The Fate of Cryptocurrency Industry
It’s fair to say that the last two years have been an exciting period for cryptocurrency industry. From Bitcoin’s peak in December 2018 at £14,450, to new competitors such as Ethereum, Ripple, and BCH Cash entering the market, cryptocurrencies have been the darling of investors and speculators universally.
Before we take a gander at what might happen in the future, it is imperative that we understand and acknowledge all the issues impacting the crypto sector in the present. Vitalik Buterin’s publication, “Hard Problems in Cryptocurrency: Five Years Later,” is an excellent place to start. The creator of Ethereum has given his opinion on the 16 main problems that cryptocurrencies are facing today.
Based on Vitalik’s analysis, we will be looking at two major problems facing cryptocurrency industry today; Scalability and consensus theory (proof of work/proof of stake). In that regard, Wise Cryptos has researched the possible solutions, as suggested by other crypto developers.
Low Scalability is a Major Cryptocurrency Issue
Scalability is one of the most discussed areas when it comes to weaknesses portrayed in the blockchain, the underlying tech of cryptocurrency. Currently, the infrastructure for the industry is not quite matured. Well, for you to comprehend the issues of scalability, you must familiarize yourself with the notion of scalability trilemma.
The scalability trilemma states that cryptocurrencies can only choose two options between speed, decentralization, and security. The most popular cryptocurrencies, like BTC and Ethereum, have prioritized decentralization and security. Therefore, the speed of crypto transactions is often agonizingly sluggish.
In fact, the slow transaction speed is vastly accountable for slowing down the mainstream adoption of crypto.
Buterin argues that one of the most significant problems facing the cryptocurrency space today is the issue of scalability. He claims that the best performance and scalability can be reached with shards on-chain. This will bring on massive scalability improvements that aim to increase the Ethereum blockchain’s total throughput rate.
About this assertion, Bram Cohen, the creator of BitTorrent, opined that it would not be a “real” sharding, but rather a redefinition of the nodes towards lesser participation with the partial operation. He strongly believes that payment channel networks are a much better way to go about the issue of blockchain scalability.
Other experts such as developers at the Raiden Network believe that the scalability problem can be solved by increasing efforts towards scaling on-chain, which means increasing the block size limit. This technology is super exciting and promises to be important projects that bring scalability solutions to Ethereum.
The Raiden team plans to boost scalability by offloading on-chain transactions and giving folks the tools to communicate off-chain. This could potentially relieve the pressure of fees in the short-term but would only offer a linear improvement.
Another proposed solution would be to focus on exponential scaling off-chain by building additional protocols on higher layers. Each layered protocol would profit from the security of the BTC network while boosting functionality off-chain.
The most viable off-chain scaling solution for BTC is the Lightning Network, which could offer the exponential scaling necessary for the ecosystem to radically increase its throughput. If successful, most estimates assume there will need to be other scaling improvements to Bitcoin — such as Schnorr signatures, Liquid sidechains, and others.
Another startup, known as BEXAM, which is a new platform aiming to address blockchain scalability for enterprises, offers a hybrid blockchain/DAG platform that creates custom blockchain solutions.
The BEXAM team claims to offer 0.2s block times and 40 million transactions per second (TPS) rate. Their unique approach to the scalability challenge is achieved via a new, consensus algorithm called ‘Proof of Rounds’ (PoR), a proprietary algorithm that creates a hierarchy of nodes to optimize data disbursement while removing hash values to achieve its speeds.
In tackling blockchain scalability, many experts are tirelessly working to offer different consensus mechanisms, with each coming with its own set of trade-offs. In order to decentralize everything, the blockchain industry is going to need many fresh approaches to secure decentralized networks.
The Proof-of-Work (PoW) Issue
PoW is the validation protocol used by many cryptocurrencies such as Bitcoin, where mining devices verify transactions by competing to solve cryptographic puzzles. The process gets harder with increasing transactions and requires a lot of computing power, as well as large amounts of memory space. While the algorithm has proven to be secure for Bitcoin, it’s also very resource-intensive.
Instead of producing more PoW blockchains, the cryptocurrency industry appears to be concentrating on developing other consensus mechanisms so as to support different use cases.
An emerging alternative consensus mechanism is delegated proof-of-stake (DPoS), which is a deposit-based proof-of-stake that uses a consensus algorithm based on real-time voting combined with a social system of reputation.
The downside of DPoS is that the network becomes far more centralized, an opinion that was reiterated by BitTorrent creator Bram Cohen in a recent tweet. This limits its ability to be censorship-resistant, open and borderless, making the network particularly susceptible to take over from an oligarchy.
As highlighted by Vitalik in his recent analysis, a malicious oligarchy can buy votes to ensure it stays in power and could potentially change the rules of the network.
For instance, the EOS blockchain is currently centralized in the hands of a few Chinese token holders, claiming to take 11 nodes to control the majority of the EOS network.
In his analysis, Vitalik believes that PoS is a bad idea, as the ASIC-resistant PoW algorithms currently in use by the Ethereum network come with a minimal life span, and they also make the notorious 51% attacks relatively cheaper.
Additionally, while the PoS mechanism has reduced transaction fees by lowering the cost of mining, it compromises the main principle of blockchain tech, which is decentralization.
Possible Solution: The Proof-of-Assignment Approach
The most efficient blockchain solutions are those that address scalability, transaction fees, and data storage simultaneously.
Proof of assignment (PoA), a mining system developed by the IOTW startup, tackles some of the scalability problems associated with PoW and PoS through what is known as “micromining”, while also solving the issue of data storage.
The PoA algorithm works by randomly selecting a limited number of candidates to solve cryptographic problems. Here, the ledger is not stored in the mining devices and therefore takes up very little memory space on a user’s device.
Vitalik, in his analysis, advocates for random sampling, which allows a small randomly selected committee to statistically stand-in for the full validator set. This is in line with the PoA model, where blocks and transactions are verified by pre-approved participants, who act as moderators of the system.
Such a mechanism leads to less computing power and memory requirements, making proof of assignment practical for unspecialized day-to-day use.
Even though the PoA model is explicitly designed for IoT devices, it may open a way for others to follow in making blockchain tech functional in practical daily use.
The crypto space has changed a great deal since the first blockchain transaction on the BTC network. Along with the well-known PoW and PoS algorithms, other consensus mechanisms have been proposed, with alternative methods for reaching a consensus within a blockchain.
PoA is a reputation-based consensus algorithm that introduces a practical and highly scalable solution for blockchain networks. It was first proposed in 2017 by Ethereum co-founder and former CTO Gavin Wood.
The PoA algorithm leverages the value of identities, meaning that block validators are not staking tokens but their own reputation instead.
Consequently, PoA blockchains are secured by the validating nodes that are randomly selected as reliable entities.
As an alternative to existing algorithms, the PoA model enables companies to maintain their privacy while availing of the benefits of blockchain technology.
Whether or not PoA consensus ultimately ends up predominantly used in private and permissioned blockchains, or as a vital sidechain to a public and decentralized network, is yet to be seen.
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