Bitcoin's obituary as a currency

The number 13 is normally associated with bad luck, but it’s certainly not the case for Bitcoin as it has reached the fantastic milestone of crossing over $4,000 in price for a single BTC on the 13th of August, 2017. That’s no mean feat for a cryptocurrency which has taken the world by storm and has gotten everyone talking about it, sparking off one of the greatest paradigm shifts in technology of the 21st century through the introduction of the distributed ledger technology known as the blockchain. However, the road to this milestone was a very bumpy one indeed, and one bump too many has caused me to write this article.

I don’t want this article to be one focused on the basics of Bitcoin, but a bit of history won’t go amiss. In 2008, Satoshi Nakamoto issued a white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. He (or she, or they) dubbed this as the new electronic payment system based on cryptographic proof. I have highlighted these words in order to counter the argument of those who say that Bitcoin was not created to serve as a currency. Bullshit. The intent of Satoshi was very clear indeed – that Bitcoin would one day replace the system of fiat currencies and be the one currency to rule them all.

However, I strongly believe that Satoshi’s vision of Bitcoin did not near completion for unknown reasons. It might be the case that other DLT systems were close to being released, prompting Satoshi to grab the first-mover advantage. Or, it could also be that the 2008 economic crisis was seen as the perfect opportunity to publish a revolutionary white paper in the wake of the negative public sentiment on the traditional systems. Whatever it was, Satoshi gave birth to a wonderfully flawed child, and left it up to the people to bring up this child in the best way possible.

If two parents squabble over the upbringing of their child, what is to be expected when that same child has thousands of parents? That is precisely what we’ve seen happening over the past years when it was obvious that Bitcoin was in dire need of an upgrade due to its lack of scalability and severe transaction malleability problem. What should have been a quick and easy decision turned out to be a years-long dragged out petty argument, with the parents acting much more childishly than one would have ever expected. Even to non-technical people such as myself, the solution was obvious – Segwit was the first natural step towards upgrading Bitcoin, and it was rejected because a sizable portion of the miners wanted to safeguard their investment in the mining hardware. While that was understandable, it is certainly not justifiable, and the miners should have never been afforded that much power. They are the guardians of Bitcoin’s blockchain, not the owners. The owners are all those who own some Bitcoin, no matter how small a fraction that might be. And the owners just saw their control being wrestled away from them.

And so we ended up with the only possible compromise – implementing Segwit along with a block size increase to keep the miners happy and further centralize their power. The miners threw a tantrum, the miners got what they wanted. This will continue each and every time there is a contentious issue… because there will be another contentious issue, you can rest assured on that. Whether it’s another security problem or an inevitable moment when the Bitcoin network hits its peak capacity once again, there will be another situation where lack of an internal governance system will prove to be a very serious problem indeed.

I have touched upon certain issues in the chunk of text above, but allow me to go straight for the jugular and highlight the issues which I believe will impede Bitcoin from achieving mainstream currency status:

1.      Proof of Work is outdated

Proof of Work, Bitcoin’s consensus mechanism for the miners, is arguably the most secure solution out there. However, it is also the most inefficient, and apart from having the tree-huggers crying murder, it is one of the main impediments allowing for next-gen scalability for the Bitcoin network. Other solutions such as Proof of Stake are viable alternatives which, although having a lesser degree of security, are being developed to be as nearly secure as Proof-of-Work as to make little to no difference, and Proof of Stake allows for a vastly greater throughput of transactions per second than Bitcoin can ever hope to achieve through Proof of Work. Proof of Burn is one such solution which amalgamates the best of both worlds from Proof of Work and Proof of Stake, although it has not yet gained anywhere near the popularity of PoW and PoS.

2.      Bitcoin lacks an internal governance system (and so does Ethereum)

In order to effect any change on Bitcoin and Ethereum, miners have to go through a laborious process of upgrading their software to signal their consensus on a proposed change. That leads to a momentary disconnection from the network, however minute, as well as increased costs of upgrading and the threat of a hard fork. Other projects such as Tezos and BOScoin have set out to eliminate this problem by integrating a voting system in their blockchain, where network participants can simply vote with the a click or touch of a button and the will of the majority wins, with the minority having to succumb to the will of the majority. Sounds familiar?

3.      Bitcoin’s blockchain is outdated

This is closely related to the first highlighted issue of consensus, but not just that. The ten-minute average block confirmation window has worked relatively well so far, but what will happen when a hundred thousand transactions per second need to be verified? EOS’ graphene blockchain solution can theoretically handle such a load; Vitalik Buterin’s sharding proposition is also a viable answer for this problem. Segwit and a block size increase can only get you so far; it’s like trying to upgrade the metaphorical horse when others are developing their own car. Good luck trying to get Bitcoin’s miners to agree on any similar solution.

4.      The barrier to entry for Bitcoin is still too high

And I am not referring to Bitcoin’s price – rather, I am referring to the fact that Bitcoin is still pretty hard to get hold of, understand, and store for your average person on the street. A lot of questions are still commonplace nine years after Bitcoin’s conception: what exchange should I use, which wallet should I download, how do I store Bitcoin securely, etc. Even if the mythical Exchange Traded Fund gets approved in the U.S. someday, it still won’t open the floodgates for mainstream adoption. The public needs an easy one-touch system which allows them to quickly and effortlessly convert their fiat currencies into Bitcoin or any other currency of their choice. Sure, applications such as Coinjar can do that for you, but they still require setting up and moreover they are not native blockchain solutions. Projects such as Waves with its underlying decentralized exchange and Bancor with its smart tokens protocol are steps in the right direction towards achieving an integrated conversion solution that is as close to seamless as possible, making cryptocurrencies a truly global system with no borders in place.

All this does not spell Bitcoin’s death; far from it. Bitcoin is still king and will continue being so for a long while due to its first mover advantage and the fact that it is the reserve currency for almost all other cryptocurrencies. It will continue leading the way and setting an example of what can be achieved through blockchain technology. I strongly believe that a price of $4,000 per BTC is still just a scratch on the surface, and a price of $10,000 per BTC is certainly realistic. Heck, that would just be the start if Bitcoin gets its act together and goes through an unlikely transformation allowing it to become a true mainstream currency. However, at this point in time, I am of the firm opinion that Bitcoin is not the cryptocurrency, and that it will best serve its purpose as a store of value, a form of digital gold, which is not anything remotely bad either and will allow it to reach new heights.

That means that the race for the “next Bitcoin” is still open, and the market is flooded with contestants, with only a few truly standing out. Hey, it might also be that the winner is an idea which is still lurking in the depths of your mind, so never be afraid of speaking out and developing it, because you might just be the key to the new world’s largest currency!

 

Article written by Jonathan Galea. The personal views of Jonathan Galea do not necessarily reflect that of Bitmalta.