Is the Blockchain Broken?
Competitors are preparing to exploit inherent weaknesses in Blockchain
This May, Bitcoin’s value rocketed by 65 per cent. By the following month, one bitcoin was equal to $2,000. It looked as if the cryptocurrency had finally broken out of the trough of disillusionment into mainstream adoption. However, it became clear that the blockchain based technology had bitten off more than it could chew when Coinbase, the world’s largest crypto exchange, struggled to process the increasing number of transactions. Ethereum’s spectacular flash crash of late June added insult to injury, and all of a sudden the blossoming cryptocurrency scene was beginning to wilt. Despite these setbacks, blockchain (largely championed by Bitcoin) is still causing a stir in the financial world. But now that the cracks have started to show, can the technology survive?
The overinflated Bitcoin bubble
By now, it’s clear that Bitcoin has some crippling issues. Low transaction capacity, lack of scalability and slow processing power are just a handful of the structural problems that have limited mass adoption. It’s notoriously difficult to regulate, leading to criminal associations that have discouraged official support. And, although Bitcoin is transparent and decentralised by nature, it’s not entirely fair. Miners can reorder, delay or totally block certain transactions, damaging trust within the system. Recent estimates have also found that Bitcoin has a considerable environmental footprint. This is ironic, given that blockchain has been used to enable peer to peer, renewable energy exchange. According to Alex de Vries, Bitcoin transactions consume as much annual energy as Nigeria. As a result, he dismissed the technology as ‘inefficient by design’. So, Bitcoin may be faltering… But the concept of public, distributed applications is not. Enter hashgraph, the self-proclaimed future of decentralised technology. Hashgraph is a consensus algorithm developed using the software platform Swirlds. It can allegedly process up to 250,000 transactions per second – a far cry from Bitcoin’s underwhelming seven. As well as being incredibly fast, hashgraph uses less storage space and fewer resources. Unlike blockchain, Swirlds’ alternative algorithm doesn’t rely on Proof of Work (Pow), or in other words blocks. This means that while blockchain uses 60GB per transaction, hashgraph transactions use only 1GB. Swirlds asserts that hashgraph is cheaper, more secure, and more trustworthy due to its consensus community. In other words, it could be well on its way to breaking the blockchain. Can Bitcoin and other blockchain based applications stand up to the challenge, and if so, how?
Can the blockchain community self disrupt?
If Bitcoin (and other blockchain based platforms) are inefficient by design, then it’s time to go back to the drawing board. Ethereum creator Vitalik Buterin, for instance, has announced that Ethereum will use a completely new method of completing transactions. Instead of verification via Proof of Work, Buterin has forwarded Proof of Stake. The basic premise is the amount of cryptocurrency that people own determines how much mining power they have. While this would lower the energy expended by mining, it seems oblivious to issues surrounding trust and fairness. Less drastic suggestions include SegWit2x, an upgrade for Bitcoin’s transaction capacity. Exchanges could also use Omega One, which breaks up large sell orders into smaller chunks. If blockchain businesses fail to make these changes, then they open the stage to ambitious new players like hashgraph. Now that governmental bodies are finally starting to take note of blockchain technology, it’s not hard to imagine that they would rather use a system that was cheaper, more sustainable and more secure. It’s also worth considering how a reimagined decentralised database could affect traditional financial companies. So far, this seems to have divided opinion into two camps. The first believes that bypassing banks with Bitcoin and Ethereum will lead to more inefficiency, while the second predicts the death of central banks at the hands of new alternatives.
As if the world of finance hadn’t been shaken enough by the rise of FinTech, another shift is just around the corner. While sceptics and enthusiasts fiercely debate the utility of Bitcoin and other blockchain based applications, competitors are gearing up to exploit the technology’s inherent weaknesses. The Coinbase crashes of this summer were viewed by optimists as the catalyst for change, but five months down the line and the same issues continue to reoccur. It’s up to the blockchain community to find tangible solutions, but whether they will collaborate successfully is another matter entirely. One thing is certain – if the blockchain community can’t disrupt themselves, then hashgraph certainly will.
Is the Bitcoin bubble overinflated? What other inherent problems are there with the technology? Could hashgraph eventually replace blockchain? Comment below with your thoughts.