The financial sector has undergone tremendous changes since cryptocurrencies and blockchain advancements hit the global market. After the launch of Bitcoin in 2009, institutional and retail investors have experienced a new digitized way of trading with digital currencies.
While cryptocurrencies are merely virtual mediums of exchange, they heavily rely on blockchains to manage the transaction system effectively. On the other hand, Blockchains play a significant role in ensuring those transacted digital currencies can be displayed to the public. Simply put, blockchains act as a record center for every trade taking place between users.
Asides from the financial sector, blockchains and cryptocurrencies have caught the eyes of other industry players, one of them being the manufacturing sector. Despite having some notable drawbacks, enthusiasts from the manufacturing industry strongly believe in cryptos and distributed ledgers’ potentials. So what prompts the manufacturing industry to adopt the duo technologies, and what challenges do they face after implementation?
A Better Understanding of Blockchains and Cryptocurrencies
As mentioned earlier, blockchains play the record-keeping role accomplished by publicly displaying transaction details. The technology consists of blocks carrying verified transactions and merged on a chain of transactions. Interestingly, the public ledger is not owned by a single entity but rather is managed by a network of computers which are usually ordinary users.
Unlike fiat money, which is tangible and centrally controlled, a cryptocurrency is an intangible form of currency based on the internet. Since cryptos leverage blockchains during trade, it automatically makes them decentralized as users own a copy of the ledger to record crypto transactions. Examples of cryptocurrencies include Bitcoin, Ethereum, Litecoin, Cardano, Dogecoin, to mention but a few.
Positive Impacts of Blockchains on Manufacturing
Blockchains hold innovative security features which mostly involve consensus mechanisms. Once users in the manufacturing sector make a transaction, it has to go through a consensus model that verifies a trade’s authenticity. In the crypto world, a consensus is reached either through Proof of Work or Proof of Stake mechanisms. Blockchains also eliminate any malicious intent from the manufacturing participants in that no single entity can make any changes to the public ledger after recording, a common feature widely known as immutability.
Every member of the industry carries a shared public ledger which updates continuously after a consensus procedure. That fact alone makes blockchains more transparent in the manufacturing operations because no user would change any transaction detail without other validators’ approval. Therefore, all the data remains precise, consistent, and transparent.
Traditional financial systems consume a considerable amount of time to complete a simple transfer. It slows down the industry’s operations which may lead to financial losses. However, blockchains introduce a much faster option where the industry can make local and international crypto transfers within the shortest time possible. As a result, the industry can fulfill its financial obligations quickly without worrying about a lagging system.
Blockchains provide an easy channel to keep track of an industry’s commodities. A supply department can deal with issues relating to theft, loss, or counterfeit items by tracing goods. Blockchains tracking solution also ensures the goods are not misused or replaced within the course of distribution.
Scalability can be viewed as the ability of a blockchain network to handle a growing amount of workload. When more users swarm the public ledger, it becomes slower and, eventually, a challenge to complete most industry operations fast. Without an appropriate solution such as sharding, which partitions data to handle more users, the blockchain is headed to be less scalable. Failure to handle a growing influx hinders the productivity and adaptability level, which could help attain the demands of a manufacturing enterprise.
It has been established earlier that data on a blockchain cannot be changed after recording it. Despite being an advantage, users cannot make urgent changes that could evade unforeseen outcomes. If the manufacturing company accidentally publishes its supplier’s personal data on a blockchain, the suppliers’ identity will be compromised hence violating their privacy rights.
Every blockchain network works differently in a bid to solve various DLT issues uniquely. As such, these blockchains may not be compatible with each other making it hard to communicate or interact with other blockchains. Manufacturers may have a problem here, particularly when trying to access vital external data from another blockchain.
Positive Effects of Cryptocurrencies
Like blockchains, cryptocurrencies also carry several effects, both positive and negative.
By utilizing cryptocurrencies, the manufacturing industry is assured of anonymity. A public address, which usually acts as a regular bank account, is the only thing that identifies the enterprise. Therefore, there is no need to indicate any classified information that may put the industry at risk.
Asides from the fast transaction executions, crypto fees are relatively cheaper to use as a payment medium. The absence of intermediaries make cryptocurrencies a much cheaper option for the manufacturing sector as the transaction system is managed by a group of computer networks(nodes)
Governments sometimes mint and distribute too many fiat currencies into the market, which most often leads to inflation. Cryptocurrencies, such as Bitcoin, work differently since they have a known supply of 21 million BTCs. Therefore, a limited supply eliminates the chances of inflation and automatically makes it a scarce profitable asset that can reap more revenue for the manufacturing enterprise.
Cryptocurrencies tend to be unstable in most cases as their values can move up and down within hours or days. It is also challenging to accurately predict their price movements, making them a win or lose investment tool. In 2011, volatility swings saw Bitcoin move from $1 to $32 within three months. 2013 was another hectic year for Bitcoin as it began the year trading at $13.40 and soared to $220 by April the same year.
Still, in April 2013, the leading currency suddenly plunged to $70, a decrease of nearly 314% from the time it traded at $220. This kind of price swings can cause uncertainties for the manufacturing industry as it weighs whether to drop utilizing the digital currency or continue with it.
Low Acceptance Rate
Up to date, cryptocurrencies face a lot of opposition from governments and regulators. Recently, Nigeria’s Central Bank distributed letters compelling local banks to shut down any account associated with cryptocurrencies.
India also joined the bandwagon of countries against crypto, proposing that it would fine anyone who trades or holds the digital assets in the country. Such measures would force the manufacturing sector to keep off cryptocurrencies and avoid colliding with regulators and the government.
A portion of individuals in the manufacturing sector may not be familiar with cryptocurrencies and their underlying technology. Therefore, these users become more susceptible to hacks and scams. Cyber-related crimes affect not only an individual but also high-profile organizations without the right counteractive plan. One way cryptocurrencies may be stolen is through phishing scams whereby malicious users send emails to collect sensitive information such as usernames and passwords.
The manufacturing sector has a lot to gain from digitizing its operations with blockchains and cryptocurrencies. As an overall advantage, the two technologies create a competitive environment by utilizing a cheaper and more secure way to run an enterprise.
While both advancements present their downsides, it is solely up to the manufacturing sector to decide on how it would mitigate such challenges. As the technology sector continues to expand, manufacturing industries still have ample time to evaluate the hidden potential that blockchains and cryptocurrencies carry.