A centralized crypto isn’t necessarily a bad thing and a decentralized crypto isn’t necessarily good. Decentralization brings its own problems. Because Bitcoin and other cryptos are decentralized, there is no leader or head honcho calling the shots, which leaves them open to disagreements and attacks. There’s a constant Bitcoin civil war going on behind the scenes, which in my opinion will ultimately lead to the death of Bitcoin.
Blockchain is a software-based technology, which means that every now and then it needs upgrading. Some changes are insignificant, like a trivial update that all the miners agree to, referred to as a ‘soft fork’. It’s a bit like implementing tiny new rules within the existing box of old rules.
|Adding a few new rules to the box of old rules – a ‘soft fork’|
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Occasionally, though, the community gets into a heated debate over the direction of the blockchain. Some may want radical upgrades to ensure that it remains relevant in the world, and some may want to maintain the status quo. This is where a decentralized system falls down, especially in an environment like Bitcoin where so many passionate people are involved.
If 51 per cent of the miners agree to implement a new improvement or adjustment to the blockchain and 49 per cent oppose it, it’s called a ‘hard fork’. When a 51 per cent attack happens and the community is split on the direction of the blockchain, you get a ‘chain split’.
|A chain split|
It’s akin to having a whole new box of rules that incorporates just some of the old rules.
|New rules incorporating a few of the old rules – a ‘hard fork’|
The Ethereum »hard fork«
A classic example of this is the Ethereum and Decentralized Autonomous Organization (DAO) debacle. The DAO was an organization with the objective of providing a decentralized business model for organizing businesses using Smart Contracts. What made it interesting was that it had no management team and was totally open source. The visionaries behind it at the time imagined that it could pave the way to a country with no government, where the people themselves were the government.
The DAO did a successful fund raise and collected just over $150 million from 11,000 investors. All was looking good until a hacker stole $55 million worth of Ether. Despite numerous anti-hacking attempts to retrieve it, no one has been caught. Vitalik Buterin, the founder of Ethereum, and other big movers in that crypto, elected to implement a hard fork in order to patch over any gaps to prevent further hacks. That chain split resulted in two currencies emerging where before there had only been one: Ether Classic (ETC) and the new Ether (ETH).
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The Bitcoin Cash Fork
Although the Ethereum fork was controversial, most people agreed with it. The Bitcoin cash fork, however, is a different story. This hard fork caused physical fights to break out among developers and miners. Essentially, this is a crypto civil war between the West, which favours the original Bitcoin (BTC), and the East (mainly China), which supports Bitcoin Cash (BCH).
The ongoing Bitcoin argument is simple. Bitcoin is great (both parties at least agree on this), but it’s woefully inadequate for scaling. Put it this way: Bitcoin can do a maximum of only seven transactions per second. This pales in comparison to VISA, which regularly processes over 24,000 transactions per second. Most people would agree that, for it to properly replace existing financial infrastructure like VISA, a crypto needs to have at least the same capacity.
The bottleneck with this scaling issue is down to block size. Miners mine one block every ten minutes, and there are 1,800–4,200 transactions in each block. BTC has a 1-megabyte block size and a large part of the community wanted to upgrade it to 8 megabytes per block, making it eight times more scalable and giving it a better chance of becoming the crypto of global transactions.
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Eventually, Bitcoin Cash supporters won and, on 1 August 2017, Bitcoin experienced its first hard fork. The cool thing for BTC investors was that, if you owned BTC during the fork, you were instantly credited with an identical amount of BCH. This was literally history in the making and no one knew for sure what would happen, so I dramatically reduced my BTC holdings to 1 BTC during the fork. After the fork, I had 1 BCH – which plummeted from its inception price of $550 to $230 within a few days. Nevertheless, this whole drama had set a precedent, and what the general market took away from it was that Bitcoin could be forked and you would be automatically gifted ‘free currency’!
Can you guess what then happened? Groups across the world saw this gravy train and attempted to drum up support for more forks under the banner of improvement, when everyone knew they were nothing more than ‘pump and dump’ schemes.
The first contentious hard fork which many in the community deemed as fishy was Bitcoin Gold. The developers who pushed BTG through knew that they could create this new version of BTG out of thin air and make instant profit. For example, if you held 10 BTC, the moment BTG went live, you would also receive 10 BTG for free. When BTG launched, it was priced at $384, so you would instantly be $3840 in profit. However, because the general crypto community believed it was a ‘money-grab’, the price of BTG fell continuously. By early 2018 it had fallen to $73 and is likely to continue falling as it has no real-world value or utility. So people will continue to sell it.
There was a failed hard fork called the Segwit2x fork and, right now, I’m hearing plans for Bitcoin Diamond, Bitcoin Silver, Bitcoin Plus and so on. They may as well just be called Bitcoin Printing and Bitcoin Press, because that’s all they are. The community have found a legal way to effectively create new currency out of thin air and then sell it straight away for BTC or USD.
Bitcoin may be the very first crypto, the one that carved its way into the history books, but I don’t think it’s THE ONE. The Bitcoin brand has taken a dent with these forks, and even if they do figure out the scaling difficulty, it has way too many problems.
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The big issue for me is that Bitcoin is one of the most wasteful things on the planet. Even though Bitcoin is virtual and is nowhere and everywhere, it has very serious consequences to the planet in the form of energy consumption. Right now, processing every single BTC transaction consumes the same amount of electricity as the average US household uses in a week. It uses more energy per year than the whole of Nigeria! A little piece of my soul dies every time I press send and ping some Bitcoin around the net. Ultimately, this is all unsustainable, unless solar technology rapidly advances or the Bitcoin network changes.
Just as in the tech bubble we had powerhouses like Altavista, Netscape and AOL, which subsequently popped and disappeared after the bubble, Bitcoin may do the same when this bubble eventually implodes. The Facebook, Amazon and Google of the crypto world have not been born yet but it won’t be long before they do emerge.
For a true crypto to rule supreme, it needs to be infinitely scalable and Earth-friendly.
Since I’ve been rather scathing of Bitcoin in this post, in the interests of balance I’d like to state that I’m not a hater. As much as I am loath to admit it, I’m a fence-sitter. I personally don’t own any Bitcoin now as it’s getting to look close to falling (temporarily), and although everyone is raving about how it went up 1,000 per cent in 12 months (November 2016 to November 2017), it’s pretty average in terms of performance compared with many other cryptos.
There’s also a part of me that thinks that a forked version isn’t the answer and that we already have the best version – BTC. I think it’s silly to try and scale up this product to compete with the likes of VISA. BTC should be like digital gold. Gold in the real world is finite, clunky, tricky to store and very illiquid. BTC can easily be all of these things. In fact, it already is: it’s simply the global reserve crypto currency, just like the US dollar.
Another thing that nearly everyone forgets when touting all these fancy new coins is that no coin or token can become the crypto number one until all the dozens of main exchanges unanimously agree that another coin becomes the ‘quote currency’. You see, in currency trading, you can never trade just one currency. You have to trade it against something else. For example, you may want to buy the dollar because you think it’s going up, but up against what? It may be going up again the pound but falling against the euro.
It’s exactly the same with cryptos, except that, unlike in the foreign exchange markets where you have multiple quote currencies, in cryptos BTC is pretty much the only quote currency. You can buy a few coins with Ether but the selection is limited. To do anything, historically, you needed BTC. If you wanted to buy some altcoins, you couldn’t just buy them with pounds Sterling or other fiat currencies (that is, mainstream currencies backed by a government); you had to convert them into BTC, then go shopping with your BTC, and, finally, when you wanted to realize some of your profits from the altcoins, you’d then have to convert them back to BTC, before converting back to fiat. Until all the exchanges agree that a new crypto is the new quote currency, BTC will continue to reign supreme. However, it’s highly likely that from 2018 onwards, there will be dozens of exchanges popping up where you can buy pretty much any crypto straight from a fiat currency. In an ideal world it would be handy to see Binance, the world’s biggest exchange, allow you to convert fiat currencies into cryptos and back.
To make matters more complicated, for commercial reasons all exchanges would need to agree on a new quote currency at the same time. Crypto exchanges make their money from the small transaction fees they take on every transaction. Volume is everything for them. If one exchange made their main quote currency something other than BTC and the other exchanges didn’t follow suit, people would stop using that exchange and kill their cash flow.
At the same time, the exchanges are benefiting from this whole pantomime/war between BTC and BCH as it’s causing millions of people to flip-flop between them and generating huge commissions for the exchanges in the process.
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