This article was originally written on 25 January 2018 in Hungarian.
Is the leading cryptocurrency in a downhill or will it be able to preserve its role as the king of cryptocurrencies?
In our recent article, we are trying to define the future of Bitcoin as a leading cryptocurrency and take a deep look into the questions of whether Bitcoin will be able to remain the king of cryptocurrencies, the digital gold. We take a close look at Bitcoin’s core problems and at the developments that aim to fix these problems.
If we look at Bitcoin’s story, we see a digital currency with a complex technology behind it that has been the leading force of a fundamental financial revolution by 2017. 2017 was the year when more and more people started to talk about Bitcoin (and as a result about blockchain and cryptocurrencies), to trade with Bitcoin and altcoins and to follow this decentralized revolution. Today, people can pay with Bitcoin in more and more places and there is a constantly growing number of companies dealing with it and blockchain. Moreover, countries are paying increasing attention for it, some of them (Japan, India for example) even aim to regulate its use – all of these moves prove that Bitcoin and blockchain technology have a role to play among the global giants.
This is a huge success for Bitcoin and also for blockchain and altcoins, but not everything around it is so shiny as it seems for the first look. In this article, we will focus on technological challenges, the increasing transactions fees and a slowly mining process.
Technology
Bitcoin’s technology has not seen any changes since its inception in 2009. What was relative good-functioning then, today is outdated. As a direct result, sending BTC is a very slow process and at the same time more and more expensive today.
Today, there are more than 1000 cryptocurrencies, a few of these have far better technological solution than Bitcoin’s. So this year can be a real game changer: Ethereum, Ripple, maybe Bitcoin Cash, NEO platforms or other technologies can overtake Bitcoin’s position in terms of market capitalization. Beside of the biggest crypto giants, there are more and more companies that will revolutionize our daily life with their blockchain-based solution. Utrust may replace PayPal, With Ethos’ universal wallet, you will be able to buy cryptos with fiat money, change them for any coins and store them in one place without a need of decentralized or centralized exchange. Wanchain and Loopring will deliver decentralized exchanges, there will be blockchain-based mobiles and computers (Sirin Labs) and this is only beginning of the list.
Bitcoin’s role as a market leader is based on its history, popularity compared to other cryptos, on the fact that mainly Bitcoin (or today also Ethereum) is used to buy other altcoins and because of the media hype. Bitcoin believers, evangelists say for every technology-related criticism that Bitcoin is „the” cryptocurrency, but newbies in crypto world won’t be convinced of such kind of explanation if they want a user-friendly, cost-effective and quick platform to trade. So, Bitcoin has to innovate.
Actually, Bitcoin’s renewment is an ongoing process. Last year, during the scalability debate technological developments have been made. In the following, I’m going to introduce two significant developments that can contribute to empowerment of Bitcoin. Thanks to these developments, on one hand, it will be possible to multiply overcharge blockchain without increasing the size of the blocks or decreasing the 10 minutes block time. On the other hand, transaction fees can also be reduced.
Lightning Network
Take a simple example why Lightning Network is good for us. A coffee shop creates a Lightning Network channel with Paul (he is a node). Paul’s friend, Jason likes this coffee shop and knows that he’s going to drink a cup of coffee every morning there, so he deposits 200 USD in order to prevent the complication of paying each day for the coffee. Every time Jason drinks a coffee, he doesn’t need to pay for it, because the owner automatically takes the price of one coffee from the deposit and this whole process is controlled by Paul, so the owner doesn’t have the chance to take more money than the coffee’s price.
But if Jason decides that he accepts his doctor’s suggestion not to drink too much coffe, he can make a deal with the owner and Paul about disconnecting the coffeshop’s channel, withdrawing the deposit and getting back the money he didn’t spend yet. This final, remaining amount will be sent to the Bitcoin’s blockchain. The core of this solution is that none of the transactions (coffee purchases) ever appear publicly on blockchain, only between the two sides (Jason and the owner), so Lightning Network provides full anonymity.
It's all so simple. Let's see a video about it:
So technically, both parties deposit an amount in Bitcoin on a mutual address and undertake that this address can be used only with both party’s mutual decisions. The two sides accept that transactions won’t be sent to the blockchain (on-chain), they do only off-chain transactions without involving miners. Actually, in this solution the two actors (Jason and the owner) are the miners themselves, they are the ones that run the Lightning Network node and deposits money on it.
When one of them decides to close the channel (so essentially record the current status), he needs to send the last valid status to the blockchain and only this balance will appear on the blockchain, the earlier transactions not. A more innovation is that a third person also has the chance to join and to use this channel. Thanks to this development, everyone can have easy access to trading that will radically decreases on-chain transactions.
HTLC and Atomic-swap
The second development we take a closer look at is atomic swap. As we saw, Lightning Network will take the power out of miner’s hands. Atomic-swap and HTLC will „kill” decentralized and centralized exchanges, because with it, people will be able to trade with cryptocurrencies almost free.
Like in the case of LN, take a „daily-life” example. If Jason wants to buy Paul’s Litecoins with his Bitcoins, at the moment they can make this deal only on exchanges – it needs registration, transaction fees etc. But atomic-swap and HTLC technology behind it are able to make it done without exchanges. Jason sends his BTC through HTLC and at the same time he sets up a time limit. When the transaction is done and get into the blockchain, Paul also sends his LTC through HTLC. As soon as the two transactions are done, the HTLC automatically makes the exchange, and Paul and Jason get access to their assets. If any problems came up, for example Paul would not launch the transaction within the specified time limit, then the agreement fails and both party get back their money.
So, only one question remained: what’s the role of atomic-swap? Atomic-swap secures that HTLC technology can be used between different blockchains. It means that with atomic-swap, you can exchange not only Bitcoin, but any other cryptocurrencies that implemented atomic-swap. Of course, these transactions aren’t visible in blockchain either!
Important to stress that atomic-swap and HTLC technology have advantages primarily for businesses (crypto ATMs for example) and not for individual traders. BTC atomic-swap are already being implemented by Litecoin and Z-Cash.
If these development will be successfully implemented in a broader circle with more and more cryptocurrency in 2018, Bitcoin will surely able to preserve its leading role and find a lasting, effective solution to its already existing problems. It will be able to weaken the role of exchanges by decreasing the transaction fees, to decrease miners’ influence and get back its competitive advantages.