Taking the Next Steps
The last 12 months have been a turbulent period in the realm of the blockchain. Ever since the values of most significant cryptocurrencies skyrocketed in fall of 2017, the mainstream world has begun to take more note of crypto and blockchain. While most mainstream analysts and commentators have an imperfect understanding at best, slowly but surely traditional industries and markets are waking up to the potential blockchain technology can offer.
Most of the headlines focus on a combination of day-to-day value rises and falls of cryptocurrency giants like Bitcoin, partnerships between blockchain-based developers and traditional businesses, and the starts and stops as governments attempt to devise a regulatory stance on cryptocurrencies. Far more significant to the future of blockchain is the work going on behind the scenes to chart a course for the future of crypto and blockchain-based solutions.
The bottom line is that the current generation of cryptocurrencies and blockchain solutions are promising but deeply flawed. It’s probably accurate to say that we’re in a state where the current offerings are enough to show us what could be, while frustrating us with what isn’t.
The world of crypto is currently wrangling with a number of issues and significant choices which are likely to be resolved in the next couple of years at the latest. If developers are able to surmount these challenges, blockchain-based solutions are poised to transform finance, a host of industries and even the way we interact with each other politically and socially.
For this to happen, the following hurdles will need to be cleared.
Scope and Transaction Speed
One thing that’s simply undeniable is that the early days of cryptocurrencies cannot match the transaction speed that more traditional financial institutions are able to offer. Credit card companies like Visa are able to process tens of thousands of transactions per second, while Paypal can process hundreds. [3]
Meanwhile, default Bitcoin is able to process from three to seven transactions per second, with cryptocurrencies like Ethereum and Litecoin reaching the low double digits. As long as cryptocurrencies operate so slowly in comparison to traditional financial providers, there’s a clear disincentive toward using them. [1, 3]
The good news is that crypto developers have recognized this problem and have already been able to make inroads toward solving it. Out of the established cryptocurrencies, Ripple is the clear favorite in this regard, boasting at least 1,500 transactions per second. Ripple has a number of downsides and aspects that make it less than ideal overall, but it’s evidence of a blockchain-based financial solution able to play on a somewhat level playing field in comparison with the established financial powers. [3]
Bitcoin and Ethereum have rolled out or are developing applications to increase speeds dramatically in the Lightning Network and Raiden, respectively. While these solutions can be seen as less fundamental fixes and more as band-aids, they dramatically speed up transaction processing. What makes these developments encouraging is that it shows the blockchain industry reacting quickly to address problems.
It’s easy to lose sight of how new these technologies are, and how raw they are in comparison to polished, mature paradigms like the traditional financial industry. [1]
Perhaps most exciting, a number of new blockchain-based solutions are being developed with alternate methods to achieve incredible ease of transaction processing. Notable is Hashgraph, an algorithm very similar to the standard blockchain model but with a few tweaks that allow for transactions to be both incredibly fast and incredibly cheap. [2]
Right now, cryptocurrencies are somewhat laborious when it comes to transaction processing. When the blockchain development collective solves this problem, it will open up new vistas when it comes to how crypto can integrate into the financial world and the world at large.
Interoperability
Another ugly truth about the current state of cryptocurrencies is that it’s not particularly easy or convenient to change fiat currency for cryptocurrencies or one crypto for another. The primary means by which to do so are exchanges, and the process involves relatively high fees and a number of limitations. [7]
In fact, it’s sometimes necessary to use multiple different exchanges to go from one type of coin or currency and another. Plainly, this is less than ideal. What makes it even worse is considering blockchain-based applications venturing beyond the strict bounds of the financial industry. One of the exciting things about blockchain is the breadth of its possible applications. But in the end, for blockchain to achieve that ubiquity, communication between blockchains will need to happen. [6, 7]
Again, promising news is on the horizon — Blockchain developers have recognized the problem of interoperability and are hard at work developing solutions. The smart contract concept and several related frameworks are opening up new doors when it comes to blockchains communicating with one another.
Networks like Cosmos, Polkadot and Plasma are already tackling this issue. And even more ambitious projects aimed at creating a universal login framework for operating in the realm of blockchain are in the works. [6]
Right now, most cryptocurrencies and blockchain-based applications are islands, and it’s largely up to users to navigate from island to island. This once again limits how many people are willing to adopt crypto, as well as the realistic number of present applications.
The irony is that the promise of a decentralized ledger is removing the middleman or gatekeeper from transactions. And yet in its current form, using crypto still often requires using middlemen like exchanges. The next step, and a crucial one, is further chopping away at those gatekeepers to allow for freer and easier exchange and communication throughout the world of blockchain.
Proof of Work vs. Proof of Stake
Proof of work is at the heart of Bitcoin and most of the other first generation cryptocurrencies. Very briefly, it’s the process by which miners solve complex calculations in order to verify the blockchain as it’s created. This process is deliberately extremely processing intensive, and it’s problematic in a few respects.
First of all, crypto naysayers project a point at which a blockchain fueled by proof of work may become vulnerable to attack by a malicious actor. Essentially, as the cost of mining cryptocurrency rises and the reward decreases, fewer miners will be motivated to continue mining. At this point, it becomes theoretically possible for a single actor (or coordinated mining pool) to take control of the blockchain.
The second main objection to proof of work centers not on the way the algorithm works, but on its impact on our world. Proof of work is aptly named: It requires a lot of work to succeed. This boils down to energy usage. And Bitcoin and other cryptocurrencies are currently consuming tremendous amounts of energy, with projections calling for even more energy use in the near future. At a certain point, critics say, proof of work is wasteful and even harmful to the world around us. [4]
Yet a third time, there’s good news in this regard. Blockchain innovators are working toward perfecting an alternate method of verifying blockchain ledgers. This method is known as proof of stake, and it substitutes ownership of the cryptocurrency for processing power. Instead of rewarding miners for the amount of processing power they output, the reward goes to ‘forgers’ according to what percentage stake of the crypto they possess.
This method happens to largely solve both of the major issues raised against proof of work. It’s far less processor-intensive than proof of work. And it’s not vulnerable to a late-stage attack in the way that a proof of work blockchain algorithm is. [4, 5]
Ethereum is already moving toward proof of stake, and as the second largest cryptocurrency in existence, its decision will reverberate throughout the industry. Proof of work as a pure system of verification is too inefficient and wasteful to be the best possible solution, and the blockchain world is innovating away from it. [5]
The Crypto of the Future
It’s possible to envision the blockchain world as it will look in the next decade or so. Where now transaction speeds lag, they’ll zoom. Where now blockchains are isolated and laborious to traverse, they’ll be seamlessly integrated. Where now untold kilowatts of energy are expended, that figure will be slashed by orders of magnitude.
Crypto in the future will be quick, easy and efficient. No longer the domain of tech wonks and enthusiasts, blockchain-based applications and solutions will find a home in the mainstream, and stretch throughout nearly every industry imaginable.
The only thing standing in the way of this vision of the future are a handful of practical problems. We’re seeing the world of blockchain begin to take steps toward finding its solutions.
[1] — Big transaction fees are a problem for bitcoin — but there could be a solution, Ryan Browne https://www.cnbc.com/2017/12/19/big-transactions-fees-are-a-problem-for-bitcoin.html
[2] — Hashgraph wants to give you the benefits of blockchain without the limitations, Samantha Stein https://techcrunch.com/2018/03/13/hashgraph-wants-to-give-you-the-benefits-of-blockchain-without-the-limitations/
[3] — Understanding Cryptocurrency Transaction Speeds, Daniel O’Keeffe https://medium.com/coinmonks/understanding-cryptocurrency-transaction-speeds-f9731fd93cb3
[4] — What is Proof of Stake? Shann Ray https://hackernoon.com/what-is-proof-of-stake-8e0433018256
[5] — Proof of Stake FAQs, Dave Hoover https://github.com/ethereum/wiki/wiki/Proof-of-Stake-FAQs#what-are-the-benefits-of-proof-of-stake-as-opposed-to-proof-of-work
[6] — Polkadot’s Plan for Governing a Blockchain of Blockchains, Rachel Rose O’Leary https://www.coindesk.com/polkadots-radical-plan-governing-blockchain-blockchains/
[7] — Cryptocurrencies Have an Everything Problem — John Biggs — https://techcrunch.com/2017/12/20/cryptocurrencies-have-an-everything-problem/
