The reality is that, as is the case in all financial markets, the cryptocurrency market burgeoned, over-extended, and then corrected itself.
The current media narrative has been that cryptocurrencies and blockchain are at the end of their lines. They are dying with no hope of resurrection. Yet it might be too soon to pronounce such an ominous end, as evidence in the development of the technology suggests that a cryptocurrency resurrection is impending.
The narrative is therefore much farther from the reality than people believe, based on what has been generally expressed in the media.
The reality is that, as is the case in all financial markets, the cryptocurrency market burgeoned, over-extended, and then corrected itself.
The current decline in the market, therefore, does not spell death. Far from it. What is actually occurring is that a war is brewing in the space of cryptocurrencies, one that might be termed protocol wars.
The concept “protocol” has been used interchangeably with the term “enterprise platform.” Such platforms as Neo, for instance, have recently been allowing players to use smart contracts or to construct decentralized applications that require no mediation of a central authority. The question has arisen whether such platforms as these will exist alongside or even replace (i.e. kill) Ethereum.
Rather than being nails in Ethereum’s coffin — or even spelling death for cryptocurrencies in general — these and other innovations indicate favorable omens for blockchain. They indicate that blockchain’s myriad issues, which have long since prevented enterprises from widely adopting the technology, are on the way to being addressed. Currently, there exist not merely a handful but an entire range of protocols vying for primacy. They each aim at similar objectives, but they approach these objectives using different philosophies, features, and varying levels of scalability, sustainability, etc.
A Bit of History
As the reader might be aware, blockchain’s first wave of use cases supported at its outset the currency Bitcoin, which itself supported P2P transactions between two users in a decentralized manner, and with the addition of no third party. The transactions were publicly processed and tracked on a distributed and trustless ledger. This was in itself a simple but revolutionary concept made tangible for financial use, but whose more general usefulness soon became apparent.
These new possibilities constitute the second wave (or generation) of blockchain. One use case would be the capability the technology offers regarding building apps (decentralized apps or short dapps) that are P2P, but with no central authority involved. Ride-sharing apps, for instance, akin to Uber would be an example, but blockchain would make it better since it could eliminate the middleman (Uber) altogether and make the transaction more profitable for the peer users. Another example might be to enable the use of smart contracts, agreements that utilize blockchain as a method of holding funds or other assets in escrow.
Breaking the Barriers
The barriers to blockchain adoption by enterprises have included issues with scalability, governance, sustainability, consensus, interoperability, security, and ease of use. The following are an explanation of these and related issues, as well as a look at current innovations that have the potential to correct them.
- Scalability — Bitcoin completed three to five transactions per second (TPS); Ethereum has been able to complete double-digit transactions per second. The general assessment has been that no enterprise will be able to find it beneficial to build on this as is. Transactions per second, as a measure of the blockchain’s viability, is also an integral part of its scalability, and while growth in TPS has been logarithmic — that is, it slows as the process of development progresses — today we’re seeing various protocols making large strides with respect to TPS. From three-to-five transactions per second, we’re now seeing gains in the hundred-thousands to millions of transactions per second. An example is Hedera Hashgraph.
- Sustainability — If blockchain technology is to undergird thousands or even hundreds of enterprises, the system needs to be durable. This requires:
- A Treasury System — One that supports the chain’s ability to continue attracting capital.
- A Workable System of Governance — This is a significant issue that must be resolved if any large enterprise is to succeed Ethereum in adopting blockchain technology. Bitcoin’s model via which the miners had the decision-making power can result in stagnation and division among community members. With Ethereum’s model, developments are still sluggish and problems have led to such decisions as rolling back the chain — a decision that flies in the face of one of the foundations of blockchain, its immutable ledger.
- Consensus — Questions arise regarding who is empowered make the important decisions about the currency. The following methods have been either in existence or are new developments that will advance the development of consensus and governance for cryptocurrencies.
- The Proof-of-Work mechanism defers the ability of an individual to perform a transaction on the blockchain until s/he has verified a certain number of transactions. This method has proven to been very secure, but has generated such questions as whether the method can handle large transactions.
- Proof of Stake — The higher the weight of a player’s stake, the larger is that player’s capacity to acquire minership for the next block.
- Delegated Proof of Stake: This is a method of delegating individuals who are able to vote based on the fact that the size of their stakeholdership assures that they will derive a financial benefit from acting in the best interest of the currency. This method is used by eos.
- Proof of Authority — A system that plays out on a private chain and allows the delegation of voting rights to trusted individuals who can be identified.
- Proof of Weight — This method is based not on the number of coins held by the individual, but the amount of information stored on the system. This amount, if large, places a burden or weight upon that player to ensure the chain’s endurance.
- Interoperability — This reflects the ability to communicate between different types of blockchain, so that each can utilize the strengths of the other. This had not yet been a very fruitful area of innovation, until now. Today, such projects as Quant, with solutions such as overledgers, interledgers, and hyperledgers, have been successfully attempting to allow communication between various blockchains.
- ABFT-security (Asynchronous Byzantine Fault Tolerance) — Cryptocurrencies have no absolute guarantee of transaction security, though the supporting technology comes very close. That is, consensus on blockchain isn’t truly at 100%. Current innovations have been attempting to solve this problem — as well as related problems that exist regarding the publicity of the ledger: it is understandable, for instance, that certain enterprises might not want to adopt blockchain technology, as they do not desire to have their transactions be publicly stored. Platforms such as zk-SNARKs have developed methods to correct these issues.
- Ease of Use — Problems associated with ease of use also require attention, as it is now very difficult and expensive to find developers able to build systems for enterprises desirous of utilizing blockchain. Going rates for solidity developers are somewhere in the vicinity of $250,000 USD per build. This is cost-prohibitive to many enterprises. Systems that make it easy to enable enterprise adoption, such as the modular blockchain infrastructure design accomplished by Nuls and UniBrite, have been addressing the problem. Such SaaS offerings have also been taking into consideration the idea of blockchain agnosticism, so that it will be easier for enterprises to switch blockchain platforms if necessary.
- Innovation through Consensus Algorithms — This concept again reiterates the importance to blockchain of a “trustless” system, one in which no requirement exists that any participant place trust in another, as no one has the ability to hide anything on the public, distributed ledger. This lack of trust requires absolute consensus.
- Directed Acyclic Graphs (DAGS) — Examples of alternatives or newer generations of blockchain are IOTA and nano lattices. These have been able to process transactions much more efficiently, without hefty fees, and almost instantly. They also eliminate problems with double-spending. However, issues with consistency regarding transaction output exist, as well as the need to guard against (or correct for) the fluctuation of transaction speeds.
Unfair Market Reflection of these Favourable Developments
The financial market has not been reflecting the many innovations that have been occurring in the blockchain world, so the cryptomarket is at a low. However, it is arguable that what the current state of the technology really reflects is a calm before an expected frenzy of blockchain adoption by many corporations, who were really only waiting for a layer of convenience to be added to the platform.
With respect to regulations, too, “banks are in a Catch-22.”
They can either regulate the cryptocurrency industry, since they cannot close it down. Or, since the financial markets are now at a high and people expect a burst in the bubble, banks have the option to endorse and even adopt cryptocurrencies, so that people or institutions desirous of having a place to funnel that money will have somewhere to direct it. One example that gives evidence of this shift in mindset occurred when the SEC chairman called for the industry to respect the right of the current generation to have its cryptocurrencies — doing so (ironically) only after Bitcoin’s value had gone down by 70%. We might therefore soon see a resurgence of Bitcoin as an ETF (exchange-traded fund), if only as a place for institutional money to go.
What this amounts to is that we currently have a “$600 billion discount” based on the current valuations of the market. The headlines lack optimism regarding the future of blockchain, but the current underlying developments tell otherwise. The question now arises whether you will choose to heed the naysaying media or trust rationality to guide you toward the more financially rewarding alternative.
