Blockchain Limitations and Misconceptions

Be wary of the hype!


There is a tendency to overhype and overuse most nascent technology. Many projects will attempt to incorporate the technology, even if it is unnecessary. This stems from the technology being relatively new and not well understood, or the technology being surrounded by misconceptions. Blockchain technology has not been immune. This section highlights some of the limitations and misconceptions of blockchain technology.

Blockchain Control
A common misconception is that permissionless blockchains are systems without control and ownership. The phrase “no one controls a blockchain!” is often exclaimed; however, while no user, government, or country controls a blockchain, there is still a group of core developers who are responsible for the system’s development. These developers may act in the interest of the community at large, but they still maintain some level of control. For example, in 2013 Bitcoin developers released a new version of the most popular Bitcoin client which introduced a flaw and started two competing chains-of-blocks. The developers had to decide to either keep the new version (which had not yet been adopted by everyone) or revert to the old version. Either choice would result in one chain being discarded—and some people’s monetary transactions becoming invalid.

The developers made a choice, reverted to the old version, and successfully controlled the progress of the Bitcoin blockchain. This example was an unintentional fork; however, developers can purposely build new clients, and with enough adoption from the user base, a successful fork can be created. These forks are often discussed at length and given a long adoption period before being made mandatory to continue recording transactions on the new “main” fork. The phrase “no one controls a blockchain!” would be better stated as, “no one controls with whom and when you can perform transactations, within the rules of the blockchain system.”

Malicious Users
While the blockchain system can enforce transaction rules and specifications, it cannot enforce a code of conduct. This is problematic in permissionless blockchain systems, since users are pseudonymous and there is not a one-to-one mapping between blockchain nodes and users of the system. Permissionless blockchains provide incentive (e.g., a cryptocurrency) to motivate users to act fairly; however, some may choose to act maliciously if that provides greater incentives. The largest problem for malicious users is getting enough power (be it a stake in the system, processing power, etc.) to cause damage. Once a large enough malicious collusion is created, malicious mining actions can include:


While malicious users can be annoyances and create short-term harm, blockchains can perform hard forks to combat them. Whether damages done (money lost) would be reversed would be up to the developers and users of the blockchain system.

No Trust
Another common misinterpretation comes from people hearing that there is no “trusted third party” in a blockchain and assuming blockchain systems are “trustless” environments. While there is no trusted third party certifying transactions in permissionless blockchain systems (in permissioned systems it is less clear, as administrators of those systems act as an administrator of trust by granting users admission and permissions), there is still a great deal of trust needed to work within a blockchain system:


Resource Usage
Blockchain technology has enabled a worldwide network of value where every transaction is verified and the blockchain is kept in sync amongst a multitude of users. For blockchain systems utilizing proof of work, this means there is a large number of users churning away processing time and consuming a lot of electricity. A proof of work method is a great solution for “hard to create, easy to verify” proofs, however, it requires significant resource usage.

An additional strain on resources occurs whenever a new full node is created; the node must obtain (usually through downloading) most of or all the blockchain data (Bitcoin’s blockchain data is over 100 gigabytes in size as of this writing). This process uses a lot of network bandwidth.

Blockchains are often compared to databases, and while they both store information, blockchains have limits on the amount of data that can be stored and are not meant to be a general storage medium. In order to quickly calculate hashes on transactions and distribute transactions amongst the network, transactions need to be relatively small. Large amounts of data are usually stored “off chain,” with “pointers/references” or hashes of the data stored within the blockchain itself. Blockchains also benefit from data being immutable, which is not a trait general purpose data usually needs.

Transfer of Burden of Credential Storage to Users
Since blockchains are not centralised, there is no intrinsic central place for user key management. Users must manage their own private keys, meaning if one is lost, anything related to that private key is lost (digital assets, etc.). There is no “forgot my password” or “recover my account” feature for blockchain systems. While centralised management solutions can be put into place, they create the same problems current systems have: central points of failure.

Private/Public Key Infrastructure and Identity
Some people, when hearing that blockchain technology incorporates a public/private key infrastructure, immediately believe it intrinsically supports identity. This is not the case, as there is not a one-to-one relationship of private key pairs to users (a user can have multiple private keys), nor is there a one-to-one relationship between blockchain addresses and public keys (multiple addresses can be derived from a single public key). Nodes on the Bitcoin blockchain validate transactions before they are added to a block and subsequently incorporated into the blockchain. One stage of this validation requires the user that initiated the transaction to sign the transaction with a private key. Blockchain nodes verify the signature to prove the user does in fact own the Bitcoin value being transferred.

Digital signatures are often used to prove identity in the cybersecurity world, and this can lead to confusion about the potential application of a blockchain to identity management. A blockchain’s transaction signature verification process links transactions to the owners of private keys, but provides no facility for associating real-world identities with these owners. In some cases, it is possible to connect real-world identities with private keys, but these connections are made through processes outside, and not explicitly supported by, the blockchain. For example, a law enforcement agency could request records, from an exchange, that would connect transactions to specific individuals. Another example is an individual posting an address online for donations.

While it is possible to use blockchains in identity management frameworks that require a distributed ledger component, it is important to understand that typical blockchain implementations are not designed to serve as standalone identity management systems. There is more to having secure digital identities than simply implementing a blockchain.

Source: National Institute of Standards and Technology, U.S. Department of Commerce (Jan 2018)


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