Without Further Innovation Cryptocurrency Scalability is at Risk

In 2008, an anonymous individual or group of individuals going by the name of Satoshi Nakamoto, created the concept of a “purely peer-to-peer version of electronic cash” that would allow payments to be sent between parties without going through a financial intermediary such as a bank. Using cryptography to power a consensus algorithm, such electronic cash could be recorded on a distributed ledger by a community of nodes and miners operating on the same network. The beauty of this system is that it negated the requirement of a single trusted entity to maintain the network, instead the work to append transactions to the ledger would be distributed to the community of nodes without the need for trust. From this point, the concept of a decentralized currency system was born, and the technology that powered it was called blockchain.

This new system of transferring electronic cash between parties revolutionized the industry. It created a new way for people to send money to each other, without paying exorbitant bank transaction fees, and waiting several days for funds to show up in the receiving party’s account. It was the first, low-cost, low latency method of moving currency without a financial intermediary. The technology behind this allowed entities to submit transactions into the blockchain without anything more than a destination address and their private key. Completely eliminated was the need to create an account and submit one’s personal information — it was the first way to send digital funds, in an anonymized manner. This obviously had far reaching implications in the transfer of money, and, as expected, the earliest adopters were those whom wished to purchase illicit goods and services, without having to provide any identifying information. Despite its use, these early adopters helped to prove the model and pave the way for wider scale adoption.

But life in the crypto world isn’t always without drama. In 2014 the FBI confiscated the Silk Road website and its assets, including bitcoin held in its accounts, and shortly thereafter the largest exchange in the world, Mt. Gox, imploded as a result of a mysterious hack. Still, the currency remained strong, as the demand for a fast, inexpensive, and anonymous way of sending funds across the globe was very high. 2017 marked a turning point in the world of cryptocurrency, where demand was no longer fueled by the requirement to transfer money, but by the Fear of Missing Out (FOMO) on a frenzy of speculative mania.

But behind the meteoric surge in popularity came a dark reality that few openly discussed — the potential for the modern cryptocurrency to fail in scaling with the unanticipated demand. In January of 2017, near the start of the year long cryptocurrency rally, the average bitcoin transaction cost was just $0.35 with a confirmation time of 12 minutes, about 20% more than the difficulty adjustment setting built into the protocol. By its peak, just a year later, the average confirmation time skyrocketed to over 5,400 minutes, at a cost of nearly $55 per transaction. Today the prices and times have settled, but if we learned one thing from the crypto boom, it’s that, the currencies meant to change the world by circumventing banking subsidiaries, ended up costing us drastically more, while taking an enormously longer period of time to settle. For the first time we understood that the technologies that promised to undermine banking, were woefully underbuilt to deliver on this mission, and the altruistic development teams that maintained the core client were so decentralized that they were unable to agree on a single solution to scalability. Bitcoin ended up being prohibitively slow to use in any real world scenario, and the dream of using it as an everyday currency quickly vanished.
Perhaps you may argue that these are problems with bitcoin alone, but for illustration sake, given identical time frames, Ethereum transaction fees jumped 830x to $4.15 per transaction, and more than doubled in block time to 30 seconds. If a cryptocurrency designed to usurp Bitcoin in cost, speed and utility suffered the same fate of it’s older brethren, than it’s safe to say that even the most brilliant minds are no match for the resources and infrastructure of a major credit card network, or even an online payments system like PayPal. The implications of the lack scalability mean lost time, lost capital, and perhaps, most importantly, lost potential as a daily currency. Therefore, it is has never been more important for the core development teams that maintain these networks to find solutions to scale the networks to handle the loads that rival the transactions per second (tps) of the major financial providers.

There’s light at the end of the tunnel — cryptocurrency is less than a decade old, and mainstream use is only a phenomena of the past nine months. The challenges experienced by the most widely recognized cryptocurrencies are ones that have been introduced in a relatively short period of time. The raw software engineering talent we possess in our modern time is incredible. Today we’re seeing off-chain scaling solutions that have demonstrated significant potential — allowing us faster transaction times while limiting use of the blockchain exclusively for settlement and finality. We are also seeing innovations in the consensus algorithms that power the network, with less computationally (and electricity) expensive and faster settling versions being implemented in newer cryptocurrency platforms. Even the infrastructure that powers our ecosystems are improving. Exchanges are as fast as they’ve ever been, serving high frequency trading algorithms, with lesser and lesser fees. They are also numerous and provide a wide array of currencies to trade. Wallet technology has evolved to allow us to store currency offline, air gapped and in “cold storage” from something as small as a USB drive. It is therefore critical that we continue to innovate and apply our combined ingenuity and resourcefulness to further the cryptocurrency ecosystem. Afterall, it was born out of decentralization, and without the motivations of a corporation that reports to shareholders, extra effort and unity is required to coordinate growth, where governance would have otherwise been provided by a single entity. Given enough time and motivation, all of the challenges posited in this article can be solved — indeed we are already seeing this happening today.

At Ternion, we welcome the challenge of innovation. We believe technological progress is shaped by those willing to accept the challenge. Our goal is to produce solutions that help positively impact our world, starting with a complete cryptocurrency ecosystem that builds upon payments and exchanges.