Modex – The challenges of blockchain adoption. The company is coming to Banking 4.0 as Technology Partner.

article written on the Modex blog

Since Bitcoin entered the market in 2008, blockchain has become deeply ingrained in the vocabulary of the tech community and a constant presence in the discourse of entrepreneurs who tout it as the most disruptive technology since the advent of the Internet. We take look at the challenges that widespread blockchain adoption faces.

In its initial stages, blockchain acted as the framework on top of which Bitcoin was developed. For this achievement, it was hailed as the first technology that succeeded in challenging our perception of what constitutes money as well as how we store and transfer value. This achievement alone could place blockchain as one of the most influential technologies of the 21st century. However, what has made blockchain a hot topic among entrepreneurs and developers is the applicability of the technology beyond the realm of cryptocurrencies. Currently, a myriad of startups, as well as giants such as IBM, Deloitte, PwC, EY, Windows and Amazon, to name a few, are actively researching and delivering PoCs which demonstrate that blockchain holds the potential to streamline operations and increase efficiency in key industries such as healthcare, data storage, supply chain, fintech, cybersecurity, among many more.

Given this active interest in blockchain, one question remains: why hasn’t it seen widespread adoption yet? In general, technological advancements take a long time to mature and reach a stable form that can be introduced into the market. Even if a technology seems to hold the potential to stimulate an increase in productivity and overall quality of life, it must first embark into a trial and error phase where enterprises and emerging disruptors identify and address implementation challenges. 

The current perception on blockchain technology

The initial hype surrounding blockchain stemmed from its ability to support a new view on currencies by ensuring trust between actors from all over the globe who do not know or trust each other. For almost a decade, the main focus was put on blockchain’s ability to support this new type of currency that generated an explosion in the ICO phenomenon. By the end of 2018, due to numerous unscrupulous practices and many projects that were just disguised speculation and quick get rich scams, trust significantly decreased in the blockchain space, or so some may think. Indeed, trust did plummet, but it did so around anything surrounding ICOs. Blockchain’s image was affected by this new wave of skepticism, but for tech-savvy people and entrepreneurs who understood that cryptocurrencies are only one application of the technology, this was not the case. In fact, this initial hop provided the necessary impetus to dissociate blockchain from cryptocurrencies and look forward to new use cases that bring tangible value.

Deloitte, one of the “Big Four” accounting and audit organizations, conducted in 2019 a Global Blockchain Survey where they showcase the evolution of the perception on blockchain technology, the interest of enterprises as well as future investments in this technology. The survey conducted by Deloitte took place between February 8 and March 4, 2019, polling a sample of 1,386 senior executives from all over the globe: Brazil, Canada, China, Germany, Hong Kong, Israel, Luxembourg, Singapore, Switzerland, United Arab Emirates, United Kingdom, and the United States. The survey targeted companies with US$500 million or more in annual revenue for US respondents and companies with US$100 million or more in annual revenue for respondents outside of the United States. Respondents had at least a general understanding of blockchain and were familiar with and able to comment on their organizations’ investment plans. Furthermore, to widen their scope and perspective, on February 18 and March 8, 2019, Deloitte also administered the survey to executives at a group of 31 blockchain emerging disruptors to gauge their attitudes and investments in blockchain as a technology. All of the emerging disruptor respondents had revenue of less than US$50 million.

The Deloitte survey indicates that continued strong investment within companies willing to invest USD 5 million or more in new blockchain initiatives over the next 12 months, hovering at 40% (up to a point in 2018). In 2019, 53% of respondents claim that blockchain has become a critical strategic priority for their organization, a 10 point increase over 2018.

Furthermore, 83% o respondents believe that blockchain can be used in viable use cases, up from 74% from 2018. This highlights the fact that the overall attitude towards blockchain has straightened significantly. This suggests the fact that the technology has embarked on a maturing process in the eye of many executives and entrepreneurs who are perceiving blockchain’s true potential. But as the survey indicates, this is not the general consensus. Although a majority of respondents call blockchain a top-five priority, only 23% have already initiated a blockchain deployment, a decrease from the 34% from 2018. Attitudes towards blockchain are improving, but 43% still see the technology as being overhyped, up from 39% from last year’s survey.

The 2019 survey data also points to signs of blockchain’s increased maturity. Survey participants see blockchain as capable of providing a wider range of advantages than in 2018. The increase in diversification of potential use cases for the technology and the wider array and greater parity of identified barriers to blockchain adoption indicate a boost in the level of maturity.

Regional analysis

New blockchain initiatives in different countries and regions have a deep impact on how blockchain is implemented around the world. Changes in attitudes regarding the perception of the technology as well as legislative initiatives signal the fact that some countries will soon emerge as hotbeds of new blockchain solutions, based on their own collective objectives, approaches, and cultural sensibilities. 

Earlier this year, the Chinese government established key strategic technology priorities in its 13th five-year plan for IT. The Ministry of Industry and Information Technology released a white paper where it forwards blockchain as a key driver of economic development. The paper outlines that the “real economy” is an area in which blockchain can find long-term applications, such as, product traceability and copyright protection. Fintech is also highlighted as a domain where government regulators are pushing to develop alongside blockchain.

The survey strongly supports this claim, as 73% of respondents stated that blockchain is a top-five critical priority in China, a figure which dwarfs most other countries from the survey sample. Due to China’s ban on cryptocurrencies, private and permissioned blockchains will most likely be a focus for industries and businesses. On a similar note, 34% of Chinese respondents believe in blockchain’s disruptive potential, more than any country in the survey. Taking into consideration China’s position in the global economy, as well as the leadership role it has assumed in the Asia-Pacific region, it is safe to assume that blockchain will soon witness an explosion in this area. Paul Sin, consulting partner, Deloitte Advisory (Hong Kong) Ltd., and leader of Deloitte’s Asia-Pacific blockchain lab stated that “China, more than anywhere else in the world, will use blockchain strategically instead of tactically (…) More projects are driven by top management who use blockchain as a strategic weapon rather than a productivity tool.”

On the other spectrum, there is Singapore who positions itself as a cryptocurrency promoter. This can be determined by observing their government’s supportive stance on public blockchain platforms. Moving beyond its traditional regulatory role, the Singaporean government officially announced its understanding and acceptance of blockchain’s key role in the country’s financial future. The Monetary Authority of Singapore has adopted pro-blockchain regulations with favorable tax treatments and public funding for blockchain development. Due to the unique combination of governmental acceptance, fintech development, and entrepreneurial spirit, it’s safe to assume that blockchain technology will remain for the foreseeable future on an ascending trend in the area. Unsurprisingly, Singaporean executives showcase a greater belief in the potential of blockchain technology in the survey. Also, they seem to be more aggressive than their global counterparts when it comes to hiring blockchain talent, but seem to be more patient when it comes to return on investment.

Israeli organizations seem to be focused mainly on digital assets, particularly cryptocurrencies. As a world leader in entrepreneurial activity, cybersecurity, cryptography, and intelligence, Israel shows a high degree of compatibility with blockchain, and may soon become a hotbed for the technology. Although crypto currently exceeds corporate blockchain efforts, Israeli blockchain startups are using the technology in other areas such as DNA data storage, diamond registration, cybersecurity, and international shipping. The shift from crypto to more pertinent blockchain use cases becomes more apparent. The Israel Security Authority is working to implement blockchain in its messaging system, demonstrating that its government is ready to change its stance from a strictly regulatory role to end-user.

The challenges

Scalability

A major challenge of blockchain networks is related to the technical scalability of the network which can put a strain on the adoption process, especially for public blockchains. In contrast, legacy transaction networks are known for their ability to process thousands of transactions per second. Visa, for example, is capable of processing more than 2000 transactions per second. In contrast, the two largest blockchain networks, Bitcoin and Ethereum fall short when it comes to transaction speeds. The Bitcoin blockchain can process three to seven transactions per second, and Ethereum can handle approximately 20 transactions in a second. Compared to their centralized counterparts, this gap in performance deems the technology as non-viable for large scale adoption. 

A potential solution for the scalability issue consists of adding a second layer to the main blockchain network in order to facilitate faster transactions. Also known as second-layer scalability solutions or off-chain solutions, it refers they consist of secondary protocols built on top of the main blockchain where transactions are ‘off-loaded’ from the main blockchain to save space and reduce network congestion. 

The Lightning Network is a second-layer scaling solution for Bitcoin that incorporates smart contract functionalities on top of the Bitcoin blockchain. This allows for the creation of private, off-chain channels that facilitate instantaneous transactions with minimal fees. Lightning Network tries to lighten the load of the main blockchain by moving the transactions off the main chain to a secondary chain, known as the ‘off-chain. Since the transactions inside payment channels are between two parties, the transaction doesn’t need to be broadcasted to the public blockchain network until the parties decide to close the channel. This means that users don’t need to pay mining fees and there will be no block confirmation time. The advantage of this approach is that transactions executed within this channel are instant, and attract low fees. 

Plasma is another off-chain scaling solution. Devised for the Ethereum blockchain, it makes use of ‘child chains’ that stem from the original blockchain (also referred to as the parent blockchain). Each child chain functions as a separate blockchain that processes its own transactions while relying on the security measures deployed on the parent blockchain. Each child chain operates independently and runs parallel to each other, which boosts the speed and efficiency of the system. Furthermore, each child chain can have its own set of rules and qualities. This means that child chains can be designed to process only a specific category of transactions. Scalability is less of an issue for private blockchains since the nodes in the network are purposely designed to process transactions in an environment of trusted parties, which makes sense business-wise. 

Lack of interoperability

Blockchain has become a rapidly expanding industry that has an abundance of players and solutions. The problem is that with so many different networks, the blockchain space is in a state of disarray due to a lack of standards that would allow different networks to communicate with each other. Currently, most of the blockchains present in the market work in silos, incapable of sending or pulling information from another blockchain. According to a Deloitte report, the lack of interoperability “grants blockchain coders and developers freedom, and can give IT departments headaches as they discover that platforms can’t communicate without translation help.” The report highlights that on GitHub, over 6,500 projects are leveraging a variety of blockchain platforms with different protocols, coding languages, consensus mechanisms, and privacy measures. “Standardization could help enterprises collaborate on application development, validate proofs of concept, and share blockchain solutions as well as making it easier to integrate with existing systems,” as stated in the Deloitte study. 

As time passed, various projects have emerged that offer interoperability among different blockchain networks, such as Ark, which uses the SmartBridges architecture to address this dilemma. Ark claims to provide universal interoperability, and cross-blockchain communication and transfers. Another similar project is Cosmos, which uses the Interblockchain Communication (IBC) protocol to enable blockchain economies to operate outside silos, and transfer files between each other.

Lack of blockchain talent

Whenever a groundbreaking technology emerges, the developer community needs time and resources to accommodate the new demand. Blockchain is currently still in its infancy, as a result, there is an acute shortage of developers proficient in this technology. The fact that educational institutions have just recently begun to introduce blockchain-related courses, will alleviate the market demand but the results will become palpable only after students will finish their training. 

A research conducted by Glassdoor indicates that the demand for blockchain-related jobs has increased by 200% between 2017 and 2018. Having a sufficient pool of qualified developers is a top industry concern. The gap in market demand and current availability of skilled developers is reflected by the higher than average salaries a company is willing to pay to a blockchain professional.

Integration with legacy systems

In most cases, if an organization decides to integrate its legacy system with a blockchain, they are required to completely restructure their previous system, or devise a way to successfully integrate the two technologies. The problem is that due to the lack of skilled developers, organizations do not have access to the necessary talent pool to engage in this process. Reliance on an external party can alleviate this problem, but most solutions present on the market require the organization to invest a significant amount of time and resources to complete the transition. Also, the high incidences of data loss and breach are sufficient to discourage most companies from transitioning to blockchain.

Recently, new solutions emerged which enable legacy systems to connect to a blockchain backend. One such solution is Modex Blockchain Database, a product designed to help people without a background in tech, access the benefits of blockchain technology and remove the dangers posed by the loss of sensitive data.

Modex BCDB is a new take on blockchain technology which removes the need to invest resources in blockchain training and facilitates fast adoption of the technology in businesses. The solution proposed by Modex is a middleware that fuses a blockchain with a database to create a structure that is easy to use and understand by developers with no prior knowledge in blockchain development. As a result, any developer who knows to work with a database system can operate with our solution, without needing to change their programming style or learn blockchain. Modex BCDB is able to transform with minimal changes any type of database into a decentralized database which holds the same valuable characteristics inherent to blockchain technology: transparency, increased security, data immutability, and integrity.

Every enterprise is reserved and unwilling to make changes to its database, and for good reason, as data loss or data corruption constitute major risks. Modex BCDB doesn’t work by deleting the existing database, or data entries. The database is maintained intact throughout the process, data integrity is ensured by calculating the metadata of the records and storing it on the blockchain. Moreover, the system does not restrict access to the blockchain or to the database, so when a developer needs to make a reporting or ETL transformations, they can always perform warehouse analytics by accessing the database directly. This is because Modex BCDB has been purposely designed to be agnostic. With our solution, clients are able to set up a network, regardless of the type of database employed. In a consortium, each company can maintain what type of database they prefer (Oracle, Microsoft, IBM, MongoDB), and connect them through a blockchain-powered network to ensure cohesion, availability while protecting corporate interests.

Energy consumption

The majority of blockchains present in the market consume a high amount of energy. This is because Proof of Work, the consensus mechanism used to validate transactions and ensure trust in the network is purposely designed to be difficult and inefficient. This mechanism requires high amounts of computation power to solve a complex mathematical problem to verify and process transactions and to secure the network. The amount of energy consumed by computers that compete to solve the mathematical puzzle has reached an all-time high. Add to this the energy needed to cool down the computers, and the costs increase exponentially. 

Concerning this issue, the World Economic Forum published in 2017 a white paper where it states that “Estimates liken the bitcoin network’s energy consumption to the power used by nearly 700 average American homes at the low end of the spectrum and to the energy consumed by the island of Cyprus at the high end. That’s more than 4.409 billion kilowatt-hours, a Godzilla-sized carbon footprint, and it’s by design. It’s what secures the network and keeps nodes honest.”

The large amount of energy required to maintain and run a blockchain network acts as a deterrent to companies that are seeking more viable alternatives. To overcome this issue, many blockchain proponents are developing more efficient consensus algorithms, that are less energy taxing. Furthermore, from a business perspective, private blockchains are more suitable to serve company interests, as they provide restricted access, an additional layer of privacy to protect trade secrets, and are more energy-efficient.

To conclude, blockchain seems to have embarked on an ascending trend. According to the Deloitte report, countries are manifesting real interest in the applicability of the technology in enterprise use cases which signals the fact that blockchain is steadily reaching maturing. The acknowledgment of blockchain’s potential to act as an innovative disruptor, across multiple industry segments and businesses may soon trigger mass adoption. Although there are still multiple challenges that need to be addressed before witnessing large scale use, the increase in trust and eagerness to tap into the benefits of blockchain means that the technology is on the right track. Emerging disruptors need to shift their focus from trying to perfect a single form of the technology, and focus on multiple iterations, each with its unique use case.