According to a study by Greenwich Associates, a management consulting firm founded in 1972, the traditional finance industry spends more than $1.7 billion on a yearly basis on building blockchain-related protocols, platforms, and products.
$10 Million a Year
The budget of blockchain development by major banks and financial institutions has increased by around 67 percent on average since 2017. The Greenwich Associates team noted that 10 percent of banks internationally are spending over $10 million a year on blockchain initiatives, development, and funding.
In an interview with Bloomberg, Richard Johnson, vice president of Greenwich Associates Market Structure and Technology, explained:
“More than half the executives we interviewed told us that implementing DLT [Distributed Ledger Technology] was harder than they expected.”
The struggle of banks in implementing blockchain technology likely originates from the tradeoff between security and flexibility. If a blockchain network’s capacity is increased inorganically without innovative scaling solutions and two-layer networks as seen in Ethereum’s Sharding and Bitcoin’s Lightning, it is difficult to maintain a high level of security and decentralization.
One possibility is to create a private or permissioned blockchain network that is not entirely decentralized but distributed to a certain extent, with strong cryptography to replicate the structure of the blockchain. But, this is often less secure, decentralized, and transparent than public blockchain networks like Bitcoin and Ethereum that are completely distributed and exist peer-to-peer.
Flexibility vs. Security
Running a decentralized blockchain protocol is costly and inefficient at this stage, specifically for large-scale applications. In an AMA session with OmiseGo developers, Ethereum co-creator Vitalik Buterin noted that it is possible to increase the capacity of the Ethereum network to a million transactions per second, which would be more than sufficient to process payments and information at the capacity of commercial banks.
However, such a drastic improvement in the capacity of the Ethereum network requires significant progress on both Sharding and Plasma, two solutions Ethereum developers are currently working on.
At a conference in Seoul, Buterin also explained that it is about a million times more expensive to use the Ethereum network to process data than centralized servers like Amazon.
“Blockchains by themselves are a far less efficient computer and database than technology that has existed for 40 years. If you want to talk about what blockchains are for, the answer is not simple raw efficiency. If you look at Amazon EC2 pricing, the cost of this is about $0.04 per hour. How much does it cost to make the Ethereum world computer to do stuff for you? Every Ethereum block, which comes every 14 seconds, on average takes about 200 milliseconds for my laptop seconds to process. A block has a million gas and let’s assume the average gas price of 4 GWEI. The cost of filling up an Ethereum block is $13.4 per 200 milliseconds.”
As emphasized, the application of blockchain must come with a clear purpose and vision, given that it is significantly more expensive to run applications on a decentralized and cryptographically secure blockchain than centralized platforms. As a tool to process information, blockchain technology should only be used when necessary and when trustlessness is required and necessary.