Many people have heard of blockchain technology, but few know what to do with it. Some people will tell you it is the next big thing, poised to disrupt almost every industry under the sun and reshape the world, affecting everything from real estate to education to the structure of modern democracy. Others will claim that blockchain is technically advanced and theoretically interesting, but overrated and impractical .
Many proposed uses for blockchain will remain far-fetched forever: Blockchain will not bring peace to the Middle East, and current blockchain solutions are inefficient. But the technology is improving and the ecosystem is maturing; The blockchain of tomorrow may have a profound effect on the ways we live our lives and conduct our business.
It may just take a little time. Even Facebook, which has announced its own cryptocurrency, acknowledges in its white paper that problems still persist:
“As of today, we do not believe that there is a proven solution that can deliver the scale, stability, and security needed to support billions of people and transactions across the globe through a permissionless network.”
What must change before blockchain thrives in corporate America?
Some analysts prefer to call blockchain ” distributed ledger technology ” , and the name, even if it does not roll off the tongue, is accurate. Blockchain allows companies to create ledgers that are immutable and secure; The ramifications for payment processing, remittance transfers, supply chain tracking and digital distribution are profound. Blockchain possesses capabilities that even the most sophisticated traditional ledgers (paper or digital) do not have.
Smart contracts enable the trustless automation of value or data transactions when certain predefined conditions are met. In the coming years, these pieces of code may streamline and accelerate vital but slow economic processes, such as the transfer of real estate and insurance payments . And they may open markets for new products that could not exist today.
Unfortunately, blockchain systems, despite using thousands, or even millions, of computers, have not yet solved the problem of scale . To give a familiar example, consider payments: Visa and PayPal process thousands of transactions every second, providing one-click payments with no waiting.
Bitcoin ( BTC ), the world’s leading cryptocurrency, clears roughly five transactions per second, and it often takes an hour for transactions to be finalized. Facebook has designed Libra to clear around 1,000 transactions per second.
That is impressive, but it is not enough for a company with billions of users. Once the speed issues are resolved, blockchain pioneers must still address privacy concerns, since anyone with access to a given chain can see all of its associated data. After that, there are the legal and regulatory challenges that always accompany innovation.
Solutions for throughput, speed, privacy and regulatory compliance are on the way. Thousands of the best developers are working on protocols that will accelerate finality and move transactions per second into the five- or six-figure range, while permissioned blockchains will address the main privacy concerns.
Companies are increasingly engaging with regulators. The United Kingdom’s Financial Conduct Authority earlier this year granted a license to a cryptocurrency investment firm, while regulators from groups such as the Financial Action Task Force (FATF) regularly engage with blockchain companies and blockchain media.
That is not to say that the path to cooperation between regulators and companies will be easy: new technologies like blockchain force both sides to ask difficult questions. What convinces a regulator in one country or state might prove less convincing to a regulator elsewhere; We have already seen that some regions are more welcoming of blockchain innovation than others. Today, the world’s blockchain laws are a patchwork. Let us hope they become more consistent in the years to come.
Different layers of blockchain
Blockchain experts often speak of Layer 1, Layer 2 and Layer 3 technologies; Each new layer builds on a previous level of technology to provide greater utility and efficiency. Much of the activity so far has been at Layer 1. What are the differences between the various layers? Transit and commerce provide a good model. Vehicles and a road network could constitute a Layer 1; Layer 2 would be a state-of-the-art logistics structure for moving goods and people on demand. Layer 3 could be an e-commerce system that relies on Layer 2 logistics to move goods. Blockchain needs solid solutions at all three layers, and there are signs that Layers 2 and 3 will flourish in the coming years.
In fact, depending on how you define the term, some Layer 2 solutions have already debuted, although they are limited. The Lightning protocol, for example, speeds up Bitcoin transactions, but it does not allow crucial blockchain features such as smart contracts and will not work with other blockchain protocols. If Layer 2 protocols are going to transform blockchain, it is clear that protocol-agnostic tools, equally suited to different chains, must emerge.
Microsoft has stated that it anticipates that Layer 2 blockchain will move the technology from niche to mainstream, but such success seems unlikely if the systems are not interoperable.
Once the technology is better understood and the legal situation is codified, we can expect early-adopting companies to use blockchain widely. Already, large companies such as Bank of America , Microsoft and JP Morgan have begun to investigate blockchain, but most companies have remained cautious and have contributed a relatively small portion of their resources to distributed ledger technology.
The exception to this rule could be Facebook, which claims big plans for its announced Libra cryptocurrency , but blockchain is not yet central to the social network’s value proposition and the launch itself could be postponed . Enterprise understands the value of patience, and we are unlikely to see mass deployment until early adopters demonstrate that blockchain saves money and opens new markets. If the rapid settlement of complex transactions through a smart contract becomes standard, for example, we can expect a new technological gold rush.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Ed Felten is the Robert E. Kahn Professor of Computer Science and Public Affairs at Princeton University, the founding director of Princeton’s Center for Information Technology Policy, and a member of the United States Privacy and Civil Liberties Oversight Board. In 2015–2017, he served in the White House of President Barack Obama as Deputy Chief Technology Officer of the United States. He has published more than 150 articles in the research literature and three books.
