Bitcoin’s 99 Problems = No Future?

Bitcoin has enjoyed a lot of ‘incumbent inertia’ that comes along with having first-mover advantage in the cryptocurrency marketplace. That’s more than clear by simply observing the market price alone for 1 BTC (even though the price is still down from the bonanza that ensued running up to Christmas 2017). However, future long-term sustainability challenges continue to creep up.

In the wise words of Jay-Z:

“If you’re having girl problems I feel bad for you son,
I got ninety nine problems …”

Bitcoin’s got 99 problems. So where do I begin? Well, I’d likely lose most readers if I highlighted all 99 problems, so instead, I will highlight my top-10 challenges for the future sustainability of Bitcoin.

Problem #1: Bitcoin’s Wealth is Centralized

For an ecosystem that purports so highly the advantages of decentralization, Bitcoin wealth is actually surprisingly (or perhaps unsurprisingly) concentrated and centralized in the hands of a few. Estimating Bitcoin wealth down to the individual-level is difficult because there is no direct link to equate that one Bitcoin address equals one individual in the real-world. This one-to-one correlation does not exist since one address can hold the coins of multiple individuals. However, best estimates indicate that in actuality 4.1% of Bitcoin addresses own 95.5% of all Bitcoin. The converse statement is also true that the remaining Bitcoins, or 3.5% of all Bitcoins, are owned by the vast majority — i.e. 95.9% of addresses. Breaking it down into the context of majority control of the Bitcoin network, 1% of all Bitcoin addresses control nearly half of the market. These are a set of truly astonishing facts considering Bitcoin’s decentralized characteristics.

For a digital currency that was initially desired to be so vastly different than common societal conventional norms surrounding global wealth, Bitcoin has not escaped the strife between the ‘1% versus the 99%’ — lexicon that has only recently entered common vocabulary. Bitcoin’s wealth distribution actually matches and mirrors that of global wealth trends. The stratification of wealth follows a Power law distribution.

Ultimately, the Power law indicates that from a wealth perspective, the top-10 richest individuals will be multiple magnitudes greater in wealth than the next-10 and so on. However, the long-tail in the Power law distribution is a perfect visual summary of the disparity between the ‘1% versus the 99%’. Bitcoin operates in much the same way. Only a handful of individuals or entities in the Bitcoin ecosystem own most of the coins.

Problem #2: What about all those lost Bitcoins?

Not all ecosystems are secure from leakage and loss. In the real-world, money has a very low probability of loss whilst in storage with a reputable financial institution. This is because, when entrusting one’s money to a financial institution for safe-keeping, there is a level of due-diligence and onus on the part of the financial institution to keep it safeguarded from forms of monetary loss. In the Bitcoin world however, the safekeeping of Bitcoins is solely the responsibility of the end-user. Every day, there is irretrievable loss that occurs in the Bitcoin ecosystem.

According to recent findings, between 2.8 to 3.8 million Bitcoins have been lost forever — never to re-enter into circulation ever again. Here the word ‘lost’ requires further elaboration. When a Bitcoin is lost forever, it means that no one can assert coin ownership of them because the secret keys have been lost in some way or another. Once the secret signing key associated with a public key of a transaction has been lost, those coins can never be spent again, and are trapped forever in a cryptographic lock. There have been many high-profile incidents that have made the news recently of individuals throwing away either pieces of paper or hard-drives that had contained the secret keys associated with thousands of Bitcoins. Those Bitcoins are in fact are permanently lost in time and cannot be retrieved.

While the initial parameters of the Bitcoin ecosystem set forth a cap of 21 million Bitcoins — there will be far less than that available for trade and transactions. Estimates range from between 17% to 23% loss compared to the total Bitcoin’s currently in circulation. This means that approximately 1-in-5 coins are eventually lost. It is a staggering statistic. However, many have also pointed to the fact that coin loss due to improper key management is on the decline. It could be that in the early days of Bitcoin, there was a lack of knowledge and level of complacency with respect to key management, and of course, over time people do tend to forget where they might have stored their keys. With Bitcoin growing in popularity and price, vigilance around key management is coming to the forefront.

It is also interesting to note here that the majority of coins in Bitcoin, or approximately 64% of coins currently in availability today, have never actually been spent further. It would appear that many consider Bitcoin as an investment vehicle, an avenue for long-term gains, rather that utilizing it for everyday transactions or to capitalize on short-term price movements. Therefore, indeed, while loss is an avenue to take coins out of circulation, many coins are by default, out of circulation already today. Many view Bitcoin as a store of value with potential many-times-over than current market prices, and as such, its utilization as a long-term investment vehicle will remain despite near-term price fluctuations.

Problem #3: Bitcoin’s Processes Transcations at a Snail’s Pace

Bitcoin’s transaction processing capabilities and the number of transactions processed per second is an area that continues to see much attention. The single-most limiting factor, and the narrowest bottleneck in the Bitcoin ecosystem, continues to be the restriction on block size. Recall that each block in the Bitcoin blockchain is constrained to 1 MB — one of the initial parameters set forth in the system. The block size ultimately dictates Bitcoin’s transaction processing power.

Over time, there have been numerous proposals to change block size constraints. Recently, Bitcoin Unlimited proposed to remove the block size limit entirely and SegWit2x (if it had been accepted) would have moved to double the current block size capacity. Block size real estate remains one of the most important parameters dictating the throughput of the Bitcoin ecosystem.

In order to get an understanding of how far off Bitcoin’s transaction processing capabilities are — a comparison between Bitcoin to traditional payment processors indicates very large gaps. It has been commonly circulated and cited that Bitcoin can handle at maximum 7 transactions per second. In reality, it has been shown that Bitcoin’s average transaction rate is between 3–4 transactions per second. In 2017, the average rate of processing was 3.1 transactions per second, up from 2.5 transactions per second in 2016. However, a comparison between Bitcoin to Visa, MasterCard, UnionPay, American Express, JCB, and Discover shows that Bitcoin must improve by several orders of magnitude to compete effectively.

Even the likes of PayPal, in 2017 processed 7.6 billion transactions yielding an average rate of 240 transactions per second processed. Visa has the greatest established capacity for payment processing — at a peak, the Visa system can handle over 56,000 transactions per second (Black Friday, Christmas Eve). Bitcoin has a long way to go still to be utilized for mainstream and everyday purchase transactions.

Problem #4: Bitcoin’s Extreme Wastefulness

It is clear that Bitcoin uses a tremendous amount of computational power for the seemingly wasteful action of competing to solve an arbitrary cryptographic hash puzzle once every 10 minutes. However, the possibility of achieving financial pay-off and reward has been incentive enough to continue to fuel large-and-heavy interest in Bitcoin mining. As such, the network difficulty continues to increase. This creates a circular chicken-and-egg argument. The more interest there is in mining, the more miners, the greater the available computational hash rate, the greater the network difficulty, requiring an even greater computational hash rate, requiring even greater network difficulty to secure Bitcoin via the proof of work paradigm. Ultimately, mining each new successive Bitcoin becomes far more difficult than the previous one — it is a system that is forever ramping up.

Many would argue that the Bitcoin ecosystem is not sustainable for the reasons of its extreme level of wastefulness and the insistence of solving a hash puzzle to propose a new block in the blockchain. Bitcoin mining computational clusters now have the same issues that traditional server farms from the likes of Google and Facebook have with respect to setting up in cooler climates to facilitate chip cooling and to think of inventive ways to reduce operating expenses. Many would say that the level of wastefulness in Bitcoin is not only extravagant but also scandalous.

However, there are currently research proposals underway to utilize Bitcoin’s proof of work for the common good. Rather than wastefully solving an arbitrary mining hash puzzle, conceptually, the same computational resources can be redirected to solve some of the world’s most pressing problems. A number of research areas and real-life problems could be theoretically tackled and benefit from the use of Bitcoin’s amalgamated computational prowess.

Some example of using Bitcoin for the common good include:

Problem #5: Can Bitcoin keep up against a Quantum Computer?

From an ecosystem participation perspective, Bitcoin relies on the fact that no one singular participant will hold greater than 51% of all computation hash power available. This 51% attack scenario — means that most participants will actively play by the rules for the furtherance of Bitcoin’s market value. Playing by the rules ultimately yields the greatest expected outcome — and a better outcome than trying to subvert the ecosystem by forking and trying to work backwards to create self-advantageous double-spend scenarios. However, the great assumption that is made here is that more or less, all participants will have the same basic unit of hardware available to them. It is just a matter of who has more of these basic units to create substantial computational clusters — which may be just a function of financial investment ability.

But what if a supercomputer was introduced into the Bitcoin ecosystem? Better yet, what if a quantum computer was introduced into the Bitcoin ecosystem — what would happen then? A quantum computer is substantially different than a regular binary-based computer founded on the concept of dual-state bits (0 or 1). In quantum computing, there also exists an analogous dual-state system, but a qubit (a quantum bit) can be a superposition of both states — yielding a tremendous amount of information conveyance potential beyond binary-based computers.

If a quantum computer ever came alive in the Bitcoin ecosystem, it is safe to say, that it would immediately destroy the entire P2P network. The hash rate of the entire Bitcoin ecosystem could be replicated by a singular quantum computer. The market value would plummet, and the entire system would collapse. In many respects, Bitcoin mining has kicked off an avalanche of fury surrounding the need for ever-more-efficient computer chips capable of intensive computational speeds with greater levels of electrical efficiency. Bitcoin and other cryptocurrencies have indeed left their mark on the global sphere of research and development into mainstream quantum computing. According to many, research investments made by companies such as Google, IBM, and Microsoft may mean that the first commercial quantum computing hardware could come online in the next 10 years. Bitcoin may naturally progress into the world of quantum computing, or conversely the world of quantum computing may lead to the collapse of Bitcoin — no one knows for certain, however it is an interesting thought experiment of speculation.

Problem #6: Rogue Mining: Malware & Mining Drones

With anything of financial consequence there is a spectrum of actors, both good and bad, that contribute either positively or negatively through the enforcement of their own agendas. Over the years in digital computing, just as there have been positive trends of growth and accomplishments, there have also been trends, fads, and fashions within the realm of cyber security. Cyber threats continue to evolve since the days of worms, trojans, and phishing expeditions. Nowadays, it is ransomware that is used as the attack of choice.

The proliferation of ransomware, in conjunction with pseudonymous platforms like Bitcoin, gives cyber attackers new means and methods to steal from infected end-users. In a way, ransomware has become a very efficient mechanism of global attack, with the potential of netting real ransoms in the way of digital currencies.

For example, consider the global WannaCry ransomware attack. WannaCry had a tremendous global impact infecting well over 300,000+ computers and 45,000+ servers in 100 countries. It infected many Fortune 500 organizations too –those in the healthcare, financial, and business sectors alike. To date, it was the largest ransomware attack ever to be established in history. WannaCry would infect users PCs, encrypt their files, and display a message to the end-user that if they wanted to decrypt their files, they would have to pay a ransom in the form of $300 USD worth of Bitcoins. Payment was directed to one of three Bitcoin addresses. Within the first 24 hours, infected users had sent 11.3 BTC to the creators of WannaCry (to their Bitcoin addresses), and within the first 5 days, the total amount grew to 43.8 BTC — a small fortune given today’s Bitcoin market price. Subsequently to the WannaCry epidemic, followed another ransomware attack called Petya which was similarly destructive but on a relatively smaller scale. In the end though, Petya used the same collection strategy that WannaCry did — users would have to relay the equivalent of $300 USD in Bitcoins in order to have un-encrypted access to their files again. With respect to Petya, in the first 24 hours 3.9 BTC was collected. However, in both cases the Bitcoin addresses associated with WannaCry and Petya are public knowledge. The pseudonymous nature of Bitcoin means that anyone and everyone can watch the future transaction path of anyone trying to spend these Bitcoins. Any attempt to spend could ultimately lead to the capture of the individuals behind the respective attacks, and therefore, the funds sit in those Bitcoin addresses idle so far.

Outside of ransomware attacks and their attribution to Bitcoin, another silent avenue of mining for Bitcoins has come through the advent of rogue mining channels. Cryptomining malware silently introduces itself into a user’s PCs hijacking a portion of available processing capacity unbeknownst to the end-user. Via rogue mining, the victim’s processing power is then used to collectively mine for Bitcoins and the profitability of this endeavor is mostly a function of how long the cryptomining malware can infect a user’s PC without being detected — quietly and silently mining Bitcoins along the way.

There have been a number of estimates made in the mainstream about how many organizations have been ultimately infected or hijacked in some way in order to rogue-mine for Bitcoins. Some estimates believe that upwards of 23% (nearly a quarter) of all global organizations are affected in some way — with attackers repurposing corporate assets to power the ever expanding thirst for computational hash power. Unlike conventional ransomware attacks, which are predicated on the need for some form of alert or attention by the end-user to attack to pay a ransom, in the rogue cryptomining scenario, malware can remain undetected for long periods of time.

Problem #7: Mining for Bitcoins have real Energy Consequences

As Bitcoin mining continues to proliferate, some would say there is indeed a ridiculous amount of energy to run the Bitcoin ecosystem. There is a stunning amount of power required each and every day, and behind each and every individual transaction.

According to most recent projections the Bitcoin network’s overall energy consumption will reach 125 TWh by early 2019. Moreover, the rate of increase month-over-month and year-over-year is staggering. When compared to world electricity consumption in TWh, the forecasted consumption required by the Bitcoin ecosystem by 2019 represents 0.6% of the total world’s energy needs. Indeed, the energy to power Bitcoin represents the total yearly consumption of a small country — and this has very real consequences.

To bring further context to this discussion of Bitcoin’s energy guzzling nature, consider this: in 2017, the Bitcoin ecosystem processed a total of approximately 104 million transactions and consumed an average of 29.0 TWh across the span of that year. This means that each and every single transaction consumed 280 KWh per transaction! Move forward to the estimates for 2018 and the rise in electricity consumption is a whopping 1200 KWh per transaction! Considering that the average US household uses about 11,000 KWh per year in total electricity demand — it would seem that even one Bitcoin transaction is not a trivial enterprise. Bitcoin has a long way to go with respect to electricity demand per transaction against common payment processors like Visa. While in Bitcoin a singular transaction takes several hundred KWh to process, one Visa transaction takes 0.00169 KWh — an incredible difference.

While ASIC mining chips continue to improve in terms of energy conversion efficiency, the network difficulty level continues to demand higher and higher hash rates to successfully mine. The energy consumption alone of the entire Bitcoin ecosystem can definitely undermine future long-term sustainability and remains a significant challenge.

Problem #8: Along with Energy Consequences for Bitcoin Mining — What about Environmental Emissions?

Associated with the tremendous energy consumption required not only for the entire Bitcoin ecosystem but on a per-transaction level, are real-world impacts to the environment in terms of emissions. There are real-world environmental considerations with respect to the economic activity that Bitcoin produces.

In 2017, the annual carbon footprint of the Bitcoin network was approximately 30,240 kilo-tonnes of CO2. CO2, or carbon monoxide, is a greenhouse gas which inevitably leads to world-wide increases in ambient temperature, in concert with the climate change epidemic. On a per transaction basis in 2017, each and every transaction produced 290 kg of CO2. Considering that the average car produces 4-to-6 tonnes of CO2 in a year, a couple of Bitcoin transactions would be the equivalent of typical car usage for a year.

When comparing both the electricity consumption in conjunction with environmental emissions, it becomes clear that Bitcoin has a long way to go to in addressing these challenges.

Problem #9: Bitcoin Can’t Actually Power the Internet of Value via Micropayments

A micropayment, or microtransaction, is a financial transaction that involves the flow of a very tiny amount of funds from originator to recipient. While the lowest denomination of transferrable funds in a traditional fiat based currency is typically the cent (i.e. $0.01 USD), a digital currency can support much smaller denominations (i.e. 0.00000001 BTC) giving rise to the idea of micropayments.

In the traditional economy, micropayments are often seen as being highly unprofitable because of the tiny transaction amounts. The traditional economy facilitates the flow of transactions via extremely large overheads and centralized intermediaries — the price of running such a cost-intensive system is passed on to the end-user. In addition, centralized financial institutions are often involved in dispute resolution and mediation processes between parties due to fraud and other reasons. In this way, central trusted parties must facilitate means and mechanisms to allow for reversibility of transactions (i.e. escrow) — and this additional cost again forms a prohibitive barrier to micropayments in the fiat economy. Ultimately, the traditional financial economy limits the minimum practical transaction size — eliminating the potential for sustainable micropayments.

Micropayments fueled via cryptocurrencies can, however, become useful in the Internet of Value since they would allow for the following two types of broad value capture potential:

1. Interaction-Based Micropayments

2. Usage-Based Micropayments

Interaction-based micropayments would largely be derived from the interaction of various participants in the social economy and the resultant flow of goods, services, and content. Previously, it was discussed that digital cryptocurrencies could support the seamless interchange of goods and services via ‘likes’ and ‘tweets’ — the convolution of social media with the Internet of Value. Moving one step forward, cryptocurrencies that support micropayments could also propel forward the Internet of Value by applications in content generation. Micropayments could allow for tiny payments to incentivize individuals to write reviews for products and services, or for any general type of authorship. Micropayments could support the micro-level scale down of the gig economy or sharing economy and support micro-tasks. Micropayments could also support the micro-level outsourcing of large projects. Therefore, interaction-based or social-based micropayments will play a dominate role in micro-level value creation, advancing value creation possibilities that were not possible before within the confines of the traditional financial economy of credit cards, bank cards, or merchant gateways.

Usage-based micropayments are predicated on content consumption and paying only for the content that is consumed instead of utilizing subscription-based models. Micropayments could be used to monetize the precise viewing of content like movies and music via tiny payments. Micropayments could also be used in the consumption of services, like Wi-Fi at coffee shop. Furthermore, micropayments have the potential to change the way online customer service requests are handled today.

However, Bitcoin as it is currently setup is very ill-suited to be used for micropayments. The Bitcoin ecosystem in its current manifestation is not technically setup to support micropayment processing. Many micropayment platforms (many of them very much in their infancy stage) have moved away from Bitcoin and switched to the utilization of other cryptocurrency ecosystems that are better suited to micropayment transactions.

Problem #10: Bitcoin stands no chance against Ethereum’s Transaction State Machine & Smart Contracts

While the flow of transactions serve to indicate the status of an economy, the flow of contracts are equally as important. Typically contracts are administered by a central trusted party and create some form of legally binding obligation between two parties; generally one party will be providing goods, services, or assets and the other party will be consuming those goods, services, or assets. The contract is there to enforce the exchange, transfer, ownership, title, authority, and monetary allocation. A central trusted party is needed to provide enforcement of the contract.

A smart contract, also referred to as a cryptocontract, is a tamper-proof, trackable, and irreversible record that combines both a contract and a transaction in one. It can be better understood via a hypothetical example. Imagine if Airbnb were to employ smart contracts in the rental of vacation properties and homes powered by a cryptocurrency. In such a case, all relevant details about the terms and conditions between the host and the guest would be inscribed in a smart contract like length of stay, time-window of arrival, cancellation conditions, and so on. The Airbnb accommodation would be outfitted with an electronic lock that is connected to a cryptocurrency blockchain. When the guest arrives at the host’s accommodations, the guest could gain entry through the communication channel between their smartphone and the electronic lock. The phone would transmit the guest’s secret key, and the final part of the smart contract would be executed allowing the guest access to the host’s property. In such an envisioned system predicated on the use of smart contracts, all actions are facilitated through a cryptocurrency blockchain from payment to execution of terms and conditions to property access — all without the need for any centralized oversight.

Many have proposed that the real future of cryptocurrencies will lie as being the fuel to power smart contracts. While Bitcoin is the first successful blockchain application, it is not technically built to handle complex smart contracts. Recall that Bitcoin’s scripting language is non-Turing complete. This ultimately means that Bitcoin is not setup to encode complex scripts used to represent smart contracts. On the other hand, a cryptocurrency like Ethereum (ETH) has properties of Turing-completeness and the Ethereum ecosystem allows developers to write their own smart contracts (called autonomous agents).

The facilitation of smart contracts will be an important marker in a cryptocurrencies potential growth trajectory. The potential proliferation of blockchain-derived smart contracts calls into question Bitcoin’s longevity.