If you have read my posts over the past year you know I have reiterated a few key points. The first is that Ethereum’s future is reliant on the implementation of Proof-of-Stake (PoS). The second is that Bitcoin’s utility is steadily declining. The last is the inevitable arrival of blockchain in the lives of the average consumer. These points are interconnected and reveal insights for the future of blockchain technology.
The importance of Proof-of-Stake for Ethereum is clear. By analogy, PoS upgrades the Ethereum virtual machine from a processor used in an old graphing calculator to a processor akin to those found in modern smartphones — more than 100 times faster. Due to intrinsic inefficiencies in the Proof-of-Work (PoW) algorithm, where miners have to contribute enormous amounts of processing power (and ultimately electricity), PoW struggles to scale transaction rates at a level required to facilitate millions of users. This is demonstrated in Bitcoin’s $40 transaction fees and Ethereum’s CryptoKitty-caused slow-down.
Already, so-called “Ethereum killers” have emerged, capitalizing on the recognition of PoW inefficiencies by implementing their own PoS systems ahead of Ethereum’s upgrades in the next few months. IOTA, Cardano, and NEO to name a few, are seen by some as legitimate Ethereum competitors with their early PoS systems. While they have seen significant gains in terms of market cap over the past few weeks, this does more to validate Ethereum’s methodical move to PoS than to validate the competition. Many dissenters who pointed to PoS as an unproven consensus algorithm now have no ground to stand on. In addition, these smaller chains have much less at stake (pun intended). A sweeping and hasty change to the Ethereum protocol without sufficient auditing and thought would put the entire developer ecosystem and blockchain at risk. Ethereum now has the benefit of learning from proven PoS implementations on a number of blockchains. In addition, the investor appetite for a PoS switch has been affirmed. Once upgraded, the established Ethereum userbase and countless projects running on Ethereum will enjoy a transaction rate increase by orders of magnitude. Today’s internet users are accustomed to millisecond loading times and PoS closes the speed-gap that exists under Ethereum’s current consensus protocol.
While these “Ethereum Killers” have theoretical limits much higher than Ethereum’s current platform, Ethereum is poised to be the first blockchain to actually utilize the capacity available in a PoS system. Ironically, even as other blockchains may have higher theoretical limits, none routinely process 800,000 transactions per day like Ethereum. (Most barely approach 100,000.)
Vlad Zamfir, a lead developer for Ethereum’s Proof-of-Stake upgrade called “Casper,” replied to a tweet below regarding Casper’s timeline:
Bitcoin’s Declining Utility
I will now refer to Bitcoin investors as “believers” because there is little reason to put money into such a useless platform. You might be saying, “but Parker! Bitcoin has more than quadruped this year!” And Bitcoin may continue to go up before it dies, but it will die. If that death is a transition to Bitcoin Cash or Ethereum or another platform is anyone’s guess. There is a limit to how much electricity the world is willing to contribute to making a digital currency with so little utility. At some point the charm of Bitcoin will wear off and average investor knowledge will increase to more efficiently price Bitcoin where it belongs. When the cost of creating a Bitcoin is less than investors are willing to pay, other assets are going to become more popular.
Bitcoin’s first mover advantage and brand awareness are the only features keeping Bitcoin afloat. Before the major SegWit upgrade, which has done almost nothing to help Bitcoin scale, Bitcoin was slowly losing crypto market share hovering below 50% for the first time ever. Hype surrounding the SegWit upgrade and other forking events brought Bitcoin back up to 60% of the crypto market as it soared to $19,000 per BTC. This price-action helped conceal Bitcoin’s technological problems in the interim. Now that the hype has subsided, Bitcoin is starting to lose traction again and high-fees and long transaction times will start to weigh on Bitcoin again. Coinbase added Bitcoin’s major competitor, Bitcoin Cash, and the confidence in Bitcoin’s value is deteriorating. Now that the shock-factor of $19,000 per Bitcoin is starting to wear off, Bitcoin’s market share has sunk below 45%.
Bitcoin Cash has made some progress with savvy store-owners who previously only accepted Bitcoin. Obviously, buying and selling goods with $40 fees is infeasible. Thus, Bitcoin Cash’s low fee and fast transaction times have proved useful for people already comfortable with the Bitcoin name. Some of Bitcoin Cash’s success is merely confusion and cognitive bias, but as it stands there are not many good alternatives. Ironically, Bitcoin Cash’s scaling solution may never be truly tested. Since inception, Bitcoin Cash has rarely done more than 50,000 transactions per day. At that rate, Bitcoin Cash has not seen the benefit of its increased ability to handle transactions. In fact, from 2014 to 2016 Bitcoin maintained lower fees than Bitcoin Cash with equal or more transactions per day. To put that in perspective, Ethereum does more than 800,000 transactions per day and even did two consecutive days averaging more than one million last week. Meanwhile, Bitcoin averaged 300,000 per day with $35 fees as compared to Ethereum’s 30 cents.
Bitcoin Cash supporters, including Roger Ver, repeatedly refer to Satoshi Nakamoto’s Bitcoin Whitepaper to argue that their version of Bitcoin is closer to Satoshi’s original vision. The community’s emphasis on Satoshi’s whitepaper is sure to put them in an awkward position. At the moment, Bitcoin Cash is simply Bitcoin with an adjustable block-size. The modification gives Bitcoin Cash transaction capacity theoretically comparable to Ethereum in its current form. Ethereum has proven that adjustable block-sizes are conducive to scalability to a point. However, it is becoming clear that a different consensus protocol is the future for blockchains to process much higher volumes of transactions. Unfortunately for Bitcoin, just as the central belief in Christianity is the reincarnation of Jesus, paramount to the Bitcoin cult-following is the consensus protocol, Proof-of-Work.
In summary, Bitcoin Cash’s $42B market capitalization is an affirmation that investors, companies, and consumers desire a faster payment system than Bitcoin. Bitcoin and Bitcoin Cash will undergo major tests of value for investors as Ethereum and other blockchains continue to develop scaling solutions that dwarf any system developed using Proof-of-Work alone.
The Arrival of Blockchain
The arrival of blockchain to the average consumer is coming soon. As I described earlier, PoS open the door for many decentralized applications that have not been possible before. The benefit of decentralized applications is that middle-man can be cut out of most transactions. The utility of smart-contracts enables sellers and buyers to transact more directly. For example, Uber charges their drivers 25% per trip. It is easy to imagine a decentralized Uber in which drivers pay a fraction of that for the same service. Similarly AirBnB, real-estate, PayPal, and other industries are likely to have decentralized competition.
At 800,000+ transactions a day, Ethereum is only recently pressing against the theoretical limit that makes Ethereum a viable decentralized computing platform. In aggregate PoS, sharding, and other solutions offer at least one-hundred times the current transaction capacity. The new speed offered by scaling solutions will make decentralized applications truly viable to the consumer. For instance, Coinbase just released their Ethereum browser and wallet called Toshi for smartphones. Coinbase is still developing partnerships for its fledgling iPhone app, but already users can enjoy the infamous CryptoKitties application or make Ethereum transactions with other users. Unfortunately, Toshi is rather clunky, slow, and expensive due to Ethereum’s current transaction congestion and fees. When Ethereum upgrades to scale by orders of magnitude, Toshi becomes a viable application for consumers. It is telling that the cryptocurrency monstrosity, Coinbase, is focusing their efforts on an Ethereum browser as opposed to other projects.
- Ether Futures are coming soon. Bitcoin doubled on that news and I expect Ethereum to make major moves as well. Ethereum co-founder, Joe Lubin, announced that ETH futures were coming, but I don’t think the market has priced in that news just yet. Combined with Ethereum updates in the next few months I think price per Ether reaches $1500 by the end of 2018.
- 20% chance Bitcoin survives in a meaningful way into 2019. 80% chance Bitcoin loses any dominance by 2019. This could get bloody and interfere with my first prediction.
- People will use blockchain technology without even knowing it in 2018.
If you need a way to keep track of cryptocurrency on your phone I recommend the new app CoinStats. I have no affiliation.
HAPPY NEW YEAR!