May

18

 Bitcoin is currently stalling out on transaction speed and will force the hand of the core development team to make adjustments.

At present, the miners are clearing (very roughly) 2000 transactions every 10 minutes, this is primarily due to the limit of the block size of 1 megabyte and the amount of transactional information they can place into that size.

There is a lot of hand-waving about the slowing rate of growth of bitcoin versus other cryptos and the glacial adoption of newer protocols is certainly a part of it. For my part, I am content that the developers are overly cautious as any bug in the implementation can crash the economy. Ethereum learned this firsthand last year after they lost millions due to a bug. That said, Ethereum is also a model about how resilient the cryptos can be in the face of lost confidence.

At some point, bitcoin will increase the size of the block above 1MB and punt the transaction problem down the road for a while, but it exposes one of the problems with it's design which is transactional throughput. Most of the cryptos out there have the same tree-based transactional design that at greater scale will eventually cause the system to come to a crawl under normal load, not to mention making them vulnerable to spam attacks.

There is some promise in a new way of guaranteeing transactional integrity without a tree in DAG (directed acyclic graphs). The concept is more of a mesh of (very) lightweight transactions, each of which is forced to validate two other previous transactions. This obviates the need for miners and makes every initiator of a transaction do the proof of work. This concept would scale far better than (what has become) the centralized miner model of the major cryptos.

I am aware of two cryptocurrencies being developed that use this model, Byteball and Iota, with Iota having a better marketing department. They are completely unproven, flawed, hoarded and still in development, but already have a solid following and are trading at what I'd consider high premiums. If they somehow reach critical mass without implosion there may be a big future in actual microtransactions, fulfilling the promise of cryptocurrencies years ago.

Andy Aiken writes:

Ethereum is on track to convert to a Proof of Stake transaction model sometime in 2018. Like bitcoin, ethereum is currently a Proof of Work cryptocurrency, in which transactions must be included in each new block being "mined".

As Jayson indicates, mining is highly computationally intensive. BTC and ETH mining requires special hardware, and consumes hundreds of gigawatts of power globally.

In a Proof of Stake (PoS) system, the network consists of nodes that reach network consensus on transactions without the computational intensity. The owners of the nodes (stakeholders) get a share of the transaction fees. A node could be run on an ordinary PC. There are currently PoS coins, but they are much less popular than bitcoin and ethereum.

On May 22, there is an Initial Coin Offering (ICO) for Tezos, which will be Proof of Stake right out of the gate. Tezos claims to be a direct competitor to Ethereum for the mantle of next-generation bitcoin. I'm skeptical of this ICO since the issuance is uncapped. This means that interested individuals and institutions will be able to get a piece, unlike other recent ICOs (e.g. Blockchain Capital, a venture fund that issued its own coin) that closed within 5-10 minutes of opening. On the other hand, Tezos could raise billions of dollars while being years from developing anything close to what Ethereum has already developed.

Byteball and Iota are using an entirely different model and a unique distribution system. E.g., if you hold BTC, you can get an allotment of Byteball by providing some personal information.

Cryptocurrency is much like the auto industry of the early 1920s. The failure rate of new coins/businesses will be high. Regulatory agencies are barely present, there are many scams, and a gambling mentality at the cryptocurrency exchanges. But the opportunities appear to be commensurate with the risk.

Stefan Jovanovich writes: 

AA may want to adjust his historical analogy slightly. The failure rate for automobile manufacturers peaked not in the 1920s but in the preceding decade. By the "early 1920s" the "Big 3" were already established.

The historical analogy that works best for me is the growth in the collectibles market pioneered by Joseph Segel. No one can question the Marxist measure of value for the objects that the Franklin Mint and others produced just as no one can quarrel with the enormous amounts of human labor, energy and computation that have gone into producing these current digital collectibles. One wonders what network of Quality Value Convenience will evolve out of all this buying and selling of precious man-made objects.
 


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