I’m not worried about Bitcoin scalability, but I am losing sleep over Ethereum

With the recent surge in the Ethereum price (ETH reaching 30% of Bitcoin’s market cap at nearly $5 billion), I find myself reassessing a number of my conclusions, to the point where I’m wondering whether it could overtake Bitcoin as the dominant cryptocurrency at some point in the future.

Because of various network effects, I hold a cryptocurrency maximalist position, believing that one protocol will eventually win +80% of the market.

With that as a given, I currently have a binary view on the ecosystem: either Bitcoin will win, or Ethereum.

Here are my assumptions about the Ethereum (ETH) blockchain, compared to Bitcoin’s:

  • “Turing vulnerable”, i.e. has a much larger attack surface
  • Less backwards compatible
  • On track towards a more centralized future
  • Transaction finality is less certain
  • Its proposed proof-of-stake mining algorithm won’t be more efficient than proof-of-work
  • Will suffer more blockchain bloat than Bitcoin, leading to more risky design paths such as sharding.

Based on these assumptions, I had until recently projected a path forward where Bitcoin continues to dominate the cryptocurrency market.

However, the following observations give me pause:

  • Bitcoin faces a scaling bottleneck with no clear short term solution
  • Ethereum’s current on-chain tx fees are much lower than Bitcoin’s
  • Its great flexibility makes it attractive to developers
  • Several projects are making the transition to the Ethereum platform, or are creating applications for it: Brave, Storj, Shapeshift.
  • The NY Department of Financial Services (DFS) has given Coinbase official authorization to offer ETH to its customers.

I am still skeptical about the long term merit of the Ethereum blockchain as a store of value (and with that, of its long term staying power), but nonetheless I am seriously considering the following questions:

  • What if the current lull in attacks to the network can be maintained, or if the market comes to accept hard-fork interventionism?
  • What if the market majority wants a more centralized—governed—cryptocurrency?
  • What if Ethereum’s developer community is capitalizing on Bitcoin’s deadlock and is gaining enough momentum to take the upper hand?
  • What if Ethereum solves its scaling conundrum with payment channels? According to Raiden’s team lead, the software is getting close to launch.
  • What if ETH finds a way to make PoS work, and people buy into the good sounding narrative that PoW is more wasteful?
In short, what if Ethereum manages to become a good enough cryptocurrency and thereby wins this protocol war?

At the risk of making an all-too-simplistic comparison, Betamax had better picture quality than VHS. But VHS had a better marketing strategy (rental market), and had tapes that ran the length of a feature film, which was more in line with what the market wanted.

On the flip side, I see the following:

  • Bitcoin has a consistent track record of being an immutable ledger (ideal for long term value preservation), versus ETH’s interventionist history
  • Likely higher developer activity in Bitcoin vs Ethereum
  • Bitcoin has 100 core contributors, ETH has ???
  • Core dev Vlad Zamfir: Ethereum isn’t money, safe, or scalable
  • Legal concerns about ICOs and ETH/ETC launches, SEC fallout possible
  • Buterin’s & Zamfir’s approaches to scaling (Casper) seem to diverge
  • Problematic scaling future, e.g. “mathematical proof that it is impossible to determine the ‘true’ transaction history in a proof-of-stake blockchain without an additional source of trust”, sharding
  • Future inflation rate unknown
  • Uncertain fundamental value proposition over Bitcoin’s modular design

Bitcoin also has a few aces up its sleeve:

  • Segwit can be activated via UASF, circumventing miners and allowing immediate activation of alpha status lightning payments. (If that fails, Lightning can be implemented even without segwit.)
  • Rootstock could port Ethereum’s tech to Bitcoin.
  • Sidechains are close to production-ready, don’t need segwit and allow for unfettered experimentation with additional features. (In this way, anyone who just wants cheap extra block space can find it on a sidechain.)

If it is true that over time one cryptocurrency will overwhelmingly dominate as the basis for an ‘internet of property’, then a lot of capital is at stake when considering the question who is winning this protocol war, Bitcoin or Ethereum?

In that regard, here are some questions I’m hoping to find answers for:

  • What are the different challenges for implementing payment channels (lightning, raiden) on Bitcoin vs. on Ethereum?
  • What are today’s non-speculative ETH use cases? (What do people need ETH for?) And, related, what are some revenue generating ETH smart contract based businesses?
  • Are there ways to quantify the differences between Ethereum’s and Bitcoin’s security model?
  • What proxies do we have to assess the aggregate quantity and average quality of Bitcoin vs. Ethereum core development?
  • What are potential analogies with historical protocol wars?
  • What kind of security analysis has been done on blockchain bloat and sharding?

Thanks for reading, I’m eager to hear your thoughts and discuss.

I own BTC, I don’t own ETH (for the time being).