Five crucial challenges for blockchain to overcome: Deloitte

Paul Ratje | The Washington Post | Getty Images

A bitcoin mine near Kongyuxiang, Sichuan, China on August 12, 2016.

Blockchain is similar to an accounting ledger, only it records transactions across a vast network and is decentralized, meaning it doesn’t require any central authority to oversee it.

Advocates of the technology say that’s a huge advantage when it comes to tracking financial transactions and other data.

But there’s a problem, Deloitte says.

“Blockchain can be slow,” researchers at the consultancy said in a report published on Monday. “In contrast to some legacy transaction processing systems able to process tens of thousands of transactions per second, the Bitcoin blockchain can handle only three to seven transactions per second; the corresponding figure for Ethereum blockchain is as low as 15 transactions per second.”

It adds: “Because of its relatively poor performance, many observers do not consider blockchain technology to be viable for large-scale applications.”

With bitcoin’s blockchain, any number of people can participate in the network, as it is public. So-called miners on the network work out complex mathematical problems to validate transactions.

There needs to be consensus on the network about the validity of the transaction in order for it to go through. While this system reduces the risk of malicious activity being carried out on the network, it can also increase the time it takes for transactions to settle.

However, Deloitte has said work is being done to create a more efficient model that can speed up transaction speeds. Firms in the industry like Hyperledger, Stellar and Ripple are using new consensus mechanisms aimed at accelerating this process.

These new models are called “proof-of-stake” systems, where a cryptocurrency miner is required to have a certain stake in the digital asset in order to participate in the network.

“The evolution of consensus mechanisms is improving blockchain speed significantly — good news for applications in trade finance, supply chain traceability, auto leasing, marine insurance, health care, and insurance,” the report said.