The power of permissionless distributed ledger technology (DLT) goes far beyond cryptocurrencies.
What started 10 years ago with Bitcoin was like the big bang of the DLT space - the birth of the blockchain. For many years the applications based on blockchain were limited to a pure digital means of payment, a cryptocurrency with great vision giving everyone access to the financial system in a self-sovereign fashion.
The space started to expand with Ethereum in 2013 introducing smart contracts and decentralized apps. All kind of use-cases started to pop-up daily in 2017 with new tokens being created for raising funds or just to scam people. The lack of regulations allowed to collect millions in hours without having anything provable or someone accountable - Crypto in its wild west days.
Nonetheless, the full potential of blockchain has become visible with disruptive implications:
- Decentralized system with a distributed ledger
- Tamper-proof records and trustless settlement
- Fast exchange with low costs
- Cutting out intermediaries through peer-to-peer communication
- Empowering users with their finances and data (privacy)
At this time we are at the very beginning of this journey as we can see with the market leader Bitcoin. While decentralization is always a hot topic with different approaches, there is a general problem with the global hashrate leading back into centralization. If three mining pools in china control more than 51% of the Bitcoin blockchain, then we can no longer speak of decentralization, failing the initial purpose of Bitcoin (as Satoshi said: One vote per CPU and not one giant conglomerate controlling the chain). In fact, the whole crypto space is relying on a handful individuals and proof-of-work as the de-facto leading consensus, which is a dead-end in many ways. In the coming years we will certainly see a variety of new approaches facing this issue. Proof-of-stake is one of them with a lot of variants and governmental models.
Although blockchain based cryptocurrencies started out with seemingly great superiority over traditional financial systems (free, decentralized, many times faster and with small fees), they are already struggling in early adoption days with scaling issues and rising transaction fees. For example, Bitcoin fees peaked at around $ 55 in December 2017 and Ethereum fees at around $ 4.1 during the last bull run. The leading blockchains quickly hit their limits.
If we face the truth, we have to admit it was just hype and speculation on the future outcome. Coins and tokens were mostly send around exchanges. We still haven’t seen any major adoption in the real world up to now. And we are far away from any usage on wider scale when blockchains can’t handle thousands of transactions without falling into centralization.
What I am thinking about especially is that fees and miners, even with a successful scaling of a blockchain, will be a major disadvantage over the next generation of DLT and for which I can not see any solution, because it is the essence of blockchains.
We are in a transition phase between our traditional intermediaries and true peer-to-peer transactions with no middleman at all, unless we want to choose a third-party for managing our finances.
Miners are still middlemen, but partitially converted into software code. They do what all intermediaries do - charge fees for their services. Of course this is how consensus on blockchain works (right now) and how it maintains security. But they are still between me and you, if I try to send you a coin. Through this consideration, they correspond to our old economy of intermediaries. It is still a big advancement regarding trust and efficiency. But at this threshold it is only a bridge to the real future economy that I see upon us.
Let’s put all the technical challenges aside and suppose the successful scaling of blockchains will come in the future where it can compete with Visa or Mastercard (about 2.000 transactions per second) and suppose that these transaction rates will not be achieved by highly centralizing a blockchain. Finally, suppose that transaction fees will be around at some pennys — Then there will be still a huge amount of summarized fees paid to miners/hubs day by day, making them richer. This does not sound like a revolution to me, it’s the old system continuing in a new guise.
Why blockchain based cryptocurrencies struggle to free the poor people
One will argue that fees are the incentive for mining and securing the blockchain and for us in the western countries, paying some small fees doesn’t hurt much. But does this count for the rest of the world?
From the slightly red down into deep red, the average annual income of the countries listed below is less than $ 10.000. That’s about 83 % of world’s population. And not to forget: That’s the average including the rich, means there are people with far less money for everyday life.
To make this picture of our income ratios even clearer, below are the poorest countries of our world:
People who were previously excluded from the financial world, or just unable to participate due their low income, can now manage their money independently on the blockchain. But it does not take much to see what economic damage fees are causing when every penny matters.
Is this the price of financial self-sovereignty?
Do blockchain enabled finances really work out if people have to work all day to pay the fee for a single transaction (Madagascar $ 1 median daily income)? How many transactions usually occur during the month? For these people, cryptocurrencies will never be accessible through the blockchain fee model. And the system, the gap between poor and rich, remains intact. How can a cryptocurrency based on such a model become a global world currency?
Beyond blockchain
What if there is a cryptocurrency that essentially contains all the properties of a blockchain, but requires no transaction fees? With no miners, no blocks while being highly scalable and environmentally friendly?
As technological innovation never stops, the blockchain as the first DLT will not be the end of the progress. We will see a lot more of smart ledgers evolving.
A new generation of DLT based on a Directed Acyclic Graph (DAG) allows to eliminate miners and fees, still providing all the great aspects of a blockchain. The NANO protocol as a pure cryptocurrency is a great example, nonetheless my focus is to provide a wider scope of a DLT and therefore I choose the IOTA protocol:
It’s a radically new design. Help others (by validating two previous tx) and others will help you (by confirming your tx). This sounds more like a healthy environment than on a blockchain with conflicts and competition. It literally removes the bottlenecks and scales with growing network activity, theoretically up to the speed of light.
The crucial part about IOTA is:
- You can send pure data, zero-value transactions on the network without the need of moving a token — feeless
- You can open encrypted channels of continuous data-streams (public or private)
- You need to make a payment or want to get paid for your data? The token is already there. No need for external coins. It does whatever any other coin is doing — moving value
- Everything on the same core level of the protocol: Permissionless, decentralized (after Coordicide), tamper-proof, highly scalable and quantum-secure
The IOTA Foundation (non-profit) has a lot in the pipeline. The IOTA tangle serves as the messaging and payment system for the real innovation: With the Qubic project on top of the network you can sell your computitional power (and many more like smart contracts and oracles), thus ultimately incentivizing running nodes. It does not matter who has the most power, you can even use an old computer which will become part of a distributed global supercomputer solving useful tasks. Everyone can participate and generate passive income. You can build whatever you want on top of the protocol. Open for everyone, feeless and environmentally friendly.
The future is smart
What already happens today and will intensify in the near future, is that data from the innumerable sensors, devices and different networks surrounding us is being collected and analyzed, enabling deep learning and the rise of artificial intelligence (Data is the new oil). A machine economy is emerging, which will lead us into autonomous driving and smart cities (and more — check link). Our everyday life will change radically, just as it once changed with the internet.
The world needs a protocol that enables a machine economy and forwards the internet of things (IoT). Permissionless, decentralized, secure and scalable.
The protocol which enables daily billions of free, encrypted data and value streams (true micro-payments are a necessity) in the machine economy will become a global industrial IoT standard and thus, bringing its token to a worldwide adoption. This protocol will be brought by the leading tech giants itself to our everyday life with such a wealth of use-cases and benefits, thereby adding value to the token itself and turning it into an established cryptocurrency of the machine economy:
Digital gold
To make that clearer, imagine that machines will do many times more transactions than we humans do. We will inevitably communicate with machines and vice versa.
It gets quite obvious why a machine economy will never play out on a fee model. Devices need to send data streams continuously and free of any charge. Millions of transactions each minute would just blow off every blockchain instantaneously, leading to rising fees. Micro-transactions could never work.
I personally believe that there will be a few established protocols and flourishing ecosystems around it. Blockchains will certainly remain for a long time. But the protocols completely eliminating miners and fees will bring wealth to even the poorest people on the world. For this we need the industry to drive this adoption forward.
Of course this path is riddled with many challenges. We do not need tribalism in the crypto or DLT space. Projects with superior technology will make their progress regardless of the sentiment. Instead, look at it as a big ecosystem maturing to the critical point of mass adoption.
Let’s keep the bigger picture & goal in our mind.
Thanks for reading. Always do your own research!
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