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Blockchains’ Limitations (available only in English)

Blockchains’ Limitations (available only in English)

Blockchains’ Limitations (available only in English)

There is no revolution without misconceptions. Blockchain technology is the latest of the revolutions that begun in the inherently rebel world of technology. And as every emerging technology generate extravagant expectations so was the case for the blockchain enthusiasts. The major task of the revolutionarios now is to put their feet down to Earth and understand the limitations of this technology so as to better harness its full utility.

Here some reasons why we should proceed with caution.


Blockchains offer a more slowly and even more complex way of executing transactions. And if you think that their value lies in the prospect of changing the already heavily regulated business environment, things are starting getting a bit frustrating. In fact blockchains do not simplify the way people cooperate. They just reallocate the complexity. In a centralized system a user is verified once for a lifetime while in blockchains every single transactions demands a separate phase of the parties’ signature verification. In a centralized system, every input is verified by a centralized system in the blink of an eye while in blockchains the verification process is a demanding procedure.


A great advantage that blockchains have is that they render data immutable and irreversible. A great disadvantage that blockchains have is that they indeed render data immutable and irreversible. No human being let alone a human being’s creation have ever managed to quit from the possibility of being wrong. In a blockchain, if events are not originally registered, the fake-bug will remain immovable for the generations to come. Now think of the gender change example, where data are originally registered and circumstances subsequently change. In such a case, the initial gender registration in the blockchain will never be erased. Blockchains have just no room for the “Right to be forgotten”. Add it to the prison of smart contracts (to be discussed below) and we can easily envisage blockchains as communities of one-shot games.


The security devil lies in the vulnerability of blockchains to cyber threats and hack attacks that people do not understand and as a result are inherently afraid of. Apart from the possibility of hacking attacks that are realistic yet enigmatic, there are also some other security obstacles on the road to the mass adoption of this technology. In a blockchain system running under the famous Proof-of-Work protocol for example, truth is told by the majority. Every event or data that enjoys the support of 51% of the system becomes its indelible truth. As a result, a “cartel” that controls 51% of the system becomes the master to rule them all and if they lie, lie becomes truth. Even if there is no lying cartel though, I am sure that we can all recall moments in which majority, fooled by malevolent individuals, stood with the wrong series of events.


In a blockchain, stored data are everyone’s data. Once I buy a chewing gum in a blockchain ecosystem, everyone is given the chance to view my ID (even my pseudonymous one), to track my previous transactions and to count my money. Such a level of openness can generate more problems than solutions. Can you imagine someone tracking the allocation of your wealth resources to define your characteristics as a customer, a borrower, an investor or a future client. Recently, we have seen platforms that keep data from being shared among the network and others that allow members to choose whether they want their transaction transparent or shielded.


Observed through a Coasian framework, blockchains have been initially thought to minimize transactions costs. In fact the only thing they do is yet again to reallocate transaction costs. More specifically, blockchains actually decrease the cost of trust between the parties but in the same time they increase the cost of drafting a contract or registering data. Simultaneously, the establishment of a blockchain ecosystem demands a certain amount of initial capital cost. And of course, things are getting even more expensive if this blockchain runs on Proof-of-Work protocol because in such a case the verification process demands tremendous amount of energy. This is the reason why there is a developing tendency to choosing the less representative but much more energy-efficient Proof-of-Stake protocol.

Technology adoption and regulation

A technology is adopted by the people only after they feel the change that it brings to their daily lives. Well, blockchains may face serious trouble in showing their impact. People will not simply choose a slow and irreversible method of executing a transaction just because it is decentralized and transparent. In the meantime, the uncertainty of the regulatory framework may also act as a deterrent. Contrary to the tones of papers that have been used to discuss cryptocurrencies’ and ICOs’ regulation little attention has been drawn to blockchains’ regulation. While it is undeniable that too much regulation stifles innovation, “no regulation gives no motivation” could also stand as general principle.

Smart Contracts-Not a panacea

One of the main critical features of blockchain technology is the smart contracts. They actually constitute arrangements written in computer program code verified, executed and enforced automatically on a blockchain. Information society and the Internet of Things (IoT) will try to move forward by minimizing human involvement in agreements and there are those who believe that smart contracts are the completion of this road. They are wrong.

Smart contract are like prisons in which parties are willingly locked in. They are irreversible and they offer no room for alternative solution, if circumstances change or if a better allocation of resources is possible through a breach of the contract (the so called “efficient breach”). Moreover, the minimization of transaction costs in smart contracts is also a myth that needs to be clarified. As in blockchains, transactions costs are not minimized in the case of smart contracts. They are simply yet again reallocated. On the one hand they offer a trustless option for contracts running under pre-existing norms with immutable continuation in time and clear arrangements between the parties. On the other hand though, the drafting of such a contract demands a tremendous and costly effort of specification of every possible alternatives in a structure of “if-this-then-that” statements all written in software code. Seems tough, don’t you think?

It can be said with certainty that blockchains are neither the end of markets nor the last rival of the firms. Equally, smart contracts will never set aside traditional ones. Blockchain technology seems neither able nor willing to adopt such ambitions. By leafing through the pages of economic history though, we can witness that apart from these who avoid a contract’s clarity, there are also those who are seeking it. Apart from these who are deterred by a systems complexity there are those who build on it. Apart from these who favor a contract’s flexibility, there are also those who prefer the one-shot solution. And apart from the moneylenders in the villages of India as we read in the conclusion of Akerlof’s article “The Market for Lemons” there were also banks.
Today, there are still banks in India...

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