The biggest problems of Bitcoin that people are not speaking about
Bitcoin is the oldest and currently highest valued cryptocurrency. However, Bitcoin and many cryptocurrencies have several major issues that this article will discuss. Some issues are well known and spoken of, however I want to add some more focus on the ethical, social and political impact that these systems have, the ones that are not being discussed enough.
These problems apply to most of the public, permissionless, psuedo-anonymous cryptocurrencies including Bitcoin forks, Ethereum, a lot of Ethereum defi products, Monero, Zcash, EOS and many more.
I hope this article can make people think a bit deeper about what is being built and whether it will make the world a better place…
This article provides what I call a Binary Story: a story that presents one real perspective on a topic. It does not necessarily mean the opposite of the story is not true and a Binary Story does not invalidate other perspectives on the topic. We all have different perspectives and a Binary Story shares just one perspective for others to learn from and recognize as valid.
I have been technically involved in the blockchain and cryptocurrency space since 2015 as a developer and educator. I continue to work in this industry as I see the potential for public permissionless systems to create a positive impact on society. See my conclusions for more details.
Bitcoin and most public permissionless cryptocurrencies have a very special design feature:
In Bitcoin, anybody can create an unlimited amount of accounts in the system whenever they want.
This decision has been made to reduce the censorship that can be applied to a person using the system, improve privacy and also, in some cases, to allow greater anonymity. But this decision creates a myriad of potentially devastating problems in the system which are discussed in points 1–4 below.
1. No reputation or social accountability
With the ability to create unlimited accounts, relying on the reputation behind in any account is not possible. At the protocol level, an account is able to do anything able to be programmed — for good or bad.
With this design, there is no built-in capacity for any social/human accountability that comes with reputational systems.
Accountability is a foundation of human society that we have learned to use over thousands of years. It is not without reason that we still have accountability built into our current state nations.
2. Only financial incentives to regulate good behavior
In Bitcoin, money, and only money, can be used to create incentives because this cannot be duplicated over different accounts.
Research has shown many times now that financial incentives are not always the most effective at creating good behavior. As a system designed to be the foundation of society (some crypto enthusiasts argue it this way anyway), how can we trust a system where only money is used to enforce behavior — as this will only favor the wealthiest — a paradigm that most people do not want.
Financial incentives are much simpler and generally scalable than non-financial incentives ( programmatically, and in regulation). People should very carefully consider the social sustainability that pure financial incentive systems like Bitcoin would have with human societies.
Some would argue that cryptocurrencies are not meant to be the foundation of society and in that case, please strongly consider problem #4.
3. Does not improve existing trust
To a certain level, people already are able to trust and cooperate with people they have never met before. This, of course, depends on many factors about the individuals, culture, and environment.
When interacting with other accounts on Bitcoin, due to their anonymous nature, Bitcoin removes this implicit trust that already exists and replaces it with anonymous financial incentives.
Instead of replacing trust, would it not be better for us to build a system that improves on the existing trust we have with each other?
4. Not able to self-regulate
Due to the lack of accountability in Bitcoin and co, and the reliance on pure financial incentives, it is very very very difficult to regulate behavior.
Several consequences of this problem has already been witnessed for many years now in the cryptocurrency space.
- Smart contracts and other hacks have plagued the industry, with $1.8 billion dollars stolen from 2010 to 2018 from other people mostly without consequence to the hackers. The most recent [known] hack was just last month where $350,000 was stolen.
- Scam ICOs, where scam artists create a fake investment crowdfunding and then run off with the money were and are still a big thing with millions of dollars per day stolen. Scam artists walk away with the money without consequence most of the time.
- An estimated 20% of all Bitcoin (approximately $13B worth today) is irretrievable due to keys lost by people. Nobody is held responsible (the protocol allows it so it’s the person’s responsibility to manage their keys) for this so investors are left with no options.
The reality is that while Bitcoin consensus is very secure, the application layer on top of permissionless public blockchains is extremely unsafe for the mainstream.
Bitcoin is known to be used for purchasing weapons and supporting terrorism, which 99.9% of people will agree is not ok. By a long long way, the biggest use of Bitcoin and cryptocurrencies in practice is still for investment speculation. It is good to reflect on what Bitcoin is currently being used for and asking if this is adding something for society.
Due to this lack of self-regulation, state-nation regulations are attempting to regulate the entry/exit points of cryptocurrencies (exchanges) to try to limit unwanted transactions (and also ensure taxes are paid by the citizens). An EU petition has even been made to try and create some responsibility for crypto fraudulent activities mentioned above. There are two big issues with this:
- It’s impossible to regulate Bitcoin users if they do not want to be regulated
- Regulation like this undermines the utility of Bitcoin as it is proposed as it removes anonymity.
Bitcoin cannot be easily regulated externally, but if it cannot regulate internally then how can people have enough confidence to use it safely?
5. Not designed for mainstream
Bitcoin addresses global problems in a way that is accessible only to a few. This is due to its technical design as well as its current political story (see problems #4, 6 and 8).
This makes Bitcoin a useable (actually using Bitcoins with a sovereign wallet as intended, not just holding them on an exchange) system only for:
- The tech-savvy and financially risk ready people
- B2B use cases — as they have the technical capacity to manage Bitcoin
The problems Bitcoin proposes to solve aligns with the majority of the world’s view on society. However, the solution is not adoptable enough for most. The knock-on effect of this issue is a potential for much greater inequality than we have now, due to the inability for the majority to access a technology that provides the potential for greater financial opportunity.
Some seem to be optimistic about layer 2 solutions like Lightning Network, however, these are yet to be proven in practice in Bitcoin. There are working solutions on other networks, however, these again increase complexity, trust required and degrade usability.
It is theoretically possible to overcome these usability difficulties by educating people enough, but the magnitude of this endeavor is massive. More importantly, solutions ready for the masses will solve society’s problems in a more user-friendly way that does not require as much education and thus will out-compete Bitcoin in this challenge.
6. Hard to acquire
People have to get Bitcoin before they can use it. The standard way to do this at the moment is through heavily regulated exchanges and this is both a huge challenge for regular people as well as a step that compromises the values promise by Bitcoin and co.
Yes, there are other ways to get Bitcoin like asking a friend or decentralized exchanges, but these are generally not accessible to most, or too technically challenging to start with.
7. Cannot change, upgrade or adapt
By design, upgrading the Bitcoin protocol is extremely difficult. As a piece of software technology, this goes against most of the mainstream learnings and philosophies that can be seen in all the software technology industry — that of iterating software based on user feedback in short loop cycles with the assumption that software can be upgraded. There are many reasons for this that do not need to be listed here, but the point is that Bitcoin ignores all of this and instead tries to define a system that does not need to change ever, which, in today’s evolving society isn’t smart.
8. Does not unbank the banks
(from blockchain.com 2020–03–05)
These are the “banks” of Bitcoin. The graph shows the Bitcoin operators (mining pools) and their relative political power to upgrade the system and change the rules. As the accepted game-theory in Bitcoin goes, they will only upgrade the protocol if the new rules are more profitable for them.
As you can see there are 7 pools (companies) that control 75% of the decision-making power. It is even worse in many other cryptocurrencies, notably Ethereum.
7 companies (p.s. Most are in China) running a currency and only changing the rules for their own benefit… Does this not sound very like the current banking system?
An ecosystem/society that is, at its foundation, governed by money and wealth, will likely create a system that creates severe financial inequality and greedy governance.
The rules in Bitcoin are far more unbreakable and transparent in than in current financial systems. Also, a large network of nodes audit the network. These two factors give Bitcoin an important characteristic: changes to the rules that are not accepted by the majority of the network are mathematically impossible, a characteristic not shared to the same level by many state nation fiat currencies. In summary:
- changing the rules for the worse of everyone is practically impossible
- changing the rules for the better as long as it is equally or more profitable for the operators is possible
- changing the rules for the better that reduces operator revenue is not possible. In many societies, regulation is able to affect the banking rules externally for the benefit of its citizens, making Bitcoin worse than these.
There are a few important notes to make when discussing this topic
- There is hope in Proof of Stake consensus to increase the decentralization of the political power in networks (amongst other benefits). Looking at currently operating POS chains, this has not made particularly significant improvement in most cases. Those with high hopes for Ethereum 2.0 should consider the considerable risk that this challenge is not overcome with POS. Delegated Proof of Stake is another consensus mechanism related to POS, and has shown a few blockchain cases with a higher degree of political decentralization, but also have significant other challenges to overcome.
- No matter what consensus mechanism is used in practice, the entities entrusted to operate and govern the network have the ability to hide behind an anonymous, non-socially-accountable account on the network when making decisions, and Bitcoin exists without any formal process for showing the intentions and reasoning behind political decisions. At this meta-political level, the decision-making process behind the governance of many blockchains is still extremely opaque, despite the blockchain being transparently operated.
8. Bitcoin is outdated software
The technical flaws of the Bitcoin software are mentioned last in this article because they are the problems most spoken about in this industry. Each of these listed issues on its own is quite big. A very quickly summary of these well-documented issues, Bitcoin:
- cannot scale well enough to be used as a global currency
- consumes a huge amount of energy, about the same amount as the country of Chile, and with the effective carbon footprint of New Zealand
- is extremely slow at processing transactions, degrading usability
- has account names in the form of cryptographic keys which are difficult to understand
- expect users to be solely responsible for their account management, making the loss of funds and key management difficult
- has high transaction fees, which would be even higher if it were to be more adopted
- has large price volatility making it too unpredictable to be used as a currency (that most people in the industry do not think that Bitcoin is/can be a day-to-day currency)
The good news is that there have been significant improvements made in blockchain technology that addresses all of these enough to make them technically ready for the mainstream (but not in Bitcoin).
It is certainly not without reason that Bitcoin is the way it is, and I do not want to detract from the wonderful properties and characteristics that blockchain technology offers, first shown by Bitcoin.
I was enchanted by the story of Bitcoin when I first heard of it, but have since moved on to technology that I think can make a big positive impact for humanity with less risk of creating more problems.
Maybe you have moved on from Bitcoin like I have, and are looking at other cryptocurrencies public blockchains alternatives. I hope that as you read this article you have recognized that most cryptocurrencies still share many of the problems mentioned in this article.
These problems raise significant ethical social and political concerns about its future.
Can bitcoins solve all these problems?
I don’t think so
Is that a problem?
Is there an alternative that adequately addresses all these problems?
Not that I know of
Then why do I still work in blockchain?
I see new ways to use this technology to solve all these issues, while still maintaining the important characteristics of public permissionless blockchains that increase transparency, does not result in technical or political centralization and has a positive impact on society and its people. I think the world’s complexity makes silver bullets not possible, but I do see ways for a sustainable and better world with blockchain.
I am actively researching and building systems and influencing the industry to this effect. Follow me on Twitter or Medium if interested in what I do.