I’ve loosely followed cryptocurrency for almost a decade. In 2011, I briefly mined Bitcoin (and Litecoin, when it became clear that GPU mining BTC was unlikely to net me much of a reward) from my college dorm room. Bitcoin’s proof-of-work algorithm to create a trustless ledger was a true innovation in decentralized systems, and Ethereum’s expansion of it into a general compute platform was another giant leap. But looking at the state of the world right now, neither seems poised for the level of success that is evangelized.
I am bullish on cryptocurrency in general. Our existing monetary system already operates on a digital ledger, and reducing institutional trust is a good thing. Moving money and tracking ownership is too important to leave in the custody of private institutions that have a long history of looking out for number one. Yet both Bitcoin and Ethereum strike me as being an imperfect fit for mainstream financial products. Some problems I see:
- Block discovery is too long to be used for payments.
- High volatility limits use as a method of payment.
- Smart contracts are too unreliable for institutions.
These problems are substantial hurdles that Bitcoin and Ethereum will have to face in the coming years.
I’m going to assume the reader is familiar with how cryptocurrencies operate, at least at a high level. The YouTube channel 3Brown1Blue has a fantastic explanation of the proof-of-work algorithm, and Coinbase has decent simple explanations of common cryptocurrencies and related topics.
Long block discovery
Bitcoin has notoriously long transaction times, taking up to an hour to fully settle on the network. This isn’t an inherent property of Bitcoin. The core developers have chosen to keep block discovery times averaging about 10 minutes and the amount of data per block low, which limit transaction latency and throughput respectively. Because proof-of-work requires several blocks to be found before a transaction settles, the transaction time is a multiple of Bitcoin’s 10-minute block time. Ethereum’s block…