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Why I think Bitcoin and Ethereum are a bad global payment system (currently)

So, let's get some controversy going. I like Bitcoin, the ideas of blockchains and cryptocurrency. I've profited from ...

So, let's get some controversy going. I like Bitcoin, the ideas of blockchains and cryptocurrency. I've profited from them, and if you're reading this, so have probably you. But, truth be told, I think the currently popular cryptocurrencies make a terrible global payment systems, technically, economically and ecologically. If you have information which contradict these, please comment.

tl;dr: Bitcoin is mostly useful as an ideology, not as a global payment system. It's technically feeble, produces no tangible products, it's ecologically wasteful, and cannot solve social issues.

Technically

Really, any system with a bandwidth of 3-5 transactions per second is not usable as a daily payment processing system. I'm basing this on the information that the global payment processing companies like VISA and Maestro process thousands of transactions per second with a capability for peaks on the order of 50.000 each. Ethereum with it's 15-ish transactions per second doesn't solve this particular issue.

Any kind of single-ledger cryptocurrency system (i.e. where everything is written in The One Blockchain) would also generate a huge amount of data, which will soon be completely unstorable on ordinary household computers. In other words, even if the transactions-per-second performance issue is solved, the amount of data will grow so much that full nodes would be storable only in proper data centers, which clashes with the idea of decentralization: in this case, we might as well have traditional databases. For example: let's say the transactions-per-second performance is increased to 2000 per second (which is nearly what VISA has - and that's traditional transactions, not micropayments!) - with the 1 MB Bitcoin block size, this means 1 MB each second. And that means 60 MB per minute or 3.6 GB per hour, or 86.4 GB per day, or 31.5 TB per year. I sort of brainstormed on this idea.

So, it looks like at best, a future distributed and decentralized payment system will probably also be decentralized in the sense of not having a single ledger, but multiple (side-)chains, both to handle the transaction volume and the data volume. In fact, it seems like it will be very similar to how banks are organized today - with "entities", however we shall call them, including "bank branches", handling a limited number of accounts, and a system of communication between them. None of these are currently possible in popular cryptocurrencies.

And for the - quite possible - future where Bitcoin (and because of the same problem, the same goes for practically every single cryptocurrency today) becomes a system of large payments between big players, well, A) how is that different from today, and B) then what will we do with micropayments, which are kind of already a necessary thing. The ability to do new types of services (or old types more efficiency) through smart contracts is useful, so it might be that the future of a global single ledger system lays there: not as a payment system, but as a global notary+attorney system. We'll just have to see.

Economically

By definition, the "cryptocurrency economy" is currently mostly what would traditionally be called basic financial services. Everything revolves around providing service to transfer (or spend) coins. The recent deluge of new ICOs only adds to the pointlessness of spending so much mindshare and work hours to, effectively, move some bits around.

Of course, there is the stance that cryptocurrency financial services are actually realistically needed, and that we're currently building the infrastructure for the future, so maybe it's the difference of me placing more value onto the production of goods rather than the production of financial services. I've heard of just one effort where a cryptocurrency is being tied with actual production of tangible goods - I like it, let's see how it goes in the future.

Whatever your ideological position is, the reality is that we are living in a world with states, governments and banks. And humanity as a whole has worked very hard, literally tens of thousands of years, to create social and bureaucratic structures where most people (and today, this actually means the vast majority of human beings) can mostly just coast along without fearing for their lives, not doing anything special. And human beings, in general, want to live in situation where they will not be stressed out by lack of basic needs, and because of that, those entities: states, governments and banks, will continue to be supported by the majority of people. And those entities are providing (among many bad ones) some good services to the people, including a relative safeguard of the value of money. Of course, there's always a power struggle present, and sometimes, like in 2008, a small number of people get to screw over that vast majority, but here's the thing: despite that, the majority is still better off than living in anarchy, and we all know it, because we really do know what bad societies are capable of.

Anyways, cryptocurrencies could be a "changing of the guard" moment, in the sense that it creates a class of "new rich" which by definition mutualy loath the "old money", but even if that happens, nothing substantial will change for the 99%. And we know that because of the recent "Bitcoin civil war" where it was pretty obvious how big pools, and even individals, are swaying the course of history. The only difference is that they are not called "banks" but have more colorful titles, such as Bitcoin whales. Depending on your level of paranoia, those might even be individual players. Human nature produces similar behavior for similar stimulations. Expect to borrow Bitcoin with interest not from banks but from "whales."

Replacing one system with the other just doesn't seem worth the effort if the new system doesn't bring substantial benefits to the majority.

Ecologically

If the current trend holds, by virtue of using Proof of Work, by 2020, more electrical energy will be used to make non-productive (in the sense that they don't produce tangible goods) calculations for cryptocurrencies, than what is used by the entire country of Denmark. That's pretty atrocious as far as ecology is concerned.

Since the majority of Bitcoins is mined in China, the electricity comes from very dirty souces, mainly coal. Yes, an increasing percentage of this energy will be produced from "green" sources, which is the trend globally, but still - every single Bitcin transaction consumes more than an average US home for a whole day! Think about it! Does it not seem perverse? Isn't there a better way to use this energy? For example to ship food to Africa? And that's with the current, extremely low rate of 3-5 transactions-per-second and with an economic utility which isn't actually benefiting the world as such.

Wasting gigawatts of energy continuously just to ensure the blockchain's strength from manipulation, and increasing this consumption as new miners are added, is in my mind an ecological disaster.

Of course, there are some proposed solutions. Proof of stake is one of them, but I think that one will cause non-trivial social pushback, as it basically encodes the current state of "the rich get richer by default". It's a good technical solution, but it remains to be seen if it will be accepted. Another is Proof of authority, but that seems even more similar to the current system, where "special" entities create money. You know, like central banks do.

So, as long as proof of work is in place, every time you make a Bitcoin transaction, you have effectively caused as much energy to be wasted as would power 1.6 average US homes for a day. Please, let that sink in.

No conclusion

There are actually very good reasons why the system of banks has evolved like it has, and practically all of them have to do with implicit optimization of energy use, the psychology of crowds and social stability. There is a familiar principle in physics which says that a reaction will only happen spontaneusly if the products have a lower energy than the raw materials. I suspect that, whetever (if any) solution comes out of all the cryptocurrency and blockchain research which is being done, will very much resemble the existing system. Hopefully, it will also be at least in some ways better than it. But do not fool yourselves - what I am very much sure of, is that social structures (dominance hierarchies, power pyramids, the rat race, the exploitation culture, whatever you wish to call them) will be re-built under new names. The future whales are already among us.

As I said, I like the idea of cryptocurrencies, I've done some actual work with them, I've helped some altcoins happen. But because if that, I'm really, really skeptical of the current crop of technologies. Perhaps future will bring better solutions.


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