Blockchain Potential and Challenges as seen by the EU

Blockchain, the technology behind cryptocurrency is getting more and more attention from states and companies trying to use the system to serve a larger variety of causes. Blockchains offer the service of moving value from one place to another faster and more transparently by removing the middleman. Blockchain has an enormous potential for simplifying all the bureaucratic procedures for the state and making transactions transparent and more accessible. Even though government officials tend to not favor cryptocurrency while some banks see them as their rivals, blockchain itself has a great potential for changing the way things operate in large enterprises and in the states as well.

Blockchains can give big companies an opportunity to increase transparency and speed while decreasing the expenses. Permissioned Blockchains are a way to protect the privacy necessary for the company to operate and provide safety for their customers while making any transaction easier to track and faster to execute. But blockchain isn’t exclusive to assets. Blockchains have the ability to track actions, movement, even temperatures of certain products and give access to the consumer in order to build trust. 

It’s easy to see why adopting blockchains can transform the way we communicate with brands and companies. It can even become an essential tool for holding companies accountable for their claims and actions in the future.

But since the phenomenon and the technology itself is very new, besides the skepticism and mistrust,  the technology itself is still developing to fit the wide variety of needs. Blockchain offers a way to transfer assets, contracts, even land titles with removing some or all intermediaries.

Integrating blockchain into policymaking 

Entities like the EU have long recognized the potential of blockchain for transforming the way our society operates, be that in connection with different companies or the state itself. But that’s not all there is to blockchain technology. 

With bitcoin, we are currently dealing with permissionless blockchains that offer very limited privacy and make it easy to track the details of those making transactions. This model clearly is not suitable for companies and enterprises responsible for the privacy for their customers and employees. The new report by the EU aims to explore the challenges and multiple benefits of incorporating blockchain more intensely into our everyday lives.

Besides companies and firms, there is a lot of potential for using blockchain for governance.

The Eu report found that despite many potential benefits, applying blockchain and distributed ledger technology (DLT), because of its infancy has many complex challenges to overcome.

How major companies are using blockchain to improve their services

Application of blockchain technology in supply chain management, providing the transparent interactions between producers, retailers, distributors, transporters, suppliers, and consumers was one of the things highlighted in the report. 

In the most recent news, Coca-Cola’s bottle manufacturing supply chain, Coke One North America (CONA) confirmed the pilot project with software provider SAP, that is set to expand from 2 to 70 manufacturers that deliver the 160,000 Coca-Cola bottles daily. This project is aimed at improving the distribution for the participants, since manufacturers will be able to access permissioned blockchain containing each other’s orders and requirements, making it more transparent and mistake-proof. When it comes to larger chains, where there is a lot of cross-company transactions’ inefficiency is a widespread problem. In addition, going through intermediaries can sometimes slow down the process immensely.

How different industries can benefit from using blockchain

One of the industries that can benefit from blockchain is the creative industry. Blockchain can offer a more fair way to compensate those working in the creative industry, making it possible to implement pay-per-usage, use micropayments or automatic payment distributions. Common complaint in the creative world is that as performance rights organizations such as Spotify and Youtube increasingly insert themselves into the value chain between artists and their audiences, artists receive smaller payments, and rarely have control over how much they’re getting paid and how their work is shared and advertised. It is likely that creative work has a much higher worth than what the artist is getting paid if they have to or chose to work with big companies. This, in the end, undervalues the work because of transaction frictions. Artists could greatly benefit from various blockchain offerings such as enabling smart contracts and establishing transparent person-to-person transactions while promoting dynamic, efficient pricing. It will also allow micro monetizing which is almost impossible for the artists trying to get paid by the bigger companies.

Probably one of the most important sectors that blockchain can be used for is the public sector. Blockchain allows for the public sector to provide tailored services for citizens and just improves overall trust in governments, by increasing transparency and becoming more efficient. The most basic example would be a government-issued identity on blockchain that can later save time and costs for the citizen by allowing citizens, businesses and public administration to manage and access identities for specific services. 

One of the examples of blockchains working successfully on a bigger scale is Estonia. Estonian Government has been testing blockchain technology since 2008. Since 2012 blockchain has been in operational use in Estonia’s registries such as national health, judicial, legislative, security and commercial code systems, with plans to expand its use to other spheres such as personal medicine, cybersecurity, and data embassies.

The Major challenges identified by the EU reportThe EU report found that Blockchain is now one of the technologies which are expected to become increasingly important in the next decade. The report bases this assumption on the sharp growth in blockchain startups and the volume of their funding. 2017 saw a surge in blockchains funding and the trend continued at a high level in 2018 . The countries with leading blockchain startups are the US and China, followed by Switzerland, Singapore, Japan, and South Korea. Among Europe, the leading country in the number of blockchains is the UK with hosting almost half of the blockchain startups of Europe.

One of the first challenges that come up within the report in energy efficiency. While everyone can agree that using blockchain definitely speeds things up the processing power required to run a blockchain raises some questions. Currently, blockchain designs run on algorithms that consume around 215 kWh per transaction. To put it in perspective it’s the equivalent of letting an incandescent light bulb of 25 W burn for a full year. This is caused by huge computing power it takes to validate and secure transactions on the blockchains. In addition to that, the design complexity of blockchains might make it difficult for the new user to make transactions, as it requires at least some level of technical knowledge. If blockchains are to become a more mainstream part of everyday lives there is a need for a more user-friendly infrastructure.

The challenge that is most often talked about, and which stops a lot of companies from switching to blockchain, or even introducing it is the uncertainty over how well it meshes with the current legal frameworks and whether or not it’s able to protect the information and the assets as they’re getting exchanged. Since blockchains aren’t mainstream just yet, there is a lot of skepticism regarding using it outside cryptocurrency.

Another challenge to consider is that it’s one thing, how successful the transition to blockchain can be, but the process itself and how it can be made possible is another story completely. The EU highlights the importance of considering the cost of integration or migration to the system when talking about future plans. Interoperability between different systems, blockchain or non blockchain is also key to a successful transition since realistically companies will be using blockchain alongside different technologies, according to the report.

Another challenge that lies ahead of blockchain is the feasibility of new business models and the set of necessary incentives needed for players to operate in open and decentralized ecosystems. Which, again is a matter of time and experience. 

Along with these issues, there’s a central challenge of applicable laws and jurisdictions for decentralized networks; the need for reliable rules and definitions for smart contracts and data protection along with privacy safeguards. The blockchain won’t stop being foreign and risky to companies unless there are clear guidelines that are in harmony with the law and customer protection policies.

The report argues that blockchain on its own is neither transformative or even disruptive for the public sector because blockchains need to be first integrated with legal systems in order to provide the additional new functionalities that serve to enhance the experience of citizens when dealing with the public services. Considering that the technology still relies on inputs from centralized or government-owned systems it is questionable how electronically submitted statements can be ensured without an outside arbiter.

The success of integrating blockchain into public services is largely determined by the ability of the state to set up, scale-up and maintain collaboration between many different stakeholders, concludes the report.

The future of blockchain

The important thing to note is that bringing blockchains into our everyday lives and services does not mean completely eliminating third parties and intermediaries. While some will definitely disappear, the news one will take their place. The important shift will definitely come in the form of intermediaries, while the governments will still be involved to ensure long term sustainability by providing equal conditions for participation- as predicted by the EU.

Introducing blockchain doesn’t mean it will eliminate any other type of tech-system. They will most likely be used together with other key digital technologies such as AI, data analytics and robotics. The way to get the most use out of blockchains is to use it in an interdisciplinary manner when dealing with policy, economic, social, technical, legal or environmental levels. The major changes that are bound to follow the introduction of blockchains to a variety of spheres, can only be comprehended through a mix of different areas of knowledge, including computer science, economic law, public finance, environmental sciences, and social and political sciences.

Recognizing that it’s important to consider trends and evolving technologies that come with foreseeable and unforeseeable benefits and shifting in approaches with existing regulations is the key to a successful transition. The best way to go about it is to monitor the changes closely in order to be prepared. 

It’s important when large organizations such as the European Union acknowledges the importance of technical developments and look for modern solutions on how to make everyday life a little better, more transparent. EU as one of the entities that has struggled the most with lack of transparency, turning to blockchain is a great opportunity. 

Still, it’s evident the approach is somewhat skeptical regarding the abilities of blockchain to completely take over. Nonetheless, it's clear that if we continue to work on developing blockchain technology to accommodate a variety of needs while making it simpler for people not familiar with elaborate technologies, blockchain could become an integral part of modern society. There are already ways in which we can increase the security of blockchain to make it more user-friendly but it’s crucial to remember that one single approach doesn’t really work with blockchain. It’s important to recognize that just like any business strategy would require you to consider every detail about the enterprise, the same approach should be applied to blockchain. This isn't a one-stop solution to all the problems and inconveniences. In order to get maximum benefits from adopting this technology, you should also consider the very specific needs of your sector or the company and work in accordance with that.

Most of the challenges presented by the report point to a lack of data and experience that can only be acquired through time, while continuously working on raising awareness around blockchain and making it more accessible to companies.