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I’ve been interested in Bitcoin and the underlying technology for the past couple of years, and have tried to learn as much as possible about the technology and its potential use cases. There is a lot of hype surrounding Bitcoin and the Blockchain, but I do not think many people posses enough knowledge about the technology. I don’t claim to be an expert, but I’ve been trying to keep up with the technology, the current arguments as to why Bitcoin/Blockchain are important and finally what impact it will have on the future of money, currency, finance, trade, insurance, contracts, legal, or many other industries.
As I read and think about the new technology, I stumble upon several questions that I would like to see discussed in more detail about the future of Bitcoin. Most of the media articles today discuss the value or price of a Bitcoin and the high volatility of the price. I’m not so much interested in that angle, as I believe the technology may enable mass disruption in several industries in the future. I still have some questions that I do not know how to answer or would like to hear more opinions as opposed to the future price of a Bitcoin. For what its worth, I do not own any Bitcoin as of this publishing.
- Currently, there are about 13.7m Bitcoins (BTC) in Circulation (see chart) which leaves about 7.3mBTCs yetto be mined and circulated. Amaximum total of 21mBTCs exist and no more. So, what happens to the miners value proposition once theBitcoins have all been mined? Currently, 25BTCare assigned to miners around every 10 minutes ($6750 at today’s price of $270 perBTC). This rewardwill be halved every 4 years but the mining process will become more expensive. Because of the reduced rate of mining BTCs, thefinalBTCwon’t be mined until the year 2140. It becomes more complex and associated costs increase for theBTC miners as time progresses, and at some point itmust be cost prohibitive to keep mining unless the price of aBTC rises proportionally withthe complexity of mining. Unless,BTC prices rise enough to keep the reward high enough for the miners. Bitcoin is deflationary by nature, so in theory the price of a singleBTC should rise over time – No one can “inflate” theBitcoin economy by “printing” moreBitcoins or increasing the number of availableBitcoins.
- At some point, does it become uneconomical for a miner operation? The backbone of the blockchain is a decentralized network of computers that validate a set of transactions and provide consensus as to the validity of the transactions. That’s in essence what a miner provides in the Bitcoin ecosystem. Do these miners start to impose a transaction tax (cost) to verify (Proof of Work) transactions to the Blockchain? Currently, a given benefit of Bitcoin is that it does not have a central authority, and transactions costs of minimal if non-existent. Does it stay this way forever?
- The cost to run a BTC mining operation has grown exponentially, and now groups, companies, and pools of computing power make up the mining operations. Can one of these operations become big enough to control a majority of the size of the miners? Meaning, can one group control more than 50% of the mining computing? If so, this will breakdown the “trust” of the blockchain as a control of 51% of the nodes will allow a miner to control the blockchain and allow double dipping on use of Bitcoins. Will this be a possibility in the future? This sounds like it is most plausible at the current time, and could severely impact the integrity of the system.
- It appears to me that Bitcoin is going to be The standard of the Cryptocurrencies, and all other variations will not amount to much (I could be way off here, but it appears that many of the hundreds of other cryptocurrencies have not amounted to anything over the past several years). The Bitcoin blockchain will be the standard that the future will be built upon – it might be morphed to support more transactions per second, and support side-chains so other industries could use the blockchain without affecting the main blockchain – but the BTC blockchain will the standard. I think because of this, and as BTCs become more scarce and more costly to mine but become more mainstream that they must become more valuable? Bitcoin exchanges will become more secure as more money is poured into the ecosystem and the idea of the blockchain and BTC are more accepted, so these exchanges must store Bitcoins in order to exchange between dollars, pesos, euros, renmibi, yen etc… I think at some point the price of a Bitcoin will rise – not sure if I am sure enough about this to invest by buying BTCs though.
- Because I’m interested in investing, and finance, one of the more interesting blockchain solutions has been created by Ripple Labs. Ripple Labs created Ripple for the specific purpose of funds settlement which is used for sending and receiving of funds. By using blockchain technology, and a new currency called Ripple (XRC) the infrastructure is built to bring speed and convenience to the cross-border, and institution to institution fund settlement market. Ripple is open-source, and it requires that companies or entities run gateways connected to the Ripple network to support the solution. It is the same concept of Bitcoin in that there is a public ledger, a digital currency with transactions that are validated by a decentralized network of nodes over an untrusted network (Internet). This link is a great explanation of Ripple that is much easier to understand. Will these specific blockchain implementations upend the Bitcoin infrastructure in the future? Will this ultimately wipe out the value of a Bitcoin? In Ripple’s case, there are 100Billion XRC (Ripples), and the company Ripple Labs controls a majority of those XRC’s – is this a true decentralized solution then?
- Ethereum is another alternative blockchain that is being built with some stark differences to the Bitcoin blockchain, where the technology will allow contracts to be entered into in a decentralized manner. This can be used for financial purposes and non-financial purposes such as voting. How will these new blockchain solutions entice enough entities to build mining operations large enough to support the infrastructure necessary to handle a mass adoption of these solutions? It’s early in the ball game, so I’m sure many technologies will be tried, but eventually these will be consolidated into a few blockchain infrastructures over time. I still think the Bitcoin blockchain will reign supreme as the level of investment dwarfs all others.
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