Since their inception in 2009, cryptocurrencies have set out with their ambitious target of toppling the fiat banking system. The elusive father of Bitcoin went so far as to hard coding an unsubtle dig into the genesis block: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”. A bold assault on a decaying system. 11 years on and it seems little has changed, the banking system immutable, to all but the avid crypto-enthusiast.
Aside from headlines and unrealistic dreams, where does the future of cryptocurrency actually lie? This essay seeks to explore the reality, based on undeniable issues they face and growing developments aimed at tackling them.
The first, most glaring, a problem with cryptocurrency we see is the lack of adoption. On the wider societal level, the general public neither trusts cryptocurrency nor do they hold any interest in learning its ins and outs. Ultimately, the banking system is easy. Scandals such as the latest PlusToken scam do it no favours for its credibility; and the 2017 bubble is all too recent in their memory to foster any sense of security in them.
Yet a dependable banking system is not always available. In fact, it’s relevant to consider it as more of a first-world luxury. Whilst no sane individual would ordinarily place their entire assets in a system as volatile as cryptocurrency, some currencies face steep inflation rates that offset this dramatically. Take Argentina for starters, with a 2019 inflation rate of 53.8%. The superiority of Bitcoin has become so undeniable that the Secretary for Transport began promoting its use throughout public transport last year.
Recent developments in Nigeria indicate a rapidly expanding adoption amongst the public. One single exchange records over 600,000 Nigerian users on its website alone. Whilst this constitutes a mere 0.3% of the countries
population, other exchanges welcome their own separate userbases. The extent of this is so evident that their own government is making moves to embrace this through legalisation. Even so far as considering implementing blockchains on a more national scale. With Nigeria holding the 7th largest population in the world, it’s apparent cryptocurrencies have begun cementing their global relevance.
With these examples in mind, I predict the adoption of cryptocurrency to be predominantly led in the 3rd world. The western public, likely the final hurdle to overcome. With growing importance globally, it’s only a matter of time before the western world joins in.
Any rise in adoption must be built on trust in the protocol. The validity and security of any transaction must be absolute, and yet growth promotes the blockchain as a target of interest. The simplest form of vulnerability is the 51% attack. All that is required is for 51% of a network to be controlled by one body. Every coin operating on the proof of work algorithm is susceptible to such an attack. With the cost of mining increasing, networks are growing increasingly reliant on built-for-purpose ASIC chips to offset energy costs. The once decentralised mining networks are becoming increasingly localised to mining pools, lending security to the hands of a few key players.
Whilst many coins do little to combat this, the Monero coin seeks to limit it. With a scheduled fork every 6 months, the proof of work algorithm may be dynamically updated. Any investment in specialized hardware is rendered ineffective. Further work on the RandomX algorithm has sought to reduce the efficiency of such hardware further, optimizing the process for general-purpose CPUs, thereby increasing its decentralised nature.
Whilst not all cryptocurrencies prioritise security to such an extent, the reality this illustrates is that such a vulnerability may be mitigated. If the needs arise the technology is ready to protect the network.
Perhaps the biggest threat to security in blockchain systems is the onset of quantum computing. The current Elliptic Curve Digital Signal Algorithm is the standard used to protect a user’s private keys among most coins. This form of encryption prevents anyone from gaining access to your coins through knowledge of your public keys. At least, it renders them protected from even the most powerful conventional computers. Whilst quantum computers are not quite ready in terms of their computational power, there are already methods such as Shor’s algorithm available to decrypt them. The final piece is merely the computer powerful enough to employ them.
Whilst this prospect is still far on the horizon for any form of commercial availability, it remains unclear the level of progress any government agencies (or other establishments) have made. Any hint of quantum cracking would devastate the markets. No wallet would be safe -– the very premise of cryptocurrency would be at stake.
The reality is, we don’t know when this may be feasible, just that all assets must be protected far in advance. This is a concern shared not just by cryptocurrencies, but the banking system too and any players in the digital world. Quantum-proof cryptography is a subject under considerable research at this point in time. Whilst other players have the luxury of significant resources, blockchain developers are more strapped.
In fact, blockchains face a secondary issue where adjustments to the protocol are a contentious issue. In addition, adjustments are likely to raise transaction sizes, prompting rises in mining fees. Developers are faced with the added dilemma of maintaining functional coins whilst patching looming security issues. Any coin without a dedicated developer team is likely to fall behind. We cannot say for certain when this deadline is, and yet it is this exact uncertainty that makes this all the more threatening.
In my last point, I’d like to address the fact Bitcoin mining produces 22 Megatons of CO2 annually. Equivalent to the pollution seen from Las Vegas, or small nations such as Sri Lanka. The current proof of work algorithm employed by the protocol necessitates enormous computational power to validate transactions. With bitcoin hashrates rising by 42% over the past 12 months, it can be expected this energy consumption is set to be a growing problem. Additionally, there are countless other cryptocurrencies adding their own emissions to this tally.
Despite this, there is already an indication of progress to reduce this impact. A study published this year estimated 39% of all electrical power used in proof-of-work mining came from renewable sources. Additionally, developments in mining efficiency have prompted a drop in power demand. Whilst this is good progress, this responsibility should not be left solely to the hands of miners.
The most exciting innovation to combat this is the development of proof of stake algorithms – seeking a complete upheaval of the current proof of work protocol. Where the latter sets mining rigs competing against each other to compute an intensive algorithm; the proposed new system allocates turns to validators – effectively removing the computational inefficiency seen in the current system. Whilst no large coins operate with this algorithm to date, significant progress is seen in the already-in-trial Ethereum 2.0. As the second-largest cryptocurrency, this could pave the way for others to follow.
An additional benefit of the proof of stake algorithm is its inbuilt resistance to the previously mentioned 51% attack. Through the nature of the protocol, any validator risks their own assets – or stake. This lays out a substantial financial cost, and potential loss, to any malicious parties involved.
With a growing adoption globally, I expect cryptocurrencies to become an increasingly relevant player in the global financial system. This growth will primarily lie in the global south to begin, before painting out their undeniable relevance. Blockchains have inbuilt security, and yet this is not without fault. Few current cryptocurrencies seek to mitigate these present vulnerabilities and yet the technology is currently available in case it becomes necessary. The greatest threat lies in the not-so-distant future with the growth of quantum computing. Without rapid, dedicated action to prepare for which, many coins are poised to fall victim. The growth of cryptocurrency is not limited in terms of adoption. I welcome the innovation of the proof of stake algorithm, in hope of a more sustainable outlook for this emerging currency.