“Mass adoption” in the punch card era of cryptocurrencies
From our current point of view, the early 1950s computer systems were incredibly slow, expensive and complicated to use and maintain. This opinion piece argues that cryptocurrencies are currently passing through the equivalent of this early punch card era. It demonstrates why the craze for any news of “mass adoption”, presumably justifying cryptocurrency valuations, is premature.
As objective metrics weren’t available, most alt-coin “investors” largely acted upon belief: Soft metrics like idea, addressable market size, advisors, team, whitepaper or mainnet release had to suffice. As a result, cryptocurrency valuations were solely based on speculation of perceived future demand — instead of their actual demand.
Driven by high expectations, often coupled with substantial losses, in 2019 many cryptocurrency speculators desperately look for validation, justification and solidification of their investments. In doing so, they largely progressed on to a new, ultimate metric they call real life mass adoption.
As the absence of actual real-life mass adoption is obvious and for anyone easily verifiable by low transaction volumes, investors often help themselves by interpreting partnerships or proof of concepts as signs of the beginning of real life mass adoption, assuming that PoC’s will inevitably lead to actual adoption henceforth prove their utility and in turn value.
This, of course, is a misconception, or maybe a soothing mind trick. Proof of concepts (PoC’s), as the term implies, do not lead to adoption inevitably.
They are only “proving a concept”. They might progress to further stages like closed alpha states, open beta tests, limited product tests; and if they prove themselves worthy, maybe eventually to a product release. But in itself, PoC’s are just the very beginning of a long journey, meeting lots of breaking points while passing through their following stages. Naturally, there are more unsuccessful PoC’s than successful ones.
More concerning than this “fast-track” mentality is the predominant expectation that seems to be attached to it:
By interpreting proof of concepts as the precursor of inevitable real-life mass adoption, speculators leapfrog far beyond the status quo of the underlying technology.
Cryptocurrency speculators seem to forget, ignore or are unaware that real life mass adoption on a meaningful level that would justify lofty cryptocurrency valuations is impossible until the technology caught up to a point that would actually allow it. Right now, it doesn’t:
- Transaction capacity is highly limited
- Fees are detrimental to any large scale business application
Let’s apply some basic math to see why these two statements prevent any meaningful real life mass adoption, and in turn a justifiable valuation of any existing cryptocurrency as of today.
Potential for mass adoption
Several sectors could benefit from the immutability and transparency of distributed ledgers or cryptocurrencies. It appears that almost all cryptocurrency enthusiast would agree on the following ones:
- Financial transactions by financial institutions
Currently estimated at around 1.06 billion financial transactions per day - Human-to-human value transfers (“currency”)
Could potentially be used by 7.7 billion humans roaming our planet - Internet-of-things (IoT)
The Big Four consultancies predict an emergence of 50–150 billion IoT devices within the next decade
The following chart compares the current transaction volume of financial institutions (source: CapGemini/BNP Paribas Worlds Payment Report, 482,6 bn transactions annually) with the current value transaction volume per capita (see European Central Bank Report, 246.6 transactions per capita annually, extrapolated to 7.7 bn humans) and the transaction volume of the low/high expectation of Internet-of-Things actuators (50–150 billion) (My apologies: I lost the link to the reference documents. I started my research somewhere here).
While 100% of today’s transactions by financial institutions would amount to 16,628 transactions per second (dark blue circle), no drastic increase in volume is expected (Transaction volume currently increases in the low percentages YoY).
Human P2P payments would amount to 60,211 transactions per second (light blue circle) if every human being, including the unbanked and those without electricity and/or internet connection would make as many transactions as Europeans did in 2018.
In comparison, even the very low end (less than 1%) of the expected amount of IoT devices within the next decade would dwarf any other transaction volume, if those actuators would only transact once per day: One billion IoT devices transacting only once every 24 hours would amount to 277,800 transactions per second (small dotted circle).
The larger blue dotted circle in the graphic shows an arbitrary amount of 50 billion IoT devices transacting once every 3 hours on average, compounding to 5 million transactions per second.
This particular scenario has only been added for the sake of being able to compare dimensions, because the actual high end of the expectation amount of IoT devices (150 billion) with an assumed average transaction interval of 30 seconds would result in 5 billion transactions per second (red dotted circle). Of course this scenario is rather unlikely. If it would become reality, mind that its circle would be half the size of a Lamborghini.
Whatever amount of IoT devices one expects within the next decade, even the most pessimistic transaction volume on DLTs would dwarf any other potential application of DLTs and cryptocurrency.
With the IoT sector posing a potential for high-volume, large-scale mass adoption of distributed ledgers and cryptocurrencies somewhere between 5-digit and 10-digit transaction volumes per second within the next decade and thus outshining the potential of any other sector by several orders of magnitude, I continue with the IoT example.
Basic math #1: Reliability of service
Even with IoT devices expected to be in the billions within the next decade, obviously not all of them are going to transact on distributed ledgers or through cryptocurrencies. Let’s therefore have a look at a few potential scenarios for the amount IoT devices transacting on DLTs/cryptocurrencies:
- Very low amount of devices
A future with only 20 billion IoT devices, but only 0.2% of them transacting on DLTs every 60 minutes, resulting in 350 billion transactions annually (11,111 transactions per second) - Low amount of devices
A future with 33 billion IoT devices, but only 1.2% of them transacting on DLTs every 30 minutes, resulting in 6.9 trillion transactions annually (220,000 transactions per second) - Moderate amount of devices
A future with 50 billion IoT devices, but only 2.8% of them transacting on DLTs every 15 minutes, resulting in 49 trillion transactions annually (1,555,555 transactions per second) - Medium amount of devices
A future with 75 billion IoT devices, but only 6.4% of them transacting on DLTs every 5 minutes, resulting in 504 trillion transactions annually (16,000,000 transactions per second) - Extremely high amount of devices
A future with150 billion IoT devices, but only 20% of them transacting on DLTs every 3 minutes, resulting in 5,256 trillion (5 quadrillion) transactions annually (166,666,666 transactions per second)
Regardless of the scenario that appeals to you, it is obvious that scalability solutions are dearly needed in order to enable adoption of DLTs/cryptocurrencies. Even the scenario with the lowest amount of actuators (0.2% of 20 billion devices, once every hour) would require a transaction capacity that can not be sustained by any DLT currently existing. Even if there would be one with a working solution: what happens if devices wanted to transact on a slightly higher frequency?
Businesses thinking about adopting DLT on a large scale are confronted with the question what would happen if the maximum transaction capacity of todays’ DLT solutions would be reached
Looking at adoption
For obvious reasons it would be catastrophic for businesses if they relied their operations on distributed ledger technology that is unable to process transactions because the maximum throughput has been reached.
It therefore seems reasonable to question which business would take a leap of faith and adopt a cryptocurrency if it i turn means that their operations, and thus their revenue streams, might fail once others do the same and the maximum transaction capacity is reached.
One business “adopting” the technology works out well. Maybe there is enough capacity to sustain the throughput requirements a hundred business. Maybe even a thousand. But if adoption happens as planned (by speculators seeking riches) everything would come to a grinding halt once the capacity limits are reached. Even through everyone knows it, speculators ignore it and highlight any newly emerging PoC as the second coming of christ.
Clogging of the mem-pool of Bitcoin and Ethereum has demonstrated what happens once the capacity limits are reached. When it comes to their revenue, businesses can’t trust on “science will fix it and someone will probably find a solution in time”. It’s simply too risky for them.
If there would only be small scale mass adoption or adoption by non-critical transactions, those wouldn’t justify current cryptocurrency valuations. A sustained transaction volume of, for example a minuscule volume of 1,000 transactions per second (which hasn’t even been reached by any cryptocurrency so far) doesn’t justify a valuation of several hundred million or billion dollars.
But large scale, high volume mass adoption is impossible until the scalability challenge has been solved. Bummer, isn’t it?
Among thousands of cryptocurrencies, there currently isn’t a single one with a working solution to scale, nor is there a single one that is testing a potential (cryptographically secured on-chain) solution. Only a handful are pursuing viable ideas for potential solutions.
The times of uncertainty therefore aren’t over, no matter how many proof-of-concepts, trials or actual low volume, or non-critical applications are (prematurely) interpreted as beginning real-life mass adoption. They don’t prove usefulness of cryptocurrencies and in turn don’t justify their valuation.
On the contrary: the challenge of “scalability” means that, once solved by one or more contenders, there will be a heavy devaluation of those that don’t have a viable scaling solution at least in sight.
The race for scalability certainly is going to be a very interesting period. And it’s not a matter of if but rather when. But we are not there, yet.
Basic math #2: Cost of conducting business
Businesses like to make a profit. Transactions fees are naturally conflictive to that. In addition, when it comes to volatile fees due to the underlying fluctuating monetary value of coins/tokens, prediction of the cost of conducting business, an extremely important factor for businesses, is nearly impossible.
Let’s ignore the question how billions, trillions of quadrillions of transactions would be synced and stored in distributed ledgers — and solely focus on the cost of conducting business on different cryptocurrencies.
The following table exemplarily demonstrates compounded annual transaction fees for the Top25 cryptocurrencies by market capitalisation based on the transaction volume scenarios established above. Check the one that appeals most to you and take a look at the price of conducting business.
To be fair and to focus on the underlying argument in regard to transaction fees being detrimental to mass adoption, instead of current fees, an arbitrary date with a historically low fees (due to depressed cryptocurrency valuations) has been selected:
In five scenarios, the table shows compounded fees (in billion USD) for the top25 cryptocurrencies based on fees as on December 26th, 2018.
In the two columns to the right of each scenario, compounded fees are displayed as percentage of the annual gross domestic product (GDP) of the USA, as well as the annual gross world product (GWP).
The table would of course look much different if a date during the cryptocurrency craze in late 2017 would have been selected. In that case, fees would probably compound to several hundred years of the annual gross world product (GWP).
“Transactions cost less than a cent” might sound appealing to individuals issuing occasional transactions. In high volumes, even sub-cent transaction fees would compound into monstrous burdens on the global economy, as demonstrated by the above table. No matter which of the above scenarios might appeal to you: none of them are viable if based upon any fee-driven cryptocurrency. The cost is too high, by several orders of magnitude.
“But it’s cheaper than traditional means of transferring value” is a popular argument. This is true, if compared to the fees banks charge their customers in less fortunate areas of our planet where bank transfers still cost something. The overwhelming majority of traditional means of transferring value are cost neutral database entries though. They don’t cost financial institutions anything. Switching them over to cryptocurrencies would in fact increase their cost basis. In regard to the IoT sector, there are hardly any transfers of value (yet) at all. The devices don’t exist (yet). In turn this means that there won’t be any “switching” to cryptocurrencies. It also means that there wouldn’t be any cost savings by doing it. Instead, using cryptocurrencies would be much, much more expensive compared to using traditional, centralised solutions.
“But large companies can easily afford sub-cent fees for transactions” is another common misconception. They can’t, if it comes to actual mass adoption. Look at the above table again. The money to pay for trillions of USD in annual fees simply doesn’t exist. Businesses might happily pay fees for their proof of concepts but once they go into production (“mass adoption”) and those fees would cost them millions annually, cutting into their revenue, they will look for cheaper or fee-less alternatives. Smart business wouldn’t even start basing processes on cryptocurrencies that would increase their cost basis. So there we go again: Adoption isn’t very likely on today’s technology and fee structures.
“But sub-cent fees can easily be handed down to the end-customer”. Again: no, that is not possible. At least not if we are talking about actual mass adoption. The above table should make clear that humankind isn’t able to pay fees in the range of several percent of the world gross product (low end of the above calculation) or even several hundred times of the value of all combined worldwide business activities (if you are leaning towards a higher amount of transaction volume). It’s simply impossible.
In any case, whether one considers existing processes to be switched over to cryptocurrencies, or new processes, high or low amounts of actuators transacting in cryptocurrencies, it is extremely likely that businesses will always choose a cost basis that doesn’t eat into their revenue or a fee-less alternative in order to maintain or even increase their profitability and/or gain advantages over their competitors.
Conclusion
Irregardless of decentralisation level, consensus model, synchronisation, data storage and energy requirements, scalability and transaction fees still require dramatic improvements in order to attract mass adoption in high transaction volumes, justifying cryptocurrency valuations.
The sobering reality is that if every human wanted to, every single one would only be able to issue a Bitcoin transaction roughly every 48 years on todays’ technology.
While a handful cryptocurrencies made a little bit of progress in regard to on-chain scalability, usually by sacrificing decentralisation to varying degrees, as well as some that ventured into (imho questionable) second layer (off-chain) scalability solutions, the vast majority still resides in a kind of punch card era, dealing in single- or double-digit on-chain transaction volumes while we are looking at a potential future with the requirement for 5 to 10-digit transaction volumes per second in a couple of years.
As viable, cryptographically secured on-chain scalability solution are currently not in sight, it is almost certain that businesses will not base any meaningful processes on technology that poses a threat to their revenue streams.
In addition, as demonstrated above, if fees aren’t lowered by at least four to six orders of magnitude, the vast majority of cryptocurrencies based on mining (or other reward models for that matter) will most probably not see any significant adoption. In fact, they actually might see adoption for a limited timeframe, until businesses reach a transaction volume at which it makes sense to look for more economic alternatives. That would probably mark the equivalent of a coitus interruptus in the cryptocurrency realm.
Actually, in regard to fee structures, on the slight notion of “beginning mass adoption” during a recent summit, one of the leaders of a cryptocurrency referred to lowering transaction fees, resulting in a heated discussion (here, here) of speculators, largely disapproving his stance because it would minimise their anticipated return-on-investment. His reasons are obvious: businesses demand lower fees in order to make use of that particular cryptocurrency.
In my humble opinion, the overwhelming majority of speculators of incentive-based cryptocurrencies are in for a rude awakening. Apart from a potential rise in valuation based on pure speculation, the tokens they bought will most likely not see any increase in value that is based on actual demand, caused by mass adoption.
As of today, there‘s no clear answer to which (if any) project will be able to scale to the necessary throughput, while also being able to provide a fee structure, or a „no-fee“ structure, that enables for existing or future business processes to take advantage of the benefits of DLTs.
While only time will be able to tell which cryptocurrencies will see large scale adoption, it is already certain that the vast majority will not be adopted at all — and eventually fade into obscurity. In my opinion, it seems likely that scalability and fee structure will be the decisive differentiators on the pathway to mass adoption.
About me:
My name is Ben. For the better part of the last 20 years I worked as a digital product developer at the intersection of IT, analysis, strategy, business and communication for multinational corporations in central Europe and Asia, developing answers to the questions of what, who, how, where, when and why.
Being surrounded by code my whole adult life, i lately decided to make it my center of attention. Nowadays i am employed as a software engineer by a large IT company in central Europe.
In case you feel generous, feel free to send me IOTA to buy more carrots: QIXHISSVMPUYKTMTCECFVBJSR9TGJI9D9YNHTWMNXQFYELG9INHUAHTHKJBYMWA9GPWXAYSYVTEHFR9ZYYCVSAGOKD
