Bitcoin is currently celebrating its tenth birthday. What started off as an experiment is now taking over the news headlines. It’s a topic that fascinates economists, bankers, retail investors, and computer scientists alike. This is likely due to the fact that cryptocurrencies are a lot of different things at the same time.
They are an innovative currency, risky speculative object, digital gold and a short-term hype machine. Whatever the rhetoric, Bitcoin fills the role of both a valuable investment and a gate to transport value quickly and cost-effectively across the globe. Furthermore, it retains its position as the most influential and successful application of blockchain technology there is. Plus, developments such as the Lightning Network make the technology better than ever with capital flowing into the industry from all angles. It’s time to promote innovation in order to realise its full potential.
“The technology is better than ever and more and more capital is flowing into the industry.”
Genesis. To understand the revolution that is taking place, we need to first take a quick look back at the past. In October 2008, a person or group under the pseudonym ‘Satoshi Nakamoto’ published a scientific paper entitled Bitcoin: A Peer-to-Peer Electronic Cash System. This whitepaper describes a digital currency that doesn’t require a central bank to be distributed. There is no company or state standing behind the currency to pull its strings, instead, all users simultaneously and publicly hold a record of what transactions have taken place. Those who actively become part of the network and help to update this list of transactions on their own computers by comparing it with others (thus becoming a ‘miner’) will receive new Bitcoin as a reward. Unlike fiat currencies, such as the U.S. Dollar or the Euro, no central bank creates coins or regulates transactions — the users themselves do this. Satoshi compared this process with gold mining in the sense that, ‘The steady addition of a constant amount of new coins is analogous to gold miners expending their resources to add new gold to the circulation. In our case, those resources are CPU power and electricity.’
Money 2.0. But it’s not only mining where Bitcoin is similar to gold. Bitcoin is supposed to be a universal asset that really belongs to the users and that can be spent anywhere it is accepted. The main difference between the two currencies is that gold earned its reputation as a store of value over millennia whereas Bitcoin has done the same in just ten years and it does more than gold.
Bitcoin is for money what the internet was for information. In the 90s, there was no open internet available for all, instead, there were a series of closed internal networks or ‘intranets.’ In those times, Bill Gates himself didn’t believe in the success of an open, free internet and pledged that Microsoft should work on its own intranet.
Bitcoin, like the internet, is a living digital organism that will be kept alive by the millions of people who participate in it. It is an ultra-secure payment network that can transfer billions in minutes, making it so interesting and exciting for the long term.
“Bitcoin is for money, what the internet was for information.”
Learning from the past. The internet was invented as ARPANET in 1969 yet the dot-com bubble burst a good 30 years later. We all know that this explosion was not the end but the beginning of companies we see every day: Amazon, eBay and even Netflix. Technologies which disrupt must inevitably go through multiple hype phases with both ups and downs before they reach their full potential. To dismiss Bitcoin as a failure due to its inherent problems of scalability and resource consumption is comparable to those internet naysayers who in 1995 said the technology was useless. At that point, only 0.04 per cent of the world had access to the World Wide Web and it was irrelevant to most due to content scarcity and tediously slow speeds.
What now? Bitcoin’s resilience is not just a theory. The fact that the network has run itself since 3rd of January 2009 without disruption or major incidents is its proof-of-theory. In this sense, the ‘Bitcoin experiment’ has been and still is a complete success! There is an argument which states that the cryptocurrency has failed due to the fact it hasn’t been accepted en masse. This couldn’t be further from the truth as the most popular currency is more omnipresent today than ever, despite its death being reported hundreds of times a year.
In spite of cryptocurrencies becoming more and more dominant, it is true that the technology behind Bitcoin is still in its infancy. It is necessary that some fundamental issues are resolved, particularly those around scalability and the development of regulatory frameworks. On a societal level, the aim is to reduce fraud while promoting innovation in the domestic fintech sector.
When that happens, ICOs will have the opportunity to compete for classic IPOs and they will even provide a solution for financing smaller or medium-sized enterprises. This all requires rules, though and only then will it be possible to bring real, valuable securities to the blockchain whilst putting a stop to scammy ICOs and criminal marketing such as Ponzi Schemes.
Change is coming. As mentioned, the Bitcoin network is continuously augmented and made better. I’m in particular excited about the potential of the Lighting Network. It is an off-chain, second layer solution which will solve scalability issues and will improve transaction times on the Bitcoin network significantly. This effort made significant progress over the past year and will have a big impact on not only on Bitcoin but the whole industry. Its capacity grew to new heights recently which means that Bitcoin transactions are getting faster and cheaper every day. Once the Lightning Network is widely adopted, transaction times will be instantaneous and the question of scalability will be forgotten.
Without going into too much technical detail, this added layer to the network will allow for potentially millions of transactions per second. This — combined with Bitcoin’s trustless and decentralised nature — will offer new and exciting possibilities which empower more and more people around the world to enjoy the benefits of decentralisation and trustless transactions.
THIS ARTICLE WAS ORIGINALLY PUBLISHED IN GERMAN IN ISSUE #07 of “Der Brutkasten.”