to conduct regular and comprehensive audits of blockchain protocols and smart contracts and implement advanced cryptographic methods to enhance security. However, this ongoing battle between hackers and information holders requires constant updates.
Additionally, this does not safeguard against new and effective hacking methods, such as quantum computing, for which there is currently no effective means of defense. Protecting against quantum computers is extremely difficult because they operate on a different logic, rendering standard computational protection useless.
The company states that utilizing technologies like IPFS for decentralized storage and sidechains for off-chain processing will enhance data management efficiency. However, they do not address the potential issues that may arise from creating a blockchain add-on, such as interoperability and data security.
For example, some sidechains may lack security mechanisms and rely solely on their parent chain. Others may use their mechanisms, creating a bottleneck due to the difficulty synchronizing protection and validation methods between the parent and the side chains.
Blockchain service providers often overlook compatibility issues and suggest developing protocols to ensure compatibility. However, the blockchain domain lacks standardization.
This is because it may use non-standard solutions that make Interoperability much more difficult or even impossible. If the blockchain is intended to be used with other networks, developing a protocol for each network and considering the consistency of interaction between the protocols will be necessary. This temporary solution will become optimal with wider standardization of the entire blockchain industry.
Blockchain technology has been integrated into everyday life for some time. However, our investigation into its potential drawbacks and the solutions offered by companies has revealed that the situation is not as straightforward as they claim. While problems do have solutions, these solutions come with their own nuances.