Currently, banks operate under a single, centralized ledger that is owned and operated under a single corporation, governed by a small group of individuals. We rely on banks and other financial intermediaries to handle, store, and verify the transactions we engage in every day.
In 2008, the weakness in this method was revealed, and the housing market crash ruined the united states’ economy, and brought the value of the dollar down with it. If you haven’t learned about how this occurred, the flaw was trusting small groups of people and individuals to verify transactions and ensure they were able to be executed. Houses were bought with money that didn’t exist, and the homeowners could not afford their monthly payments. With this happening consistently, the market was bound to snap, and it did.
Enter Bitcoin
Bitcoin brought with it the concept of “trustless” transactions, among other innovations. This simply means that there is no trust involved in a Bitcoin transaction, as the exchange of value is stored, publicly visible, and verified by multiple parties with incentive to ensure its verification. Therefore, two untrusting parties can engage in a transaction without the need for a moderator.
Each Bitcoin transaction is verified by what are called “miners”. In order to understand how Bitcoin can eventually become a viable payment method, it is important to understand how Bitcoin mining and transactions take place.
Bitcoin Mining and Proof of Work
Bitcoin mining works on a proof of work basis. Bitcoin transactions, as you probably have heard, are stored on a distributed ledger, rather than the traditional single, central ledger system most banks and corporations utilize.
Each time a Bitcoin transaction is verified, a new block in the chain is established, and is simultaneously transmitted to all other blocks within the chain. In other words, there is no single point of access for a hacker to gain access to your information or funds.
The Proof of Work concept works by having computers verify Bitcoin transactions through algorithms. Specialized computers designed to work at full capacity to find, solve, and verify a transaction, or establish a new block in the chain compete to solve transactions that are occurring. These computers are found throughout the world and help Bitcoin to remain decentralized and free of any single point of failure, as all of these computers are connected by the blockchain they are apart of.
When a computer “wins” and gets to verify the transaction, this “proof of work” system awards the mining rig and its user a certain Bitcoin amount. This setup is meant to incentivize truth and efficiency to the miners. With Proof of Work being one of Bitcoin’s greatest achievements, it has also proved to be one of the factors that has limited its adoption in the mainstream.
The Scalability Issue
In order for any type of currency to reach mass adoption, it must be able to handle the scale of global usage. Currently, it is hard to imagine that Bitcoin could handle such a feat. This is due to a couple reasons, including:
Transaction Fees
The fastest and cheapest Bitcoin transaction fee is currently equal to 420 Satoshis per byte. The median transaction size is 226 bytes, amounting to a total of 94,000 Satoshis for the average Bitcoin transaction. In USD, this equals close to $16.
The average person in society would not be willing to pay this every time they wish to transact for groceries, a movie ticket, or a bill payment. On top of that, these transaction fees are resulting in block formations that take up to 10-30 minutes to process. Each transaction requires about 1-3 blocks to confirm on average, with the amount of time it takes for this to occur is currently about 10 minutes.
Transactions with higher fees provide more incentive to be verified, so they are often completed within 5-15 minutes. They have the potential to be done faster, but this is never guaranteed. The delay time of each transaction depends on the strain to the network.
Recently, there has been so much strain to the network that cryptocurrency giant Coinbase was forced to halt transactional activity on their platform.
Mining System
As mentioned, Bitcoin’s mining setup is based on the proof of work concept. While this method worked well to establish Bitcoin and demonstrate its potential, it is not sufficient at scale due to the transaction fees it results in. Ethereum, the direct competitor to Bitcoin and what some believe is the true future of cryptocurrency use cases in society, recently upgraded its protocol to a new, more efficient “proof of stake” system.
Without diving into too many specifics, this new protocol reduces energy consumption and strain to the network. This results in faster transactions and increased scalability potential. While Ethereum still has some ground to cover to reach mainstream adoption, it is closer to realizing this dream than Bitcoin.
BTC The First Mass Adopted Digital Currency?
As a result of these issues, it is not likely that Bitcoin is poised to become the first mass adopted digital currency. Bitcoin does indeed have the potential to become widely used, though. Its blockchain manifesto and ability to conduct private, secure, third-party free transactions is revolutionary, and could truly change the way business transactions are handled as well as how monetary value is distributed throughout society.
It has the potential to lessen the disparate wealth gap in America, and give power back to the people. It removes the need for banks, singular corporations, and disruptive ad machines that survey over your internet activity and make massive profits from it.
The use for Bitcoin has been established – it can in fact do what it says it can do, and can have the impact it says it will have. The only problem is the scaling the infrastructure, and its inability to support billions of users.
This is the global epidemic for cryptocurrencies. They will never truly become what they envision until they can support the massive traffic such an endeavor requires. Until then, we will continue to speculate on where it is headed and watch patiently and nervously for the next big event surrounding digital currency and its scalability.