In the frenzied bubble of cryptocurrency price speculation, many people forget that this is still an evolving technology.
The emotion of greed seems to overwhelm any sensible discussion.
Shills and trolls fight it out over various coins on Twitter by pointing out the current deficiencies in their opponent’s coins and the future strengths of their own holdings!
But that’s just self-interest and greed talking.
In reality, all cryptocurrencies are a speculation on the developers’ skill in creating something that can do something. And presumably something of value.
When you invest in a cryptocurrency — any cryptocurrency — you are presuming that it will have some use now or in the future.
These uses can be many and varied. Whether that’s economic or technological, or a bit of both.
But to survive long term, it must have some ongoing benefits to users.
And that brings me to bitcoin.
Right now, bitcoin is worth something. Around US$250 billion of value, according to its market cap.
And a lot of people have argued recently that that’s a high valuation for something which is vastly less efficient than VISA as a payment system, and vastly less proven than, say, gold as a store of value.
Here’s the thing, though…
Part of that value is based on what it can currently do — namely store and transfer your wealth in a decentralised non-government controlled system — and part on what it will be able to do in the future.
It’s the second part I want to talk about today. That’s the part the critics overlook.
Because 2018 is set to be a very exciting time for bitcoin development.
Schnorrs, lightning and smart contracts
The main critique of bitcoin right now is that it’s slow and expensive.
A pretty useless payment system.
This dynamic was part of the reason for the bitcoin cash (BCH) fork late last year.
A group of people said bitcoin was becoming unworkable for transactions. They wanted it to be able to process more transactions, faster and cheaper.
There’s no argument with that.
But there was an argument on how to achieve this.
The bitcoin cash team proposed a simple increase in the block size.
The bigger the blocks, the more transactions in each block. But others thought this was a short-term fix. And it had some risks to the nature of who controlled the blockchain.
So, in the background a group of developers have been working on different ways to achieve this same goal.
In their eyes, maintaining the decentralisation aspects was the key consideration in any future protocol level changes.
Well, the good news is that 2018 is set to see big strides in these alternate proposals. And when implemented it could mean a massive swing back to bitcoin as the premier cryptocurrency for transacting….and possibly a lot more.
The first development is something called the lightning network.
This has been in development for around three years, and there are three separate teams working on it.
Basically, lightning allows free, instant transactions by taking some payments ‘off-chain’.
This means they’re not immediately recorded on the blockchain, and instead use a series of time locks and user channels to record transactions.
Groups of transactions are added to the blockchain when required.
The second development is something called Schnorr signatures.
Sam Wouters, a blockchain consultant, wrote this in July 2017 on his blog:
‘Valid Bitcoin transactions require signatures. These signatures occupy critical block space. This situation deteriorates when multiple addresses are involved in a transaction because each address needs its own signature. As a result, transaction size requirements increases, which in turn pushes transaction fees higher.
‘A potential solution would be implementing the Schnorr signatures algorithm.
‘At the end of the day, if it is just one person sending that transaction from multiple sources, there should be some way to do so with just one signature, right? This is what Schnorr signatures allow us to do.’
‘Wouters estimates that “this upgrade would reduce the use of storage and bandwidth by at least 25%. To point out the obvious: that is a huge efficiency gain.’
So, if you save space, you allow more transactions per block and increase the speed and capability of the system.
Lastly, a company called Rootstock are about to release a first version of their much talked about bitcoin-based smart contracts platform.
This will give bitcoin the same type of functionality ethereum currently has, and allow smart contracts to be developed using the most secure blockchain — bitcoin.
As someone posted in Reddit on the release:
‘People will be able to use this for mind boggling amounts of wealth transaction and skipping thousands of $ in legal and financial fees is no joke. This isn’t for beanie kitties.’
Bitcoin developments in 2018 look promising
As I said at the start, the future use cases are getting better all the time.
Any cryptocurrency project without constant development is going to fail eventually.
There are lots of them out there that are simply marketing hype.
Remember when you are assessing a cryptocurrency to look at its potential, but also its developer talent and commitment.
This will separate the wheat from the chaff as the cryptocurrency movement matures over the next few years.
My money is still on bitcoin being the biggest and most used blockchain. And these three developments give me confidence that 2018 is set to be huge.
Editor, Money Morning