Rivers to Cross: What Restrains Blockchain from Widespread Application?
COVID-19 and China
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This article is a part of EqualOcean's 'Blockchain, China's Story' report. Read more about it or download the sample and check out the contents.

The year 2020 will be the first year for blockchain to witness relatively large-scale industry applications in China – there is no shortage of such projections in the market – after 2019, which was declared by many as the first year of true blockchain commercialization.

We hold a reservation on such optimistic assessments.

Truly, we see good market conditions for China's blockchain industry, helping to drive the real economy:

1. The central government called for blockchain to be a focus of national innovation in the 'October 24 announcement';

2. Despite the cooldown in PE/VC investments, the market is reshuffling its deck, creating a window of opportunities for the tech-driven players doing the real business of blockchain;

3. Pilot projects with a practical value that target different scenarios have started to operate or are about to come – for example, China's national digital currency (DCEP), logistics, and e-government.

4. Big domestic tech juggernauts, like Alibaba's Ant Financial, Tencent and's JD Digits, have stepped onto the battlefield, aiming at developing infrastructures and exploring application scenarios, which helps to facilitate a sound industry environment.

For sure, these feel-good factors will accelerate the process for blockchain technology to harmonize with business scenarios in traditional sectors.

However, it is notable that this does not imply that blockchain is ready to be widely adopted in real business.

There are still abundant factors that 'block' blockchain to be adopted in a large-scale. If only one word can be picked to summarize the entire issue, it would probably be 'Immature' – which involves the entire ecosystem of blockchain, from the technology itself, its business model, to public recognitions and market regulations.

Blockchain industry still needs a fair amount of time to achieve the goal – in fact, this is not the status quo in the Chinese market alone, other countries that lead the way in this emerging technology are more or less experiencing a similar situation.

Technical limitations

Blockchain is more or less a baby that is being pushed to start running before it fully gets how to walk. From a technical perspective, the many technologies involved in the blockchain network make it currently hard to satisfy the standards of actual businesses.

1. The blockchain trilemma is difficult to solve in a short time

Consensus algorithms – one of the fundamental pillars of blockchain technology – should be capable of perfectly balancing the components of the blockchain trilemma, namely scalability, security and decentralization.

However, no matter what major route is chosen and what add-ons included, be it the classic Proof of Work (POW), Proof of Stake (POS) for the public chain, Delegated Proof of Stake (DPOS) – an evolved version based on the former – the Practical Byzantine Fault Tolerance (pBFT) for permission chain, or the Raft for private chain, none of the supreme arrangements we see provide a sound solution at present.

The algorithm based on POW takes advantage in terms of fault tolerance, but the process of hash function computation and multiple nodes confirmation largely restrains its processing speed. As for now, the Transaction per Second (TPS) level it can achieve is still far from what can support real-world transaction scenarios. Besides, its logic of realizing security at the cost of efficiency also creates great waste in electricity and storage space.

On the other hand, though the algorithm based on pBFT can achieve considerable improvements in terms of scalability – where two of the five mainstream permission chain infrastructures can achieve a thousand level of TPS – while the degree of fault tolerance is reduced to some extent. In addition, its processing speed tends to plummet if the number of nodes connected to the network exceeds a certain cut-off.

2. The so-called 'smart contract' is not smart at present

People tend to overestimate what a smart contract can bring about. Two things need to be clear: 1. A smart contract cannot actively acquire data in the real world; 2. A smart contract itself cannot run fully automated in scenarios where external data (i.e., any data from the physical world) is needed to confirm the results.

In this case, it is apparent that what smart contracts can help to achieve is highly limited, especially when talking about real-world scenarios.

In fact, Vitalik Buterin – founder of Ethereum – remarked in 2018 that the term 'smart contract' is not appropriate enough, and something like 'persistent scripts' would better depict the real capability of the technology.

Taking one step further, the potential of the smart contract can be significantly empowered with the assistance of other technologies like oracle, Internet of Things (IoT) and Artificial Intelligence (AI). Apparently, here we are talking about the long-run, as these technologies are also in an emerging stage, just like blockchain.

3. Privacy protection issue in permission chain

Privacy protection seems to be an intrinsic characteristic that comes with blockchain from its birth – however, when it came to real-world applications, things are way more complicated than a simple vision.

The issue is especially severe for permission chains – the structure that is easiest to adopt in real-world scenarios at present – and constitutes one of the most central concerns that blocks it from witnessing larger-scale applications.

On the one hand, parties cooperating within a permission chain would like to work together in sharing data and information and in building up an ecosystem. On the other hand, these members require privacy in terms of transaction information, data sharing and their own identity.

Therefore, the logic in designing the privacy mechanism for the permission chain is largely different from that for the public chain. In particular, the permission chain requires advanced encryption and precise visibility control to meet the actual needs of clients in real cases.

Lack of effective explorations in application scenarios

Apart from technology, the commercialization of blockchain is also at a very initial stage.

Currently, a large proportion of so-called blockchain applications can actually run or even run better without leveraging the blockchain technology, apart from this, there are also a few that tend to be too idealistic that do not have a clear business model and targeting clients.

It can even be said that compared to technical factors, these operational level issues may be more important for blockchain participants to dig into in the near future.

1. Lack of public recognition

Blockchain can help to increase efficiencies in relations of production, but not in improving production capacity. It is more difficult for organizations (i.e., potential clients) to directly feel and recognize the contribution that blockchain technology can bring to their businesses, as compared to emerging technologies like AI and big data which aim at elevating capabilities.

Therefore, even if enterprises are interested in adopting blockchain in their business, it is hard for a majority of them to put forward specific demands and what they would actually like to achieve in detail.

In this case, it increases the difficulties for blockchain technology providers to come up with the application scenarios and corresponding solutions that meet the needs of potential clients.

2. Applying blockchain technology mechanically

At present, the exploration of blockchain applications that can be well combined with the real economy is still in its early stages.

Simply put, a blockchain solution is very likely to be applicable, if a scenario does meet one of the following three conditions: 1. Cooperation between multiple entities that have no affiliation or command relationship with each other; 2. All the parties are unwilling to surrender data control and governance, and are not willing to share data and information unconditionally; 3. Excessive gaming between parties raised by information asymmetry heavily reduces business efficiency and causes redundancy.

Following the above criteria, we see blockchain, in fact, is not necessary for many of the blockchain solutions in the market.

3. Immature business model and costs concern

Even if a blockchain application is proved in the pilot projects, there is much more to concern when it comes to large-scale adoptions. Issues like which party is going to pay the price, or how they are going to share the expenditures if the investment is co-financed are all knotty issues that will probably scale up as pilot projects move to production.

Lack of unified industry standards and supporting regulations

The lack of unified industry standards and corresponding supervision from the regulators in the blockchain industry is not conducive to the establishment of a complete ecosystem.

This potentially raises the chance for speculators to take undue advantage of the loopholes in the market, which imposes difficulties for clients to judge the performance of different blockchain platforms.

Apart from this, the gap in industry standards in terms of application, security and interoperability may negatively affect cross-chain interconnection, business scenarios expansion and industrial cooperation.

A bottom line

From the above, we can discover that there are still tons of problems to be solved prior to the widespread adoption of blockchain.

The year 2020 will be a year for the Chinese market – in fact, also the other global leaders – to witness an acceleration in the real application of blockchain. However, for large-scale industry applications, probably there are still five to ten years to go.

Editor: Luke Sheehan
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