by Ziwen Zhou
Edited by Ishaani Khatri
Cryptocurrency: a term I’d wager you are familiar with, especially as more and more of the public falls in love with the indelible promise of this revolutionary technology. Indeed, various cryptocurrencies, particularly Bitcoin, have dominated news cycles as they experience preposterous price fluctuations (with daily losses/gains in the magnitude of hundreds to thousands of dollars) and continually see the development of technical upgrades.
The interest and investment in the cryptocurrency sphere shows no signs of halting, and at this point seems to rival the frenzy of the dot-com bubble in the 90s. Currently, cryptocurrencies have a market capitalization of over $190 billion dollars, which is simply an astounding figure . This pales in comparison to the quantity of fiat money, “regular” currency such as the US dollar or Chinese yuan, in circulation. Yet, some experts predict that cryptocurrencies will eventually supplant fiat money, especially as the worldwide economy that such a centralized system is predicated upon shows increasing signs of strain and deterioration.
Unfortunately, even as many can articulate a general familiarity with cryptocurrency or Bitcoin, a large percentage of people still don’t fully comprehend what constitutes a cryptocurrency.
A cryptocurrency is a digital currency that operates without a central regulatory body or bank and uses encryption techniques in order to regulate the currency supply and verify the legitimate transfer of funds. Naturally then, there is no artificial restriction placed upon the number of cryptocurrencies. A veritable menagerie have come into existence (including DogeCoin, which was originally created as a joke coin only to later be seriously traded).
The valuation of a cryptocurrency is entirely dependent on supply and demand, which explains its tremendous volatility. This offers the advantage of rendering cryptocurrencies virtually immune to regulation or manipulation by a government, which counterintuitively makes them more stable than fiat money as a monetary source as far as its susceptibility to systematic manipulation and control by external events. Experts have pointed to cryptocurrencies’ “information transparency, tamper-proof construction, and openness” as significant advantages over fiat money .
Of the thousands of cryptocurrencies, Bitcoin clearly possesses the most renown and popularity and also holds the largest share in the cryptocurrency market at 68.4% . As the majority of the value in the market is in Bitcoin, all other currencies are collectively referred to as “altcoins”.
Even as Bitcoin holds a commanding advantage over its competitors for preeminence in the cryptocurrency realm, many believe that the future actually resides with Ethereum, the largest altcoin.
Whereas Bitcoin is as pure as a form of cryptocurrency there is (simply your funds stored digitally, exempt from oversight or regulations by banks or the government), Ethereum is an entire digital ledger system that uses a currency called Ether (what is actually traded) to maintain its integrity .
In short, the developers of Ethereum didn’t simply apply the blockchain concept to currency in their efforts to decentralize. With the advent of smart contracts and “dApps,” short for decentralized Apps, business agreements, technology, and information can all change hands on the Ethereum network without the possibility of third-party influence/interference.
Smart contracts are exactly what they sound like; they are supposed to be a more intelligent way to create a contract between parties. They only execute with the transaction of Ether once certain conditions are met: as these conditions are encrypted into the blockchain, they are henceforth unable to be modified . As a result, there can be no backtracking on agreements, and business disputes become an impossibility. Furthermore, these agreements suddenly can be made at the discretion of any two parties; there is absolutely no way for the government or anyone else to be privy to or intervene in their creation or fulfillment.
On the other hand, dApps work to afford developers a similar degree of autonomy and freedom as well. By uploading their invention directly to Ethereum, they make it immediately and directly available to users, cutting out any middlemen to store information or manage functionality. The programs run on code that is publicly available, and is not owned, controlled, or turned off by anyone. Imagine then, a dApp version of Facebook or Twitter where any post would now become permanent the moment it was uploaded to the blockchain, unable to be deleted or modified by either the user or the creator of the app. At the present moment, there are over 2,600 dApps available on Ethereum.
With Ethereum, the potential for deregulated, 100% secure transmissions of money, information, and agreements is suddenly far closer to reality than the pipe dream it was once considered to be.
However, the issue with Ethereum today is that its encryption and verification system is highly cumbersome. In order to verify the legitimacy of actions performed on its blockchain, Ethereum requires thousands upon thousands of nodes (think extremely powerful computers) to work in tandem in the verification process. The problematic aspect is that each node must store the full history of the blockchain in order to accurately compare transactions with other nodes.
As the data storage requirement has already eclipsed 1 terabyte for the entire blockchain (equating to over 350 million transactions), this system is already becoming infeasible. As Ethereum seeks to continue growing toward a worldwide user base, scaling its encryption techniques is a must.
Luckily, a few methods are currently in development (with projected implementation in the next year). The two most promising solutions that are being tested are sharding and off-chain transactions.
Sharding seeks to break the Ethereum into smaller, more manageable components by dividing the node network into smaller node networks. The goal is that a group of nodes is assigned responsibility for only a small portion of actions on the blockchain. If a node needs to access transactions or blocks of data they don’t possess, theoretically other nodes can be accessed for the required information. With this method, nodes no longer have to verify the entire blockchain before approving transactions and the current 10-15 transactions per second Ethereum can handle could grow exponentially. Recent research suggests that processing efficiency could improve to levels on par with leading credit card companies, which can handle upwards of 50,000 transactions per second .
The other solution is to implement off-chain transactions. The principle here is that the majority of actions will no longer have to be verified in real time by nodes but will instead occur off the blockchain. For this to work, transactions must be irreversible by payers and able to be enforceable on the main blockchain at a later time. For a point of reference, think of a tab at a restaurant. Throughout the night, the amount on the bill accumulates as more food is consumed, but payment is withheld until the entire meal is finished.
Off-chain transactions would work very similarly with transfers occurring between two parties before being uploaded to the main Ethereum network at an opportune moment. If this method can be successfully incorporated into Ethereum, the pressure to complete transactions at a certain speed would be eliminated and the current efficacy of the network at processing transactions would be sufficient even as the network continually grows. While certain security issues arise if transactions are permitted without verification by the node network, the time and energy expenditure needed for each transaction decreases drastically, which is important for both the scaling and environmental sustainability of Ethereum .
The ramification of the successful scaling of Ethereum could be incredible. Soon, there could be a day where all our money, information, and communications go fully digital in a decentralized worldwide network.
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