Crypto has arisen in an era when memories of the 2008 financial collapse are fresh and many people distrust the banking industry.
Crypto combines many elements into one: it is a currency that frees users from the big banks, it is a payments system with low fees, it is a technology based on a shared incorruptible database and, to wrap it all up in a neat bundle, it is an investment vehicle that fits the ever-evolving scope of the digital age. So how can a single use of blockchain technology, which is storing and transferring value in bitcoin’s case, address all the emerging use cases? Well, in short, it can’t.
Bitcoin itself took the blockchain and used it for a single purpose: as peer-to-peer decentralised electronic cash. That’s it.
Ethereum (ETH), Polkadot (DOT), Cardano (ADA) and many other emerging cryptocurrencies employ a blockchain just like bitcoin, but they aspire to do much more: they are competing to become general-purpose blockchain infrastructure capable of running complex operations in the form of smart contracts.
Smart Contracts use the blockchain to allow peer-to-peer transactions without the need for third-party verification and are responsible for the boom in non-fungible tokens and a new crypto-based financial system called decentralised finance, or DeFi, where innovative ways of lending, borrowing and earning interest on cryptos – all outside the traditional financial system – are already taking place.
“Cryptocurrency and the blockchain technology that powers it are every bit as revolutionary to global finance as the Model T was to transportation. They are also as foreign of a concept to most of the public as the Model T and mass production lines were 110 years ago,” explains Sean Sanders, CEO of crypto investment platform Revix.
“This is why a diversified approach to cryptocurrencies is absolutely essential. The technology is evolving at a furious pace, and there will be clear winners and losers. This is why it’s even more important to gain exposure to a diversified basket of cryptocurrencies rather than gambling on individual.”
The big debate in crypto has now turned to how to build a better blockchain, one that can process more transactions, is more secure, is environmentally friendly and more decentralised than the earlier versions. That debate is premised on the assumption that the original bitcoin blockchain is insufficiently fit for all purposes, something that is generally acknowledged to be true.
There are broadly six debates within the crypto community that will shape the future of cryptocurrencies and blockchain technology.
1. Decentralisation vs speed
The technical architecture of blockchains, like the one underpinning bitcoin, emphasises decentralisation and censorship resistance over speed when processing transactions. Bitcoin is the most decentralised blockchain network that has ever existed, but it can only handle about 4.6 transactions per second. Blockchains like EOS, by contrast, are far less decentralised but can handle over 2 000 transactions a second, about the same as Visa’s payment network.
“If you’re using bitcoin to buy a cup of coffee, the speed at which transactions are processed on the network is critical. The merchant needs to receive what you’ve sent in seconds as nobody wants to be sitting in a Starbucks waiting 20 minutes for a payment to clear. But if you’re holding bitcoin for 20 years or using it only for large-scale purchases like buying a house, the speed of that transaction is less important,” says Sanders.
Large parts of the community think blockchains must be designed for speed from the start, and that it’s worth sacrificing some degree of decentralisation and security to achieve this speed.
“True wisdom is knowing that nobody knows how this will turn out. Thousands of different approaches are being attempted, regulation being drafted, and the whole space is evolving rapidly over time. The debate is critical, however, and at this point, spreading your bets across different crypto projects and blockchains targeting different points on this spectrum seems prudent,” says Sanders.
2. General vs limited computation
Bitcoin’s coding language is very limited in its capabilities: it can be used to send bitcoin somewhere, someone can review the transaction and its timestamp, and a few other tasks, but that’s about it. To use a programmer’s phrase, it is not ‘Turing-complete’.
The decision to limit bitcoin’s programming language was intentional. With a focus on monetary use cases, bitcoin’s creator wanted to limit the potential for programming bugs. This is a common decision when approaching software security design, and is known as “limiting the attack surface”. The downside of limiting the attack surface is that it also limits the range of what a given software is capable of supporting.
By contrast, blockchains like Ethereum were purposefully designed to be Turing-complete, which means it (and other blockchains like Cardano and Polkadot) can handle a wide range of instructions, including conditional if/then statements, called smart contracts, and to serve as a platform for multiple decentralised applications (known as dApps). More specifically, smart contracts are computer programmes that automatically execute the actions necessary to fulfil an agreement between several parties on the internet. They were designed to reduce the need for trusted intermediates between contractors, thus reducing transaction costs while also increasing transaction reliability.
The downside is that with more code there is more potential for bugs and security holes.
“The debate around functionality versus security is likely to continue. Our expectation is that there is room for both approaches to thrive, as they offer different capabilities and trade-offs. It sort of feels like a ‘Nokia versus Samsung versus Apple versus competitors’ sort of period,” says Sanders.
Different cryptocurrencies provide different levels of privacy for users. Bitcoin and many other blockchains’ transactions are pseudonymous; transactions cannot be traced back to specific individuals but can be easily traced to individual wallet addresses. This is similar to how phone calls are tied to your phone number, but not necessarily to your identity unless you choose to reveal it.
But there’s another batch of cryptocurrencies designed to offer complete anonymity. Transactions involving cryptocurrencies like Zcash, Monero and DASH are capable of being intentionally obscured, intermingled, or otherwise rendered completely untraceable. Understandably, regulators and central banks are not in favour of these ‘privacy focused’ cryptocurrencies.
As with the speed versus centralisation debate, there are multiple points of view on what the best state for a public blockchain is regarding privacy.
“We’re unsure how this will play out as well, although we think it’s likely that having the option of sending a private transaction will become the norm. From our perspective, again, spreading bets across multiple coins along different stages of the privacy spectrum is the optimal strategy,” adds Sanders.
4. Consensus mechanism
Every blockchain has a consensus protocol – a set of specifically defined rules for reaching an agreement between different actors on the blockchain. This is one of the core innovations that enable public blockchains.
There is, however, a large debate in the crypto community around the best way for the network to arrive at a consensus. Bitcoin’s use of a proof-of-work (PoW) methodology – whereby miners spend extensive computing and electrical power to solve complex mathematical problems – has proven effective and secure, but attracts criticism for its high energy use and high cost. Alternate approaches, of which proof-of-stake (PoS) is one of the best known, avoid this but have a less established track record.
Another debate is the appropriate way to govern public blockchains. Many believe the core point of public blockchains is that the code embedded in the blockchain is law, and anything allowed by the code is therefore allowed by the chain. Others believe the community surrounding a particular chain can interpret that law as it sees fit.
This debate famously erupted in the Ethereum community following the DAO hack, where a hacker exploited a bug in the code for a smart contract hosted on the Ethereum blockchain and stole $70 million. This eventually led to a ‘hard fork’ in Ethereum, wherein most of the community agreed to undo the transaction by creating a new version of the ledger restoring the stolen asset to the original owners. This blockchain retained the name ‘Ethereum’. Not everyone supported this switch, however, and the old, unchanged network that supports the ‘code is law’ point of view continued under the new name ‘Ethereum Classic’. Ethereum Classic did not restore the hacked assets. Today both cryptocurrencies have significant value.
“This debate is evolving on an almost daily basis. Many new chains (such as EOS and Tezos) have created mechanisms to resolve disputes on-chain, and those efforts have seen successes as well as failures. Handling governance is a key and contentious issue playing out in the battle for blockchain dominance right now,” says Sanders.
6. Specific and future-use cases
Finally, the increasing diversification of value among leading cryptocurrencies reflects the evolving use-case targets of public blockchain technology.
Sanders continues: “While all the cryptocurrencies currently in our Revix Top 10 Bundle [shown below] are either generalist coins with broad applications or monetary assets, coins further down the spectrum have specific use cases, such as file storage (Filecoin), prediction markets (Augur) and trading (0x). And every day, developers are experimenting with creating public blockchains for new and specific areas that merit different trade-offs and specialisation. We expect this trend to continue and expand as developers explore all the ways the tech can be put to use.”
It’s important to remember that we’re still in the early stages of blockchain development. Some technologies will survive this experimentation, others may not. Sometimes, competing protocols die off and the world anchors on a single choice: VHS over Betamax, HD DVD over BluRay, or perhaps most tellingly, TCP/IP over OSI in the early days of the Internet are examples of this.
“Our view is that the future is unknowable. One of the things that makes a monthly rebalanced, uncapped, equally-weighted index so attractive is that it guarantees that, whatever happens to the experiments listed above, if the category is massively successful, the index will also do well.”
Had you invested in Revix’s Top 10 Bundle over the last 12 months, you would have seen a gain of 537%, against an already astonishing 201% had you simply bought and held bitcoin. You can pick individual cryptocurrencies to invest in, but even the professionals struggle to pick those cryptocurrencies that consistently outperform the overall market.
So it’s perhaps no surprise that the simple and low-cost solution of bundles – which can track the crypto market as a whole – have become such a hit with investors. By buying a slice of bitcoin, Ethereum, and many more all in one, you reap the rewards of their successes without getting dragged down too much when anyone declines in value.
Revix brings simplicity, trust and great customer service to investing. Its easy-to-use online platform enables anyone to securely own the world’s top investments in just a few clicks.
Revix guides new clients through the sign-up process to their first deposit and first investment. Once set up, most customers manage their own portfolio but can access support from the Revix team at any time.
For more information, please visit www.revix.com
This article is intended for informational purposes only. The views expressed are not and should not be construed as investment advice or recommendations. This article is not an offer, nor the solicitation of an offer, to buy or sell any of the assets or securities mentioned herein. You should not invest more than you can afford to lose, and before investing, please take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.
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