The Cryptocurrency Future: Hurdles and Heroes
Significant volatility, substantial losses, panic selling. What on earth has been going on with cryptocurrencies this year?! Industry experts believe that the downward trends we have witnessed recently are in fact a good indicator. Weiss Ratings point out that what we have seen is typical market behaviour with “exuberance at the top [and] apathy at the bottom”. This sort of market behaviour is often an indicator that a turnaround is, coming.
"We have reached a point of apathy, where prices don’t move very much. Usage is virtually flat, apparently nearing its lows - and many investors are getting so bored with cryptocurrencies, they’ve simply decided to quit." – Juan Villaverde, Weiss Ratings.
Timothy Enneking, managing director of Crypto Asset Management, is of the belief that the bear market we have been experiencing is coming to an end. He expects cryptocurrencies to regain momentum during the second quarter of this year.
Enneking believes there have been four major contributing factors to the fluctuating prices since the record highs seen in December 2017.
“Asset consolidation, regulatory concerns, massive liquidation by the Mt. Gox trustee and start-ups selling crypto assets to pay salaries and expenses are all factors in the market’s overall decline.” Timothy Enneking, Crypto Asset Management.
The combination of the above factors is a good sign that the market will begin rebounding soon. Enneking notes that despite the recent drop in prices, the cryptocurrency market as a whole is still up by over 600% when compared to 15 months ago.
With this in mind, what are the most pressing issues facing the future of cryptocurrencies?
Challenges facing blockchain technologies and the projects working to overcome them
The increasing amount of electricity needed
The current means of mining coins through a proof-of-work (PoW) algorithm presents a major problem concerning the sustainability of crypto. The amount of energy consumption for Bitcoin alone is estimated to be approximately 0.27% of the total global energy consumption. To put this into perspective, Bitcoin’s energy consumption is equal to 25.5% of Australia’s total annual figure. This is a massive proportion for a single entity and one that is simply unsustainable. So, how do we solve this issue?
We need a different mining algorithm. Such an algorithm is the proof-of-stake (PoS) model being developed by cryptos like EOS, NEO, and Stellar, for example. With a PoS model, coin owners create new blocks themselves, as opposed to miners. We don't require power-hungry machines for this. This is because it isn’t necessary to try and produce as many hashes per second as possible.
The issue here is that we must store the entire history of all blockchain transactions. In doing so, the blockchain gets longer and longer and requires substantial amounts of storage.
Ethereum presents this problem twofold. It not only needs to store the entire history of all payment transactions but also every smart contract transaction executed on the platform.
Developers propose various solutions to mitigate this.
Ethereum founder, Vitalik Buterin, has proposed “a simple and principled way to compute rent fees” for users of the network based on the length of time their data is accessible on-chain. These rent fees get burnt as opposed to being paid out to anyone.
“One key goal of rent, at least in my opinion, is that contracts that developers and users forget and stop caring about should disappear from the state by default.” Vitalik Buterin, Ethereum co-founder.
Coins that overcome the challenge of scalability are the ones that emphasise side chains and sharding.
Sharding is a long-term solution for scalability issues. Each node is only required to store a portion of the data required. Different nodes work side-by-side on different shards resulting in faster transaction times. Cardano is an example of a project looking to implement sharding.
State channels, such as used by NEO, Lisk, and Ark, execute smart contracts off-chain instead of running them directly on the blockchain. The contracts are put back on-chain to resolve any disputes when necessary. Only the finished contract result needs uploading to the blockchain.
Payment channels execute micro transactions off-chain with only the initial and final transactions being on-chain, e.g. Lightning network for Bitcoin; Raiden network for ERC20 tokens.
Another example is TrueBit, a "unanimous consensus protocol" that aims to move computationally intensive transactions off-chain. If there is a dispute, the Ethereum miners resolve this. TrueBit will also use a “Forced Error Mechanism” where, occasionally, mistakes will be submitted on purpose to “check” the verifiers are doing their job correctly.
Several countries, including Australia, South Korea, the U.S., and Japan, have developed guidelines for cryptocurrency exchanges. These guidelines include required registration licences to trade. The Australian Transaction Reports and Analysis Centre (AUSTRAC) CEO, Nicole Rose said: “It’s recognised that this reform will help protect their business operations from money laundering and terrorist financing, while regulation will also help strengthen public and consumer confidence in the sector.”
AUSTRAC expects such regulation will crack down on criminal activities like money laundering. It will also help to bring back confidence to cryptocurrency traders.
Closer to home, the Inland Revenue recently released guidelines regarding cryptocurrencies as “property” for the sake of tax in New Zealand. For more info on this matter in New Zealand read Rehashed #3.
Decentralisation versus speed and efficiency
Distributed Ledger Technology consists of a consensus of data shared across multiple computers. The point is that this ledger is trustless, NO ONE on the network needs to trust anyone else; there is no central administrator.
Bitcoin and Ethereum have sacrificed transaction speed to achieve optimal decentralisation. However, one could argue that Bitcoin is becoming more and more centralised with the massive mining farms we see now. Only a few of these farms produce the majority of computational power for the PoW consensus.
“What we’re learning from those mining pools is that we’re losing some of the powers of decentralisation.” Hampus Jakobsson, Blue Yard Capital.
At the opposite end of the spectrum are projects that sacrifice decentralisation to increase speed and efficiency. Take Ripple for example.
Researchers argue that the platform isn’t as decentralised as they claim since the default behaviour of the consensus mechanism hands over control of updating the ledger to Ripple.com servers.
Others agree with this sentiment because Ripple regulators and network operators play a significant role in scaling and stabilising the payment system.
Whatever the case, Ripple provides real-time transactions and traceability at a low cost. It holds the number three position on Coinmarketcap.com which shows there is a lot of faith in the project.
Speed and efficiency are essential in taking blockchain technology to the next level to compete with the likes of Visa or Mastercard.
What does this mean for the future of blockchain?
The blockchain community appears confident that the apparent lull in trading is a good thing. It provides developers much-needed breathing space to focus on optimisation of the networks.
This quiet period presents an opportunity for the long-term blockchain platforms to prove themselves – for the industry leaders to step out from among the plethora start-ups that were created purely to cash in on the crypto hype.
Supporters are optimistic the projects developing the solutions to the current technology challenges will be able to address these issues.
Fred Ehrsam, in a post on Medium, states “it’s conceivable we could see a 100x improvement by the end of 2018, which would allow a 1–10m user app”.
These actions, in turn, will help move blockchain technology closer to the dream of a decentralised internet and global supercomputer.
Curious how cryptocurrency coins are created?
Disclaimer: The above references an opinion and is for informational purposes only. The opinions expressed by the author do not represent the opinion of BitPrime.
Last updated: 17/04/2018