August 21, 2022

Olusegun Kehinde

9 Major Limitations of Cryptocurrency

Cryptocurrency as a store of value and a mode of payment has increased in popularity since Bitcoin was launched in 2009.

However, despite the fact that cryptocurrencies deserve credit for the numerous benefits they add to the financial industry in this digital age, there are limitations to cryptocurrency that serve as a drawback to it being a perfect financial system.

Table of Contents

  • The Limitations of Cryptocurrency

  • True decentralization.

  • Scalability challenges.

  • Hacking Risks.

  • Cryptocurrency Scams.

  • An unregulated financial system.

  • Illegal Behavior.

  • No Legal Protection for Users.

  • Technical and Systematic Errors.

  • volatile (constant changes in value).

  • The Limitations of Cryptocurrency: Should You Still Invest?

Let’s look at the 9 major limitations of cryptocurrency and how they affect its mass adoption.

1. True Decentralization

The main idea of cryptocurrency and the reason for its mass adoption on a global level is the promise of a decentralized financial system in which users can execute transactions and store their assets without the need for an intermediary or the approval of a centralized authority.

Thankfully, smart contracts have been developed to serve this purpose of removing the need for an intermediary while executing transactions.

However, considering how the frameworks of most decentralized finance protocols are set up, it’s easy to doubt their claims of a decentralized payment system and find out that the centralized authorities have merely changed from government financial institutions to private institutions.

For example, Proof of Stake blockchains are not decentralized like they claim to be, for a couple of reasons.

First, validators of PoS blockchains get to validate transactions based on their stake. In short, the higher your stake, the higher your chances of being selected to validate transactions and create new blocks.

What this means is that power still rests with the top 1%, unlike how a decentralized protocol should work.

In addition, the Solana blockchain has been halted four times since it was launched. with the most recent happening on June 1, 2022.

Is a blockchain truly decentralized if a small number of people can halt a financial system without the users’ consent, preventing them from carrying out transactions on the blockchain?

2. Scalability challenges

Blockchain scalability refers to the ability of a blockchain to handle pressure caused by network congestion and perform well under the increasing workload.

To illustrate, scalability isn’t just about having a blockchain that can handle 400, 000 transactions per second.

It’s more about how the blockchain adapts when there are 2,000,000 transactions per second that are being executed on the blockchain.

In fact, in September 2021, Solana (one of the fastest blockchains) went offline for about 17 hours after the blockchain was overwhelmed by hundreds of thousands of transactions per second. And the blockchain has already experienced 12 outages so far in 2022.

Scalability has been one of the worst limitations of cryptocurrency since its inception. It’s worrisome that Bitcoin and Ethereum, the biggest cryptocurrency blockchains, can only process 5 transactions per second and 15 transactions per second, respectively.

To solve the scalability challenges of cryptocurrency blockchains, Layer-1 (on-chain), Layer-2 (off-chain), Sharding, Segwit, Lightning Networks, and Proof of Stake protocols are major solutions that have been proposed.

3. Hacking Risks

The risks of hacking in cryptocurrency can not be overemphasized. Hackers stole over $3 billion in cryptocurrency in 2021 and have already stolen about $1.5 billion in 2022.

Hacking isn’t a mere recent occurrence that will pass with time, as over the years, hackers have managed to breach the security protocols of major cryptocurrency institutions, with the biggest hacking incidents so far in Crypto being.

  • $611m-Poly Network, August 2021.
  • $540m-Ronin Bridge (Axie Infinity), March 2022.
  • $532m-Coincheck, January 2018.
  • Mount Gox, February 2014.
  • Wormhole, $325 million, February 2022.

Cryptojacking is another form of hacking that is prominent in the crypto space.

It involves hijacking someone else’s computer resources, such as desktops or servers, and using those resources to mine cryptocurrencies without the owner’s permission.

4. Scams

For many people, crypto scams lead the way among the major limitations of cryptocurrency. It has become such a big issue that scammers keep coming up with new formats and exploiting users on a daily basis.

Using these different formats, scammers stole about $14 billion worth of cryptocurrencies in 2021, especially through DeFi protocols.

Here are some notable DeFi scams in the crypto space.

  • Rug pulls

    This crypto scam happens when developers abandon their crypto projects and disappear with investors’ funds.

This is done by draining all the coins in the liquidity pool, thereby rendering the coins that investors have worthless while the scammers walk away with millions of dollars.

  • Honeypots

    This happens when investors buy tokens only to discover they can’t sell those tokens.

  • Impersonation

    In impersonation scams, the scammers claim to be celebrities or prominent institutions in the crypto space and offer gullible users outrageous offers such as doubling their assets within 24 hours.

  • Crowdfunding scams

This crypto scam can be in the form of a presale, an IDO (Initial Dex Offering), or an ICO (Initial Coin Offering).

Scammers launch a crowdfunding campaign claiming to raise funds for their crypto project.

They offer investors a chance to buy the project’s coin at a significantly lower price.

Once the amount invested in the project hits its target, it disappears.

Phishing tokens and fake airdrops are other forms of crypto scams, with most of them being targeted at newbies and other people who do not have expert knowledge of the crypto space.

 Read more: Common DeFi Scams And How To Avoid Them

5. An Unregulated Financial System

Cryptocurrency regulation is a major topic in the finance industry.

Users and experts have different opinions on whether regulation in crypto will protect investors, ensure fair access to cryptocurrencies and preserve financial stability.

However, it still remains clear that an unregulated financial system such as cryptocurrency isn’t secure as there are no laws that decide the frameworks of crypto institutions and protect investors from scams and thefts.

In addition, while regulation may affect the decentralization stance of cryptocurrency, it is still needed to legally secure the crypto space.

6. Aiding Illegal Activities

In the early days of cryptocurrency, there were assumptions that it was a mode of payment in the underworld.

drugs, guns, human trafficking, and money laundering. While digital currencies were not created to aid crime or help crime bosses stash away their ill-gotten wealth from government authorities, cryptocurrency, due to its anonymity, privacy, and decentralization features, aids illegal activities.

As it can be used for money laundering schemes without a trace of the purpose of the transactions or who executed the transactions.

7. No Legal Protection for Users

It’s something everyone knows and the major reason some people are clamouring for crypto regulation.

As thousands of users keep getting scammed, there is no legal framework that protects these users from scammers, helps them recover their lost funds, or punishes scammers and other criminals.

Users can’t also benefit from government insurance since there’s no government backing the use of digital currencies.

Scammers and hackers keep thriving and getting away with billions of dollars every year because there’s no legal framework put in place to prevent their crimes.

8. Technical and Systematic Errors

Just like every other technology, cryptocurrency isn’t free from errors.

But unlike most other technologies, the consequences of cryptocurrency can be fatal.

For example, the Terra (LUNA) crash saw over $40 billion wiped off in just a few days.

It’s all because venture capitalists found a way to exploit the Terra blockchain’s consensus, thereby causing a systematic crisis in which investors lost their digital assets.

In another incident, the Solana blockchain suffered a 4-hour outage due to a bug in how the blockchain processes offline transactions.

9. Volatile (Constant changes in value)

Frequent changes in value are one of the disadvantages of cryptocurrency as a store of value.

Most cryptocurrencies are currently down over 90% from their all-time high, which isn’t ideal for a store of value over time or an asset for investment.

The constant changes in the value of cryptocurrencies have also been a barrier to their being used as a currency for the exchange of goods and services.

The Limitations of Cryptocurrency: Should You Still Invest?

Should you avoid cryptocurrency due to its disadvantages? No, you shouldn’t.

Despite the disadvantages of cryptocurrency, it’s still a viable option when you consider investing.

Nevertheless, it’s important to ensure you have full knowledge of the crypto space before investing so you don’t end up losing your funds.

In addition, popular cryptocurrencies such as Bitcoin, Ethereum, and BNB have proven to be profitable investments over the long-term.