As we approach the ten year anniversary of the first cryptocurrency, one thing is clear… Cryptocurrencies are here to stay. Many of the earliest concerns with the first generation cryptocurrencies are being ironed out, some of which stem from the illiquidity of many coins. However, despite its hiccups, the cryptocurrencies of the future look to offer enormous economic benefits and social change.
The End of Mining — New Consensus Mechanisms
One of the major concerns looming over the cryptocurrency industry is the energy cost associated with Proof-of-Work (PoW) based cryptocurrencies. Approximately 906KWh of electricity are consumed per Bitcoin transaction, costing approximately $109 per transaction. This has lead to China banning cryptocurrency mining (Chinese source), with calls for the same in several other countries, including the US, Vietnam and Russia.
Because of the extreme energy wastage associated with cryptocurrency mining, several next generation projects have begun to move away from the energy intensive POW consensus, to Proof-of-Stake (PoS). Unlike POW that uses computational work to establish new blocks, PoS instead requires node holders to stake X amount of collateral (usually a huge amount) in order to generate a new block. This protects against 51% attacks by instead requiring the attacker to gain 51% of the available coin supply (no easy task), whilst ensuring decentralization by limiting the collateral size per node, e.g. 1000 DASH or 10,000 PIVX.
However, there are a number of cryptocurrencies that look to take it even further by producing consensus mechanisms that can secure the blockchain, without any computational burden or collateral requirement. One such example is TAUcoin, a novel pure cryptocurrency that instead uses historical transactions to secure the blockchain using its entirely original Proof-of-Transaction consensus (PoT) mechanism. Unlike older consensus mechanisms, Proof-of-Transaction does not require wasted effort, instead securing the blockchain with the most basic economic attribute — The velocity of money.
Fair, Egalitarian Cryptocurrencies
Let’s face it, most modern cryptocurrencies are not fair. If you didn’t invest in the early days, then you are likely at a stark disadvantage due to the technological arms race of the current mining scene.
Initially, cryptocurrency mining was said to be ‘egalitarian’ — ensuring that everybody had equal access to the rewards gained from mining. However, times have changed quite dramatically, with the introduction of ASIC miners and the subsequent deterioration in market conditions, only the extraordinarily wealthy (or geographically fortunate) can benefit from mining due to the high setup costs required to generate a return on investment.
However, the fair distribution of wealth comes with its own set of challenges — namely how to attract users in a market dominated by speculative traders.
Whatever the coin, we tend to find that either the oldest hands in the game, or the most wealthy users eventually make their way to whale status.
Despite this, several cryptocurrencies have appeared that attempt to make the distribution of coins a truly fair process, rather than favoring the early adopters and largest coin holders (ergo PoS). As an example, we again point to TAUcoin, a cryptocurrency that rewards users for actively transacting, rather than holding a large pot of coins (such as PoS) or exorbitant amounts of mining power (PoW). TAUcoin is built on the philosophy that the speculative nature of many cryptocurrencies contradicts their intended use as a digital money system. To combat this, TAUcoin distributes TAU freely via its bounty program, whilst rewarding those who actively use the network for everyday transactions.
Utility and Simplicity
Of the major issues with cryptocurrency, one of the ones most frequently discussed is the scaling problem. As of yet, no cryptocurrency has demonstrated the real-world capability to compete with VISA on a transaction-per-second (TPS) basis. As it stands, the absolute throughout of the major blockchains is limited to just a dozen or so transactions per second, far below the ~2,000 TPS VISA typically operates at.
In order to address this, several solutions have been been proposed, including Bitcoin’s lightning network, Ethereum’s Raiden network and several specialised high-throughput coins such as Zilliqa, EOS and Quarkchain. However, to-date, cryptocurrencies are leagues behind VISA in this regard. Despite this, one of the most promising solutions to the scaling issue are blockchain side chains.
Side chains are a fairly recent innovation that allow the interoperability of assets across a parent blockchain and its an accessory chain known as a side chain. This allows blockchains to borrow the strengths of their side chains, without requiring significant changes to their core protocols.
Besides scaling, side chains also enable a multiplicity of other features that are not possible using the main chain alone, such as allowing interoperability with other blockchains, or adding smart-contract and dApp functionality to ‘pure’ cryptocurrencies such as Bitcoin and TAUcoin.
We also expect to see widespread using of ANS (Address-Name-Service), a feature that allows cryptocurrency wallet users to set custom usernames, rather than using the long, and complicated wallet addresses common today. It is likely that the introduction of ANS and side chains into the more established blockchains will open the technology to a great number of applications and users.