The five biggest threats to bitcoin
Monday 29 June 2015
If bitcoin is going to make it, here are five problems it needs to overcome in the next year or so.
As we explored in a recent article, cryptocurrency is here to stay. Blockchain technology isn’t going anywhere. Bitcoin itself? The jury is still out. Here are five problems it needs to overcome as a matter of urgency.
1) Mining centralisation
With the increasing Difficulty, centralisation has been the story for the last year or more. Only the largest miners can access the economies of scale that make mining profitable, pushing the smaller ones out of business. Smaller miners can club together in pools, but these also represent centralisation that potentially threatens the protocol’s security - and it’s still not worth the power costs for many. This issue can be solved, but if it isn’t then other systems like proof-of-stake may turn out to look more attractive.
Tick tock. Can you find a solution before all the blocks are full?
2) Block size and network capacity
The bitcoin protocol is reaching its limits. Changing to 8 MB blocks will buy bitcoin a little time, but it’s not a permanent solution. The more effective solutions are more radical, and harder to gain consensus for. Meanwhile, ever-increasing block size will result in even more centralisation, as only the best-resourced outfits with cost-effective storage and bandwidth will cope with downloading the full blockchain. And you still have to get the majority of miners on board with any protocol change...
3) Adverse regulation
Up until now, bitcoin has enjoyed a largely regulation-free landscape. How will it fare as exchanges and other businesses are forced to implement KYC (Know Your Customer) and AML (anti-money laundering) checks? It’s not clear, but it will depend on the severity of those measures. Increase the friction of using bitcoin and you make existing fiat options look more attractive by comparison. It won’t kill bitcoin, it will just push its use into jurisdictions and spheres that have a lighter or non-existent regulatory touch.
4) Banking (lack of) support
Here in the UK, although the government has taken a pro-crypto stance, the banks are rather hands-off. (One is tempted to understand that they resent the threat, but either way, it’s the cold shoulder treatment.) It’s not the same everywhere in the world, by any stretch - in Europe, there are some extremely positive relationships between banks and bitcoin enterprises, like the partnership between FIDOR and bitcoin.de, which allows instant fiat <> crypto transfers to and from the exchange, so there is no risk of funds going missing. We’re at a critical juncture where growing adoption means working with the banking sector, not against it. It’s happening, just not everywhere. And again, this will largely determine whether bitcoin adoption is driven by low-income countries and emerging economies, or the wealthy but staid West.
5) Use cases
Bitcoin is seen by many as a solution without a problem. That’s not true: there are very obvious solutions, such as efficient remittances from migrant workers back to low-income countries (who would otherwise be charged 10% of their pay cheques for the transfer). BitScan has focused on merchants, believing that the benefits to them are huge and that enterprise will drive adoption. But we haven’t yet got to the point where bitcoin is both easy enough to use and has a clear use case (though we're working on it). This is partly due to the problems listed above: once they are solved, the way ahead is clearer. Until then, the ‘killer app’ remains elusive.
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