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The Catch-22 of Blockchain Technology

By Sean Williams - Updated Mar 1, 2018 at 8:07AM

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Can blockchain overcome this significant speed bump?

Last year was a true coming-out party for cryptocurrencies, with the aggregate value of virtual currencies soaring by nearly $600 billion, to end the year at $613 billion. This better than 3,300% gain marked, perhaps, the best year for any asset class in history, and it certainly got investors' attention.

Though there were numerous catalysts responsible for pushing digital currencies higher in 2017, the most clearly defined catalyst then and now is the emergence of blockchain technology.

A person touching an encrypted block on a digital screen that's part of a larger blockchain.

Image source: Getty Images.

Introducing blockchain and its key advantages

What's blockchain, you ask? It's the digital, distributed, and decentralized ledger tethered to most cryptocurrencies that's responsible for recording all transactions without the need for a financial intermediary. In other words, it's a transparent and immutable (i.e., unchanging) log of all transactions that don't involve banks acting as a third party.

The evolution of blockchain, which really hit the mainstream with the introduction of bitcoin in 2009, is a direct result of developers viewing inefficiencies with the current banking system. These "inefficiencies" include excessive transaction fees from banks taking their cut as financial intermediaries and transaction processing times that take, on some occasions, up to five business days to settle. Blockchain aims to resolve these issues in three key ways.

First, as noted, blockchain is decentralized. This is a fancy way of saying that data on a blockchain isn't stored in a central location, but rather on hard drives and servers all over the world. This is important as it prevents a single individual, business, or cybercriminal from gaining control of the network. Thusly, blockchain is expected to be even safer than today's banking system.

Secondly, blockchain eliminates the need for banks to act as intermediaries. All transactions on blockchain networks would just be between a sender of funds and a receiver of funds, potentially reducing transaction fees.

Binary code and blockchain nodes surrounding a digital outline of the continents.

Image source: Getty Images.

Lastly, but most importantly, since blockchain-based transactions are processed 24 hours a day, seven days a week, processing and settling times could fall to mere seconds from days, especially in cross-border transactions. The ability to move money in real time -- or nearly real time -- could be a game changer for businesses.

It's also worth noting that, while blockchain was initially intended to improve peer-to-peer remittances, it has abundant potential in non-currency applications, as well. Businesses from a wide variety of sectors and industries are testing blockchain platforms as a means to more transparently oversee supply chains, maintain customer-loyalty programs, log medical records, or even develop blockchain-based IDs.

Blockchain gains steam

Though blockchain is a relatively new technology, it's been gaining traction with businesses, both big and small. For example, IBM (IBM -0.05%) has been one of the most prominently involved companies in the blockchain revolution. Having come late to the cloud-computing party, IBM is making sure it's on the leading edge of blockchain development and testing.

In January, IBM and shipping giant A.P. Moller-Maersk (commonly known as Maersk) announced they'd be forming a separate joint venture to develop blockchain solutions for the global shipping industry. The intent of this joint venture is to make supply chains more transparent, as well as eliminate paper, making approvals quicker and reducing inefficiencies. 

Global banking giants American Express (AXP 1.28%) and Banco Santander (SAN 0.71%) also joined the blockchain party in mid-November when they announced a partnership with Ripple. Under the deal, American Express members will be able to send non-card payments to U.K. Santander accounts over AmEx's FX International Payment network and have those transactions process over Ripple's network. Ripple has suggested that these cross-border payments can process virtually instantly, and the transaction fee is just a fraction of a cent.

A smart city with multiple connected wireless devices.

Image source: Getty Images.

Even Cisco Systems (CSCO 0.80%) is getting in on the act. In October, it filed for a trademark with the U.S. Patent Office for a blockchain platform that would regulate Internet-of-Things networks -- and Cisco is the undisputed king of wireless networks. According to Cisco, such a platform would recognize wireless devices, ascertain their trustworthiness, and continuously do so for devices entering and leaving the network. 

The possibilities for blockchain are seemingly endless for big business at the moment.

Say hello to blockchain's Catch-22

Unfortunately, the blockchain revolution has hit a pretty big speed bump that may be difficult, if not impossible, to overcome. I like to call it "blockchain's Catch-22."

The phrase "Catch-22" gained acclaim from the 1961 novel Catch-22, which describes an absurd Air Force rule that seemingly has no resolution. In the novel, the paradox is that a pilot who continues to fly combat missions without asking for relief is considered to be insane, but considered sane enough to keep flying if he doesn't make such a request. Blockchain is having its own Catch-22 moment.

Right now, blockchain is being tested in proof-of-concept demos and small-scale studies by businesses all over the globe. However, virtually none of these projects are testing blockchain in scalable real-world scenarios. In other words, blockchain has proven successful when the parameters are relatively small, but little is known what would happen if millions of transactions were suddenly processed over these networks.

A risk dial turned to its maximum setting.

Image source: Getty Images.

Here's the issue: Businesses are unwilling to make a long-term, real-world commitment to blockchain without the technology first proving its ability to be scaled. However, there's no way to prove blockchain's ability to scale if no businesses will commit to testing it on a larger scale. That's the Catch-22 of blockchain technology.

Complicating matters even more is that blockchain isn't exactly a seamless fit for certain industries. Though it could be a game changer if it proves scalable, implementing blockchain could require some businesses to essentially remove most or all of their old infrastructure and start from scratch. That's a very costly and time-consuming process that isn't going to be taken lightly.

A handful of blockchain networks have already demonstrated weaknesses that need fixing. For instance, shortly after IOTA burst onto the scene in November, increased use of its blockchain bogged down the network and slowed transaction processing times to a crawl. There are clear concerns that the same thing could happen to even the most intriguing blockchain projects, such as Ethereum and Ripple, if scaled.

Can blockchain move past its proof-of-concept phase? That's perhaps the most important question of 2018 for cryptocurrencies and blockchain technology.

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Stocks Mentioned

Banco Santander, S.A. Stock Quote
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