Why One Bitcoin Developer Thinks Cryptocurrencies Have A Dreadful Future
Peter Todd, a contributor to bitcoin’s open source code, has been very vocal about his opinions — and they aren’t good for digital currencies.
Peter Todd is a 30-year old developer who contributes to bitcoin’s source code on a regular basis.
As a result, he has a done a lot of thinking about the future of bitcoin.
The ZapChain community recently had the opportunity to ask Todd pressing questions about bitcoin’s long term future. Here’s what he said.
The Powers-That-Be Say Bitcoin Must Change
Todd believes that government intervention in the bitcoin industry is simply inevitable.
“I think there’s a really high chance that we see a lot more government action against bitcoin, including the core protocol.”
This doesn’t just come from a premonition; Todd says he has been talking with regulators about this particular subject.
“I keep talking to regulators at conferences who believe bitcoin simply must change to bring it in line with other payment systems; unfortunately this means adding identity information to bitcoin transactions and making it possible to blacklist funds.”
It’s Hard to Raise Money in Bitcoin
Despite the money invested in bitcoin startups is increasing, Todd thinks investors expect revenue from early stage cryptocurrency companies. This could potentially create an environment that is difficult to properly raise money.
“First of all, in general I think a big problem we’ve had in the cryptocurrency space is that only ideas that can be monetized easily get funded.”
Ripple Labs, a bitcoin alternative that has raised over $9 million from investors such as Google Ventures, Andressen Horowitz and IDG Capital Partners, is an example Todd uses.
“For instance, Ripple had to make enormous compromises to the security and stability of the system to introduce the XCP token, which is completely unnecessary to implement the original Ripple concept; right now Ripple is essentially a centrally managed system because of it.”
The Biggest Threat to Mining is Government
As powerful as many feel the decentralized nature of mining is, Todd is convinced that governments will find creative ways to stop bitcoin miners if they really wanted to.
“The most fundamental way is for[governments] to regulate ASIC manufacturing, e.g. by forcing [manufacturers] to add ‘kill switches’ to the hardware, and/or require end-users to have licenses.”
The influence that governments have over massive technology hardware companies is why there is a chance this could happen.
“There’s only a tiny number of companies in the world that are capable of building performance/cost competitive ASICs, basically the likes of Intel, ASMC, GlobalFoundries, etc.”
Bitcoin’s Alternatives Are Pretty Boring
Because the financial technology (fintech) industry is so lucrative, a number of startups are trying to create bitcoin-like alternatives that might be more palatable for the traditional banking industry, and Todd cited two projects in this vein.
“Eris and Hyperledger are perfectly good technologies, albeit a bit boring. They’re basically just better accounting software that uses cryptography to guarantee the consistency of the accounts.”
The problem is that if these newer supposed improvements upon what become successful, that might not bode well for bitcoin.
“The worry for Bitcoin is that when it does catch on you’ll have alternatives that for law abiding companies are at least every bit as good as Bitcoin; probably better.”
Bitcoin is Not a Magical Remittance Solution
Remittances in bitcoin are a tough business. A lot of projects are trying to crack the secret to this, although Todd thinks remittances are not going to be as easy as some people think .
“Will Bitcoin compete with remittances against regulated institutions? Only in the sense that you’ll force them to lower their rent-seeking prices — like Uber this is a case of regulatory arbitrage.”
Nevertheless, remittance providers like Western Union are paying close attention to bitcoin, and this will likely spur innovation in the remittances marketplace.
“I think a key thing to understand with bitcoin for remittances is that bitcoin doesn’t magically make the remittance problems go away, but it does make it much easier to outsource them to get cheap solutions to those problems.”
The Bitcoin Foundation Is Too Scandalous
Founded in 2011, the Bitcoin Foundation’s initial goal was to provide advocacy to the cryptocurrency, and that’s something Todd agrees is needed within the industry today.
“The Bitcoin Foundation had the potential to be a good force for political advocacy; participating in politics is something where a well-known central institution is really valuable.”
Nevertheless, Todd believes the Foundation has too many internal problems for it to ever become a useful pillar for the bitcoin ecosystem to rely upon.
“I actually left the Foundation in response to them pivoting to focus on development rather than politics, although in hindsight I now realize that they’ve sullied their name too much with the scandals of board members to do politics effectively.”
It’s Still Unknown How Bitcoin Will Scale
On the subject of the Bitcoin Foundation, Todd is ardently against the idea of it advocating for technical changes in the protocol itself.
“What I think is a highly negative thing for the Foundation to be involved with is making fundamental changes to the bitcoin protocol.”
One thing that he sees as alarming specifically is Bitcoin Foundation Chief Scientist Gavin Andresen’s scalability work because of its lack of academic rigor.
“It hasn’t been research based — Andresen doesn’t participate in any of the academic research on how to scale Bitcoin, nor have his [analysis] to date been done to anywhere near the rigor required to be a part of that.”
Bitcoin Companies Are Penalized For Double Spending
Prior to confirmation (which takes many minutes) bitcoin transactions are at risk of double spending.
“A big problem we have is that people who lose money due to double-spends are rarely [incentivized] to admit it.
This means a fraudulent person could spend the same amount of bitcoin more than once — a huge problem for some bitcoin companies, according to Todd.
“Coinbase for instance appears to be contractually obliged to accept 0-conf payments, something they apparently struggle to do successfully.”
Ethereum Is More Like A School Project
Ethereum is a earnest effort to create a better bitcoin, one that is highly programmatic, making it much more dynamic. Todd has his reservations about the project, however.
“They have very smart people on the team, but they aren’t focused at all. What they’re doing looks more like a research project than an serious effort to actually solve a real consumer problem.”
The Ethereum project has good intentions. Many developers, including Todd, think more commercialized ventures will supercede Ethereum in the future.
“I expect to see them produce some good ideas, but ultimately be out competed by simpler systems incorporating those ideas.”
Confirmation Times Cannot Be Lowered
Bitcoin block confirmations generally take about ten minutes. That’s often longer than is possible to wait for a transaction to clear. However, Todd says it is not feasible for bitcoin’s code to be adjusted to make confirmations quicker.
“Confirmation time is security parameter; lowering it makes the system fundamentally less secure for a lot of reasons, including giving an advantage to large, centralised pools.”
While decentralized systems like bitcoin remove the need for trust in a third party, they are usually not as fast as centralized ones. Todd believes the solution for this is to build off of bitcoin technology in order to entice consumer adoption.
“We just can’t lower it enough to the point where it’s competitive with centralised systems and acceptable for retail — a second or two at most — so we’re better off accepting that and building systems on top of Bitcoin instead.”
Bitcoin Has Massive Political Ramifications
It’s easy to forget that bitcoin was thrust upon the masses because of the economic collapse in 2008, and Todd offered a prescient reminder of that.
“Bitcoin is a technological system that only works because of clever economics and politics, and has a very political purpose.”
Because of the concern for centralized systems and the governments that control them, proof of work emerged as a way (through bitcoin) for people to bank themselves. Even so, that may not be the best possible solution.
“If not for politics you wouldn’t need to be using something as convoluted as proof-of-work consensus — a trusted quorum of servers is way simpler and more efficient.”