Shefali Deshwali

@shefalideshwali

Risks of Blockchain Projects- Why So Many Blockchain Projects Fail?

February 17th 2019
Photo by Icons8 team on Unsplash

Blockchain technology has successfully raised the bar in the past couple of years and has managed to gain attention amongst all the major industries. The increasing rate of ICO funding can be taken as a sign of acceptance of technology worldwide. According to CoinSchedule, the total amount raised by ICOs in the year 2018 was $21,483,484,047 which is way more than the rise in 2017 amounting to an equal of $6,576,372,746.

However, despite the high curve of new evolving projects coming into existence, the overall blockchain domain is in jeopardy. A report by the China Academy of Information and Communications Technology (CAICT) states that almost 92% of blockchain projects have failed. This raises a huge discomfort knowing that the revolutionary technology of blockchain is not turning out to be well for everyone.

Being a relatively new technology, Blockchain has its highs and lows. There’s no one solid reason (but many) for the failure of a lot of projects and it would also be unjust to say that all of these failed projects didn’t have any potential. In fact, many of these projects could have succeeded given their strong core concepts. However, due to lack of due diligence and proper planning, these projects have crashed down to their core. Let’s go through some reasons that are responsible for the failure of many blockchain projects:

Major Reasons Why Blockchain Projects Fail

  1. Lack of Originality- The failure of most of the blockchain projects is a result of many factors combined including but not limited to fraudulent tactics, improper roadmap and project planning, plagiarised documentation, fake executive teams and, unreliable promised of guaranteed returns etc. And it’s not just the small projects that hold such problems but even the most successful projects in the space like TRON have been accused of using plagiarised content in their whitepaper by industry leader Vitalik Buterin.
  2. Transparency is at stake- While blockchain technology advocates the core concept of transparency, many of the new project ideas don’t. Meaning that new blockchain projects are being introduced in the markets without any clarity on their execution part. Moreover, companies that propose project ideas are not even willing to expose the clarity by showing proper data and results rather they expect people to believe in the idea itself and put money in the project just based on that.
  3. Lack of Evaluation Methodologies- Success or failure of any company based on a blockchain idea has no certain parameter associated with it. According to a study conducted by Statis group, almost 80% of the ICOs conducted in 2017 were scams. Since there’s no framework that could showcase the state of the company, it is hard for the investors to make better decisions in terms of investing their money in these projects. As a result, many are fooled by the idea rather than doing the fact-check.
  4. Lousy Claims- There are promising whitepapers, press releases, and potential use-cases being introduced with the project concept but there’s no proof that describes the effect of applying blockchain as per the project idea or even the long-term or after-effects of applied blockchain for the investor. This way, people are trusting the alluring sales pitches as opposed to the value that blockchain could add to their actual work.

And the Risk Prevails…

Apart from the reasons responsible for the failure of many blockchain projects, it wouldn’t be wrong to say that the technology itself is still in its development stage. And in order for it to take the high road, there are yet many risky barriers that need to be crossed. For succeeding with an idea, it is important to analyze the risks at stake first. Underestimating the risk factors of blockchain technology has surely led to the downfall of many potential ideas. Some of the risk factors that are responsible for blockchain criticism are as follows:

  • Cybersecurity Vulnerabilities- Blockchains are widely recognized and advertised for their properties of being secure, reliable and immutable as they use encryption techniques for authentication procedures. Digging deep into the matter reveals that blockchain faces its security flaws as hackers can exploit these systems due to the lack of multi-signature, poor validation and vulnerabilities in blockchain codes thus leading them to steal millions and billions in one go. Moreover, since there are no regulations around blockchain technology as of now, no one can claim the loss of funds as an act against the law.
  • Consensus Inefficiency- Blockchain technology uses consensus mechanisms such as proof-of-work (PoW) for functioning. However, as the system has grown and the technology is advancing, these mechanisms are turning out to be inefficient. For instance, the PoW consensus algorithm which is used in the Bitcoin blockchain consumes a lot of power and energy thus, affecting the environment around. Researchers have found that the complex and inefficient nature of consensus algorithms is not ideal for harvesting the most out of blockchain technology. More efforts need to be put in to improve the state of consensus mechanisms.
  • 51% Attack- Mutual trust in a distributed consensus of blockchains is achieved through the principle of mutual consensus. However, this very concept goes against itself in the form of the 51% attack problem. Also known as double-spending, the 51% attack refers to an attack on blockchain when 51% of the participants control more than 50% of the network by forming a group. Due to combined power and more share, the network is compromised and can be run according to the choice of the attackers. This could result in loss of funds and control of the blockchain network.

Moving Forward

While many projects have failed in the cryptosphere, a few have made big names in the industry too. The blockchain technology holds its set of advantages and disadvantages but in the end, it’s in the investor’s hand to decide what’s right for them. When investing in a potential project, it is important to do due diligence, understand the regulatory compliance and check the legitimacy of the company.

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