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Why blockchain’s limitations are good news for start-ups

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Oh, blockchain.

A year ago, you were the technology du jour, purported to solve major problems affecting mass industries. Transparency, smart contracts, immutability – the combined potency of these ideas allowed us to envision a society where financial institutions could not only be held accountable, but could be made obsolete. Bitcoin, Ethereum and other emerging cryptocurrencies could become currencies of the world, enabling peer-to-peer trading of energy, money, products, services, music, and more.


Since then, the fanfare around blockchain’s potential world-changing applications has become – at the very least – muted. In the year since enumerable investors jumped on the blockchain wagon and swathes of start-ups pitched how they could provide innovative solutions based on the technology, the limitations of blockchain have became clear. 

 

Is all hope for blockchain lost? 

No. Far from it. 

However, at present, we need to reel in expectations and look at blockchain with a more pragmatic eye. Its possibilities are still vast, but possible solutions need to be aligned with the realities of the technology’s capabilities, and its limitations.

 

Speed (or lack thereof)

A doctoral student at MIT built a vending machine based on debit-style crytocurrency card. The problem? The financial transaction – that is, the money transfer to the owner of the machine – had a time lag of up to three days. If the cryptocurrency account used didn’t have sufficient funds, then the vendor would get nothing, with little in the way of ability to trace the original buyer.

This is just one of many examples were blokchain’s lack of speed creates fundamental issues. Two years ago, blockchain was touted as a panacea to the music industry’s woes over rights and royalties. But any piece of music on the blockchain will be laden with a massive amount of metadata – who owns the rights, who played the bass, which label released it – that could, according to Alexander Stewart from Berklee’s Music Business Journal, create such a time lag that it “could lead to double spending.”

Which feeds into the next problem with blockchain:

 

Scalability

Blockchain’s lack of speed creates implications for the large-scale solutions that many want the technology to support. Even companies at the forefront of blockchain adoption have struggled. “Those incumbents who pioneered their own internal experimentation, and were open minded about public ledgers, have found that when trying to do anything at scale, things just don’t work and the economics are, for now, often cost prohibitive,” wrote Wired Money. Yanislav Malahov for TechCrunch agreed: “Companies seeking to leverage the undeniable power of the blockchain are being confronted by its scalability limitations.”

 

Data integrity

Another huge impediment is data. In music, for example, many – including Imogen Heap, a fierce proponent of the technology – want an industry-wide blockchain-based database for music, where rights and revenues are transparent and where it is clear to artists where their music is being played. While this sounds like the perfect antidote to the void of information created by digital streaming services, there is no one body who wants to own the inputting legacy data. The task is simply too vast.

But there is another issue  - data integrity. A large percentage of data on any blockchain database requires human input, and doesn’t account for human error.

 

Cryptocurrencies

If the general public weren’t familiar with bitcoin, the recent worldwide cyber attack that demanded bitcoin payments in its ransom note at least put it on their radar. Bitcoin was already suffering from a bad rap due to trust issues, a lack of user friendliness, and a prohibitive number of steps to enrol in a bitcoin exchange. “Unlike regulated currencies, cryptocurrencies are not readily available to transact,” reported Hatching Amazing on Medium. “Visa or MasterCard is not going to work with your bank to process Ether and inform you about the point in time exchange rate.”

 

So, what should investors and innovators be looking for? 

Blockchain still has potential, and this potential is huge. But as a technology that it is difficult to come to grips with, what should investors and innovators be looking for?

 

Convergence with other technologies 

Blockchain on its own is clearly limited in the short term. But combined with other technologies, its potential grows. For example, it makes a perfect pairing with other emerging technologies, such as IoT, 3D printing, AI, and robotics. “Where it gets really interesting is if [blockchain and other technologies] all leverage [a] new web infrastructure, it could provide a common operating system whereby they begin to converge, combine and accelerate one another,” reported Wired Money.  

 

Working either with, or around, blockchain’s limitations

Social tech start-up Alice has launched a new tool that uses blockchain technology to show donors the exact impact of their donation. Alice works by “freezing” donations until charities can prove they have achieved their donation goals. This is just one example that works with blockchain’s lack of speed while leveraging its shared ledger.

  

Smaller solutions

Solutions don’t have to be large to be effective.  A recent report that says it will be SMEs that help drive Britain’s growth, and small-scale solutions solving significant problems in a range of sectors can have as much impact as a larger, wide-scale solution.

 

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Gayle O’Brien

Written by Gayle O’Brien

Gayle O’Brien started her writing career during Web 1.0 and still appears to be standing. After multiple stints in-house and agency side, her writing now focuses on start-ups, technology, and innovation. A dual citizen of the US and UK, Gayle divides her time between Massachusetts and south-east England.