EU Blockchain Observatory recommends how to improve scalability, interoperability and sustainability of blockchain projects

A recent report suggests that success of the blockchain industry in Europe depends on clarifying many of the relevant legal and regulatory issues. These include resolving the tensions between GDPR and blockchain, the legal, fiscal and accounting status of crypto assets, and the legal status of smart contracts. The report examines the factors that are likely to shape how platforms develop and recommends how to nurture the European blockchain market.

The EU Blockchain Observatory & Forum has published its Report on Scalability, Interoperability and Sustainability of Blockchains. The report has been produced by ConsenSys using BOF stakeholder input. BOF is part of the Commission’s EU Blockchain Initiative (see our post on the Commission’s Fintech Action Plan).

Three challenges to the wider adoption of blockchain

BOF considers that “permissioned, purpose-built blockchain platforms” aimed at specific use cases and user bases will constitute the first wave of blockchain technology adoption in Europe. But, even though the blockchain ecosystem has been “steadily maturing over the past several years”, there is still much to be done before we see the mass adoption of blockchain technology. The report identifies three types of challenge: scalability, interoperability and sustainability.

Scalability – the blockchain trilemma

BOF notes that blockchains can generally have only two of the following three properties: scalability decentralisation or security. It considers that solving the scalability issue for blockchains – in particular, public, permissionless ones – is one of the most important technical challenges facing the community today.

While a highly decentralised and secure blockchain platform may not be scalable, a scaled and decentralised platform may not be secure. While the technical challenges are being tackled, BOF suggests parties consider sacrificing a degree of decentralisation to achieve security and scalability.

Interoperability – how to share data off-chain

BOF is concerned that, in order to succeed, blockchain platforms should have the ability to communicate and share data with other platforms. BOF believes a small number of global network comprised of interoperable platforms will be the “backbone of a Web of Value” for the blockchain industry.

While work continues on technical solutions, BOF recommends two approaches to achieving interoperability:

  1. Using a third-party “off-chain entity” to validate transactions and information. This party would be responsible for either transferring information between platforms or recording the state of the different platforms – much like a notary service – so that each participant is able to trust the information. 
  2. Sharing information directly between blockchain using cross-blockchain bridges and smart contracts to verify that information. 
Sustainability – ensuring long-term viability

BOF suggests that the health of projects are measured using parameters such as the sources and amount of funding they receive, the quality of their governance structures, or the market capitalisation of any tokens issued.

The report also considers environmental factors. BOF recommends that developers and designers move away from proof of work to proof of stake consensus mechanisms. Proof of work systems can consume huge amounts of electricity. The report argues that proof of stake can deliver the same level of security using significantly less energy and the energy which they do consume can be recycled, for example by using heat generated by servers to heat buildings.

Success factors

As an increasing number of projects reach maturity, BOF has identified the following success factors for large scale blockchain projects:

  • Clear purpose and concept: including a clear requirement for blockchain instead of a traditional database technology
  • Strong governance structures: providing clarity on roles and responsibilities
  • Component-based service-oriented architecture: this allows components to be swapped out as new options become available
  • Homogenous production environment and pooled resources: e.g. customising standard apps developed by consortia saves time, effort and ensures compatibility.
Recommendations for regulators and policy makers

According to BOF, the industry needs the right infrastructure in place: not just technical hardware and software stacks, but also the appropriate standards, legal framework and best practice/governance. Getting this right “will require a balancing act between harmonisation and fostering technical development”.

BOF recommends that European regulators support the adoption of blockchain technology with a “light touch”, “wait and see” approach. They should avoid stifling innovation by letting designers and developers “experiment and learn” how to best use blockchain technology.

Policy makers, meanwhile, should be well-versed in blockchain technology and work alongside established participants in the blockchain industry to develop a regulatory and legal framework. BOF recommends that European Governments make themselves open to changes by employing blockchain themselves in government services where appropriate.

What happens next?

Building on previous reports addressing Blockchain innovation in Europe, Blockchain and GDPR, and Blockchain for Government and Public Services, the next BOF report to be prepared in the second half of 2019 will look into issues related to privacy and confidentiality.