Top 5 Blockchain Challenges Impeding Crypto Adoption
Is the buzzword 'mass adoption' unfolding right now?
In 2023, only 420 million people use cryptocurrencies, a stark comparison to the 5.2 billion individuals with bank accounts. The gap can be attributed to challenges such as the banking system's hesitancy to adopt blockchain, the inherent volatility of crypto assets, and ongoing political scrutiny of the technology.
All this crypto stuff, it needed parallel processing, and [Nvidia] is the best, so people just programmed it to use for this purpose. They bought a lot of stuff, and then eventually it collapsed because it doesnāt bring anything useful for society. AI does,Kagan told the Guardian.
Beyond these external challenges, there are also inherent difficulties within the technology itself. We have highlighted 5 fundamental problems facing blockchain.
Blockchain scalability
Cryptocurrency networks are defined by three core attributes: scalability, decentralization, and security. The blockchain trilemma posits that enhancing any two of these aspects often results in a trade-off with the third. This dilemma forces developers to continually innovate to find a balance among these key features.
Blockchain Trilemma. Source: www.ledger.com
What leads to scalability issues? To answer this, let's examine the role of each blockchain attribute:
- Decentralization: This foundational principle distinguishes blockchain from traditional databases. Sacrificing decentralization is typically only considered in private blockchain networks.
- Security: A critical feature ensuring defense against vulnerabilities, hacking, and various types of fraud.
- Scalability: The networkās capacity to sustain its performance as the demand or load increases.
Created in 2008, Bitcoin places a strong emphasis on decentralization and security. Its network mechanism, which ensures new blocks are created roughly every 10 minutes, results in Bitcoin's current TPS (Transactions Per Second) standing at 5āa fixed attribute intentionally implemented by its developers. In this context, it's not a scalability issue but rather an intentional functional limitation.
After Bitcoin, Ethereum became the next significant blockchain, launched in 2015. It provided a more expandable architecture where transactions are processed concurrently and are not limited by the block mining time. However, Ethereum's performance is relatively modest, with a TPS of around 12.
TPS of Ethereum and L2 Solutions. Source: L2beat.com
However, the issue of scalability is not unresolvable. Since the beginning of 2020, the market has seen the emergence of Layer 2 solutions that delegate certain network operations. Key technologies used include:
Projects like Arbitrum, Optimism, ZkSync, and Lightning Network are designed to tackle the scalability challenges of blockchain. With these and other developments, the long-awaited mass adoption of cryptocurrencies might be just around the corner.
Transaction Fees and Speed
Scalability challenges lead to another major hurdle for widespread cryptocurrency adoption ā the cost and speed of transactions.
Ethereum Daily Transaction Volumes. Source: Etherscan.io
Luckily, Ethereum isn't the only blockchain in the market. There are other blockchains and scalability solutions available. Tron, BSC, Arbitrum, and Polygon are examples of projects aimed at increasing transaction speed and reducing costs.
Transaction fees, paid in the network's native token, fluctuate with market rates, often limiting blockchain use for smaller transactions due to high costs and price volatility relative to the dollar. Individuals seeking to make everyday crypto payments, such as buying coffee, may opt for more convenient solutions like Whitepay.
The emergence of new projects introduces healthy competition and drives technological advancement. However, it also brings us to another blockchain challenge ā compatibility.
Compatibility
Cryptographic assets are distributed across a variety of blockchain networks, which often lack direct interconnectivity. This creates a demand for compatibility solutions to seamlessly carry out transactions with these assets.
Distribution of Locked Assets Across Different Networks. Source: defillama.com
Compatibility in the blockchain context refers to the ability of wallets (users) to interact with various blockchain networks. Think of it as moving goods between islands ā you need either ships or bridges to transport goods from one island to another. Similarly, in the blockchain world, there's a need for analogous mechanisms.
While there are already over 10 significant cross-chain bridges, this area remains vulnerable to attacks, which can deter users. Some of the most prominent bridges include Wormhole and Nomad Bridge. The market may need a solution that either guarantees 100% secure interactions with these bridges or eliminates the need for bridges altogether.
Security
Between 2012 and 2022, the total value of stolen crypto assets reached $30 billion. Despite advancements in security tools, the threat of attacks persists.
51% Attack: A vulnerability found in blockchain networks that use the Proof-of-Work consensus algorithm, where transactions are validated through the computing power (hashrate) of validators.
51% Attack. Source: coin98.net
Reentrancy Attack: This hacking method exploits vulnerabilities in smart contracts. Attackers initiate a withdrawal request from an account and exploit the system to divert additional millions of dollars before detection. A notable recent example is the attack on Curve Finance, which led to a $50 million theft.
Sybil Attack: A prevalent vulnerability where a hacker creates numerous identifiers using a single node. It can be utilized for generating artificial demand, launching 51% attacks, and conducting spam attacks.
Lack of Regulatory Clarity
While El Salvador has legalized Bitcoin, other countries are proceeding cautiously with cryptocurrency integration. Presently, laws exist to facilitate crypto companies' interaction with the traditional financial sector. However, the timeline for comprehensive cryptocurrency regulation remains uncertain.
Much of the concern in the crypto world is lack of regulatory clarityāthe industry would welcome sensible guidelines within which to operate, so long as it doesnāt stifle innovation.
Will crypto companies be able to address these issues?
The answer is still up in the air. However, the sector is progressing, with companies consistently receiving funding and crafting unique solutions.
Blockchain is a new frontier in technology and finance, so its adoption requires more than just a few decades. For example, the banking system first appeared in 14th-century Italy but only became widespread after 400 years.
