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- Blockchain has been hailed as the best thing since the development of the internet, but it comes up against its own set of problems.
- Scalability issues and environmental concerns are some of the issues plaguing blockchain and stifling its adoption rates.
- Several solutions have been put forward in an attempt to find a solution to these challenges.
After Satoshi Nakamoto mined the first Bitcoin block, the blockchain industry took off like a rocket, and now cryptocurrencies represent a $ 2,000 billion market. The invention of blockchain has been hailed as the solution to some global issues like transparency and has been deployed in several sectors. However, the technology is far from perfect and has some issues it faces.
The problem of scalability
One of the most fundamental issues affecting blockchain is the issue of scalability. As adoption rates continue to skyrocket, most blockchains face the challenge of not being able to handle a large amount of transaction data in a short period of time. This results in long waiting times and high costs, which leads to several advanced solutions.
Several Layer 1 solutions have been proposed, such as increasing the block size limit, but this has come with its own set of issues. As an alternative, other blockchains decided to shorten the time it takes to create a new block, but none of these solutions worked.
Their shortcomings gave birth to Layer 2 solutions that worked by bundling similar transactions together to reduce the number of transactions. Polygon and the Bitcoin Lightning Network are examples of Layer 2 solutions that attempt to address the scalability issue.
The environmental problem
Mining cryptocurrencies, especially those with proof-of-work consensus mechanisms, consume large amounts of energy. Bitcoin’s annual electricity consumption rates exceed those of several countries, raising serious concerns. The use of fossil fuels for cryptocurrency mining has come under heavy criticism due to its environmental impact.
   
As an alternative, Proof-Of-Stake blockchains were developed to circumvent this debacle. According to Cardano founder Charles Hoskinson, Cardano is “currently 1.6 million times more energy efficient than Bitcoin”. Ethereum has broad plans to move from proof of work to proof of stake with Ethereum 2.0, while alternative energy sources like solar power and geothermal power are believed to reduce Bitcoin’s environmental impact.
The security problem
Blockchain-based platforms face a security challenge that continues to grow in proportion. Once considered non-hackable, cybercriminals take advantage of small flaws in the design of projects and exchanges. They launch 51% attacks like the situation with Ethereum Classic and several instances of flash loan attacks.
Several exchanges have experienced security breaches in the past, such as Mt.Gox, which resulted in the loss of over 700,000 BTC. Polynetwork suffered a record breach in which over $ 600 million worth of cryptocurrency was stolen but ultimately returned. Over $ 1 billion has been lost due to blockchain security breaches and to quell these events, projects are investing heavily in the security of their assets.
The regulatory problem
The regulatory problem associated with blockchain and cryptocurrencies is a double-edged sword, as opinions are divided as to whether or not they are a good thing for the industry. A level of regulation will boost consumer confidence and attract more institutional investors to the space. However, strict regulations can also slow down the growth and development of cryptocurrencies.
Extreme cryptocurrency regulation like the situation in China has negative effects on the markets and can bring mining activity to a halt. Several exchanges have faced regulatory issues in multiple jurisdictions and the lack of uniformity makes it difficult to navigate crypto exchanges.
According to Binance CEO Changpeng Zhao, regulatory issues occupy more than 80% of his day because his business has been the target of heavy gunfire from regulatory agencies.
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