The internet is awash with steamy debates over the future of Bitcoin and crypto-currencies. A Forbes article astutely summarizes the debate as “digital gold vs. digital cash.” I say the world needs both digital gold and digital cash – not necessarily implemented in one and the same system though.
A Forbes story titled “Is This Massive Power Struggle About To Blow Up Bitcoin?” provides good insight into the current debates in the Bitcoin sphere (hard forks, Bitcoin Unlimited and all that).
The Forbes story reports an astute observation attributed to Coinbase’s Adam White. “At the highest level, there are two camps that see bitcoin becoming two different things: digital gold or electronic cash,” says White. “Neither is right or wrong. They’re just different perspectives on what the network can become.”
The difference is simple. Digital gold is meant to sit in a highly secure digital vault for years, or even decades, until you can sell it at big profit. Digital cash is meant to be used daily for coffee and beer. These are two quite different perspectives indeed. According to Forbes writer Laura Shin, Bitcoin Core developers consider Bitcoin as digital gold, and Bitcoin Unlimited supporters consider it as digital cash.
Who’s right? Both, and neither. How do different perspectives translate into different design priorities? The main issue is scalability – the maximum throughput, measured in transactions per second, that the network can support.
Today’s Bitcoin network is abysmal in terms of scalability – it can support a few transactions per second, tops. From the point of view of a long term investor, that’s perfectly fine: the investor needs to make just two transactions in a lifetime, the first to buy bitcoin low, and the second to sell bitcoin high. Other requirements, such as watertight security, are much more important for long term investors.
Consumers and merchants who use crypto-currencies need scalable blockchain networks to buy and sell lots of coffee and beer every day. It’s worth noting that the top payment networks that exist today – the credit card networks such as Visa and MasterCard – support tens of thousands of transactions per second. That’s scalability for you, not Bitcoin’s seven transactions per second. Of course, in practice the Bitcoin blockchain is complemented by off-chain transaction layers, which provide a higher throughput but may compromise on decentralization and security.
Miners need scalability too. Profitable mining in the old default sense of creating bitcoin out of thin air being a thing of the past, today’s miners – and tomorrow’s miners for sure – need to rely on transaction fees. If there are transactions the miners get transaction fees, but if there are no transactions the miners don’t get transaction fees.
In-between the long term investors and the users/miners, there are the traders. They want to buy (or short) bitcoin today and sell (or buy cheaper) bitcoin tomorrow. The scalability requirements of traders are intermediate, but arguably closer to those of long term investors – unless the traders are Artificial Intelligences (AIs) running on supercomputers dedicated to light-speed High Frequency Trading (HTF), but that’s another story.
So how will cripto-currency networks evolve? In which direction?
My crystal ball isn’t better than others and, as Niels Bohr noted, prediction is very difficult, especially about the future. However, I’ll hazard a prediction based on Bob Heinlein’s immortal acronym:
Or in longer form:
“There ain’t no such thing as a free lunch.”
The engineer in me has learned – first in college and then at the School of Hard Knocks – that there ain’t no such thing as a free lunch indeed: design requirements tend to conflict – if you want the lunch, you have to give up the money.
I strongly suspect that the requirements of investors and users (or miners) can’t be reconciled in a single blockchain. But what’s wrong with two (or more) blockchains?
Bitcoin as-it-is seems a solid system, fit for the purpose of long term investors.
Other crypto platforms such as (for example) the blockchain technology developed by Symbiont claim to support tens of thousands of transactions per second, just like the top credit card networks.
I suspect this level of performance is just out of reach of any presently conceivable version of Bitcoin. If so, Bitcoin is likely to keep at least part of its currently dominant role as long term investment vehicle (digital gold), but be replaced by faster crypto-payment networks (digital cash).
Image credit: Sh4rp_i/Flickr.