The reality of Bitcoin
We are very early here. The merchants don’t actually use cryptos as currencies, they automatically sell it on the exchange for cash because “volatility is the enemy of viability”. Basically, cryptos are speculative bets that are pretending to have a usage in the commerce and only fuelled by the sheer hype which pushes the price up.
Bitcoin is most likely not the future of money. Pro bitcoin people like to say how its such a mathematical brilliance in terms of sending value somewhere, but there are plenty that can do exactly the same and even better which I will talk about in the separate article and in the separate video. Nevertheless, the network effects is still probably the most important indicator of success for any protocol.
First of all, Bitcoin doesn’t scale.
Its transactions are slow, fees are large and the size of the blockchain keeps expanding. The owner of a full node wallet has to download all the data from the internet. If the wallet was off it takes quite a bit of time for it to restart and for all the transactions to download. Therefore, to overcome these difficulties more and more users would prefer to store bitcoin on the client servers or even on the exchange which raises a lot of security concerns and goes completely against what security experts like John McAfee are stressing about. Thus, the idea for every user keeping all the history of transactions turned out to be too idealistic.
Why it’s not Scalable and why it splits?
Because of the inability to reach consensus. This inability has caused Bitcoin to hard fork and that caused the network split and create another bitcoin, “Bitcoin Cash” which basically promised people larger blocks as an answer to scaling issues and the narrative that it is “The Bitcoin Satoshi originally promised” “A Peer to Peer Electronic Cash”. We are on the road for another split, this time it’s “Bitcoin Gold” which promises to change mining protocol to “Equihash” which enables GPU mining, ASIC resistance, and replay protection. This is not the end. After the 25th of October, we may even have 4 bitcoins: Bitcoin (BTC), Bitcoin Cash (BTH), Bitcoin Gold (BTG) and Segwit2x Bitcoin (B2X). Now that’s confusing! The problem that will arise from the network split is that it will be difficult for newcomers to differentiate especially considering people not understanding what it is used for. They may think its a currency that you can use to pay for things “safely” and “quickly” OR they may think it’s a “Hold of Value” an actual asset to have which is, by the way, has no solid basis to hold its value. “Isn’t it a peer to peer payment just like that guy Satoshi was saying?” People in media also calling it “digital gold” and now we are going to have “Bitcoin Gold”. It may change peoples perception is a sense that we were promised only 21 Million coins in total, and now we are going to have how many?
The most fundamental problem
The most fundamental problem is in its consensus protocol “Proof of Work (PoW)”.
Firstly, it uses too much electricity, in fact, it uses far more than actually necessary to support the transactions. The more miners there are, the more secure the network gets from attacks. However, the efficacy of transactions doesn’t change. Regardless of your humanitarian views, it may be wasteful.
Secondly and most importantly, the control over Bitcoin may be captured by the “dynasty” as explained in the great book “Beyond the Bitcoin Trap” by Kevin Lawton. Basically, it means that the control over network gradually concentrates in few and fewer hands. Bitcoin is subjected to several “dynastic captures”: geographic, hardware and political.
There is another consensus protocol called “Proof of Stake” (PoS) for which Ethereum is headed. It is also subjected to “Dynastic capture” but it uses significantly less electricity.
The most mining operations are in China due to cheaper electricity. One political decision can hurt bitcoin tremendously (probably an understatement). People with lower investment capital are severely disadvantaged and it becomes less and less feasible for them to mine and the ones who have larger investment capitals can continue an arms race. Also, within the mining hardware industry, there is now a monopoly “Bitmain” that comes from China.
2 solutions for a true cryptocurrency
In order to create a true cryptocurrency, there needs to be invented some other consensus protocol or there should be a ‘Proof of Stake” (PoS) with some degree of centralization and possibly randomisation.