Bitcoin, while not being the first attempt of digital money, is the first decentralized cryptocurrency born out of the financial market crash of 2008. Notably in 2017 where the value of one Bitcoin multiplied its value over twenty times, people increasingly became more aware of this digital asset through mass media. The information provided by the Google Trends website further highlights the curiosity of individuals about this topic. While Bitcoin’s philosophy is novel, the system has its flaws. Running the Bitcoin network has a considerable environmental impact through the amounts of energy required to keep it operational. The attached price tag to Bitcoin which is manipulated by speculation has already brought many bad actors to the network that exposed security issues of the underlying Bitcoin protocol. These are the reasons that are being discussed and have contributed to Bitcoin not being a widely adopted method of payment. This article argues which conditions need to be met for mass adoption of a cryptocurrency. Since Bitcoin is slow to adapt, there are other cryptocurrencies on the market and/or actively being developed that might meet those requirements before Bitcoin does. In order to become a widely adopted cryptocurrency, an energy-efficient and secure algorithm like Ouroboros must be implemented for it to get accepted by a population that is becoming increasingly aware of environmental and security issues and their potential catastrophic consequences. The following will explain the status quo, showcase an alternative, and examine, if people actually care about the environmental impact of their payment methods.
Karl J. O’Dwyer and David Malone showed that the power used for Bitcoin mining was already comparable to Ireland’s electricity consumption in 2014. As per CoinMarketCap, since then, Bitcoin has received increased popularity and its trading price has increased from $311.42 on December 31st 2014 to $20,089.00 on December 17th 2017. The bullish run got more people interested in mining bitcoin, as the highly volatile market through very few market regulations on a few exchanges made it possible to become very wealthy through high risk / high reward speculation. In combination with the algorithmic increase in difficulty in mining, which results in a block reward, the space has entered what O’Dwyer and Malone call a hardware arms race (3). This means that in case of Bitcoin, more processing power determines higher chances of getting rewarded, if all miners in the network follow the protocol. However, as Ittay Eyal and Emin Gün Sirer have shown in their work Majority is not enough: Bitcoin mining is vulnerable, the incentive model has its flaws in that bad actors, miners that do not follow the protocol, can achieve higher rewards when deviating from the protocol and as a result negatively impacting the whole network. While decentralized in nature, centralized exchanges make it easier to trade Bitcoin. The Mt. Gox scandal outlined by investigative journalist Jake Adelstein in his book Pay the Devil in Bitcoin: The Creation of a Cryptocurrency and How Half a Billion Dollars of It Vanished from Japan showcase the dangers of keeping one’s own funds on the exchange. With all these developments, it can be said that Bitcoin is victim of its own success. The exponential increase in miners and speculation moved it far away from what Bitcoin’s creator Satoshi Nakamoto labeled a peer-to-peer electronic cash system. First and foremost, because the status quo encourages an extreme consumption of energy and secondly, flaws in the protocol and ecosystem have been and will be further exploited, we should look for alternative concepts that address Bitcoin’s current and future problems to create a widely adopted cryptocurrency in the spirit of Satoshi Nakamoto.
For the reason that Bitcoin has the first-mover advantage, an alternative should not only address the in this article outlined and other current issues of the most traded cryptocurrency, but should also address potential problems that Bitcoin could face in the future. The Ouroboros protocol, as described by Kiayias et al, is such an alternative. Transaction confirmation times that primarily protect against double-spending attacks are five to sixteen times faster using Ouroboros compared to Bitcoin (Kiayas et al 49-50). It is important to note that performance improvements in Ouroboros are yet to be implemented, as security is the current main concern of the project. Therefore it is highly likely that confirmation times for transactions will decrease over time. An added benefit is quantum-resistance, one important security feature that Bitcoin currently lacks. Unlike the majority of other protocols including Bitcoin’s, Ouroboros itself is academically peer-reviewed and proven to be secure. It can be concluded that Ouroboros is a superior alternative in regards to security concerns. Furthermore, the protocol implements a proof of stake algorithm, which disincentivizes energy wasting behavior. Mining does not take place in a proof of stake environment. Unlike Bitcoin, where the best condition for an individual is to have the most processing power compared to the other actors in the network, there is a higher chance to getting rewarded by holding a proportionally larger stake of coins. As part of the Cardano project, the coin of choice for the Ouroboros protocol is called ADA. ADA coins started to publicly trade on October 1st 2017 at just $0.02 per coin. Its current daily all-time high was reached on January 4th of 2018 at $1.30 per coin and was despite being traded on only two major exchanges at the time, the fifth biggest cryptocurrency per market capitalization (CoinMarketCap). Cardano encompasses the Ouroboros protocol, ADA coin, and other projects. It’s academic, scientific roots are well-known in the cryptocurrency space. Therefore it is no surprise that the first use case of the Cardano blockchain delivers proof of university diplomas (Castor). A shift from speculation to practical use of a cryptocurrency will aid in reducing volatility, which is the major obstacle of a wide adoption of any cryptocurrency as a real payment method on a larger scale. David Yermack, a professor of finance at the New York University Stern School of Business, argues that “A currency should have only negligible volatility in order to be a reliable store of value.”, thus making Bitcoin or any highly volatile cryptocurrency an impractical choice as a payment method. There are of course interesting exceptions as shown in Bitcoin trading in Tokyo, which illustrates many different businesses accepting Bitcoin in Tokyo many years before some companies started paying employees in cryptocurrency and Bitcoin became an official legal payment method in Japan in April of 2017 (Sedgwick). People might have different ideas on what those practical uses are. The monetary uses of speculating out of the picture, there are certainly still ideological philosophies present that emerged out of the cypherpunk movement. However, it’s not necessary the knowledge what’s best for us that we as humans act upon. It should be common knowledge what harm a modern sedentary lifestyle does to our health. Yet, it takes a game like Pokemon Go that encourages people to go for walks (Barkley). Chohan also makes the connection of the importance of leisure to the usage of cryptocurrencies with the case study of Cryptokitties. It illustrates that individuals are willing to spend the corresponding value of hundreds and thousands of US dollars in cryptocurrency on leisure activities despite knowing that their spent cryptocurrency might be worth ten times more in a few months.
As people are getting more “concerned about the hazardous impacts of environmental deterioration on their enjoyment of life”, businesses, organizations and individuals marketing to American audiences should “detail clearly how their products help conserve natural resources, and exactly what benefits or values these products deliver to consumers and the environment.” in order to facilitate a pro-environmental purchasing action (Chan et al). The reverse is also true for the critics of Bitcoin. A valid argument to not use Bitcoin is the global energy consumption that is required for confirming transactions. A proof of stake algorithm, like the one defined in the Ouroboros protocol, has the advantage of not wasting energy by making block creation mathematically difficult for security reasons. By securing comparable services to Cryptokitties or verifying university degrees on top of the Cardano blockchain, there is further legitimization of running standard computer hardware to confirm transactions other than just moving funds. This benefit needs to be communicated in individualistic societies to get an advantageous position over competitors that can not demonstrate attempting to follow green initiatives (Chan et al).
There are currently 1530 cryptocurrencies listed on CoinMarketCap. In the case of the other 1529 cryptocurrencies that are not Bitcoin, they have to not only overcome Bitcoin’s first-mover advantage (Luther 399), but also solve all of Bitcoin’s current problems and more. Bitcoin, while certainly not the current best technological implementation of Satoshi Nakamoto’s vision of a peer-to-peer digital payment technology, is by far the most well-known cryptocurrency. Bitcoin still has a 40% market dominance. Followed by Ethereum, a second generation blockchain technology made increasingly popular by Cryptokitties recently, has around 18% market share. Bitcoin had many publicity challenges to overcome as well. It came into spotlight for being the preferred payment of the now defunct dark web marketplace The Silk Road, where one could purchase drugs and other illegal items or information for Bitcoin. It has been called a bubble and market crashes has been falsely predicted by so-called financial experts over the years. Bitcoin always bounced back to new highs. Bitcoin is still the highest valued and highest traded cryptocurrency, despite having an energy-hungry algorithm. Therefore it does not appear, that the immediate future of Bitcoin is threatened at all.
However, the future belongs to technologically advanced, future-proof, well-funded, open-sourced and interoperable blockchain technologies like Cardano. Cardano’s main selling point is the philosophy behind it. Charles Hoskinson, a key figure of the project, talked long before the project’s inception about bringing blockchain technology and all of its advantages to the unbanked world in order to increase the quality of life of those individuals living in unbanked places like Sudan or Afghanistan. Because the team is big on the grueling academically peer-reviewed process of proving their cryptographic methods secure, users of the technology can feel much safer. With the proof of stake model, an excessive consumption of power by miners does not exist, making the cryptocurrency a prefered choice for environmental-aware individuals. It is for these reasons that a cryptocurrency like ADA, that takes security and environmental impact serious, will find mass adoption and be the first cryptocurrency to reach a trillion US dollar market capitalization by itself.
Works Cited
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