What problems will the Bitcoin blockchain have to solve?
The world needs new money. And not just money, but an innovative digital currency. It won’t happen overnight, but a digital currency without the control of central banks is very useful for society.
And such a currency exists now. We are talking about Bitcoin, but… According to the data Coinmarketrate.com, the king of cryptocurrencies has some very important issues. It can no longer rely on the network effect, it is important that the problems that are present today are solved in order to provide a full user experience.
And so, it’s important to first consider how Bitcoin works in order to understand how problems affect it. And the main thing you need to know is a digital currency, which is recognized by a lot of people as a means of exchange, that is, they use it to buy and sell goods and services.
In order to own a BTC, first of all, it is necessary to have a Bitcoin wallet, whether it is hardware, software or online. This allows not only to store cryptocurrencies in it, but also to make transactions.
It is also the first cryptocurrency since its creator in 2009, Satoshi Nakamoto, decided to launch it after seeing the chaos created by monetary policy during the last subprime crisis. It is called a cryptocurrency because it uses cryptography to ensure security and therefore does not depend on centralized structures such as banks.
All this is possible due to the fact that a complete record of transactions is stored in a ledger called blockchain. Blockchain also ensures that people do not commit fraud, for example, they do not try to spend the same Bitcoin balance twice.
An important difference between Bitcoin and fiat currencies is the fact that in fiat currencies, the state can continue to print banknotes to pay its debts, despite the fact that this causes great negative consequences for the economy. On the other hand, some cryptocurrencies, such as BTC, have a final offer, which in this case is only 21 million.
However, we haven’t reached that limit yet, and new cryptocurrencies are being released every day thanks to a process called mining. Powerful computers are used to solve complex mathematical algorithms. For completing this task, miners receive a reward in the form of new BTC.
As more and more people join this activity, it becomes more and more complex. Up to the point that it will be impossible to get new coins.
Since there are no entities that can directly influence it, that is why they say that it is decentralized, not subject to inflation, economic collapses and all the troubles that usually occur in economies with intervention.
What are Bitcoin’s problems related to
It’s time to consider the problems faced by this cryptocurrency, as well as possible ways to solve them. These are the main problems that the cryptocurrency must cope with if it wants to finally take its place in the financial and monetary sector.
- Lack of intrinsic value
One of the biggest problems with cryptocurrency today is that it has no intrinsic value. This is a popular term among value investors who can calculate the value of a company through its assets and liabilities. Instead, Bitcoin is more like a commodity, since its price is determined only by demand and the amount that the buyer is willing to pay.
This is a difficult question, because by its nature it will never have intrinsic value. Its price will always be determined by supply and demand, so it is very difficult to predict its price.
This and other problems are part of the reasons why BTC may disappear.
- Tax and legal problems
The second problem with Bitcoin is that there is a legal loophole in terms of taxation and regulatory framework. Even today, cryptocurrencies are very young, so it is difficult for governments to determine how to manage them. Many countries of the world, pioneers in this field, have decided to take measures on this issue, while each of them has taken its own position.
In order for people to start using cryptocurrencies, it is necessary to establish minimum and clear guidelines on how people can use them. This implies that the problems and potential solutions are known. But to achieve something like this requires a far from simple process in a sector that is completely innovative.
Finally, an important point for governments is to decide how they will regulate these cryptocurrencies. This question is also extremely important for users who are not entirely clear how to work with them.
As cryptocurrencies are adopted and their market develops, the laws accompanying them will also develop.
- HARDWARE Contest
The process of verifying blocks with transactions is one of the weak points of Bitcoin, which is criticized by most of the community as a competition for who has the most computing power and the cheapest access to electricity.
This is due to a consensus algorithm called Proof of Work. Some have suggested an alternative, such as Proof of Stake, which is less demanding on hardware to solve this problem. In this mechanism, several nodes selected by the community are used to complete the task, without the need to involve a large hardware team.
The advantage is that they have to “put” a large number of cryptocurrencies on the line, the more, the greater the reward, and if they act incorrectly, they risk losing them.
- Economic impact
There has been a lot of speculation about what might happen when the maximum total number of Bitcoins is finally reached. It is expected that at this point inflation will end and a period of deflation will begin, and this will happen in 2140.
However, the correct use of this cryptocurrency today is enough to offset the effect of issuing new currencies. On the other hand, demand exceeds supply, so the deflationary effect is guaranteed.
- Slow transactions
It takes 10 minutes to confirm a Bitcoin block, and hence transactions in it. Therefore, if we have to wait for confirmation of the transfer of funds in order to receive a product that we want to consume quickly, this is a big problem. A typical example is coffee, which will have cooled down by the time the transaction is confirmed.
This problem also makes Bitcoin less liquid than other financial instruments that can be exchanged in seconds.
Fortunately, there are many solutions aimed at solving this problem. On the one hand, there are payment processors that first conduct transactions off-chain and thus provide instant and secure payment.
But there are also solutions such as SegWit or Lightning Network, which are aimed at achieving the same result. Thus, we could receive instant payments, and even with almost zero commissions, without involving a third party, as is the case with current solutions.
- Long-term security of the hashing algorithm
The hashing algorithm in Bitcoin is called SHA256, and many experts strongly doubt that it will continue to work as well in the future. If there is even the slightest possibility of hacking it, Bitcoin could be in serious trouble. For example, quantum computing poses a serious threat to it.
However, there are many new currency projects and developments for Bitcoin that are aimed at eliminating this threat, even if it has not yet arisen. This may reassure us about the future in this regard.
- High rates
The high fees that Bitcoin users suffer from are the number one problem of this cryptocurrency. Users even paid more than $50 per transaction at the peak of its price at the end of 2017. This undoubtedly works to the detriment of its use as an everyday exchange currency.
This is due to network congestion, which makes transactions with higher fees a priority for miners. This leads to price competition, which only increases the cost of transactions.
As we have seen with the example of the problem of slow transactions, there are developments working in this area that will indirectly help reduce commissions to acceptable limits. Even technologies such as the Lightning Network can eventually eliminate the commission practically, or at least make it so low that it will not be comparable to the amount of the money transfer.
- There is no mechanism for returning lost funds
If something has happened to your credit card or bank account, the organizations that support these services can solve your problem. However, in the case of Bitcoin, the stolen BTC disappears forever.
Unfortunately, there is no mechanism for returning BTC, which is a tragedy for a person who made a small mistake.
But all is not lost for the owners of this and other cryptocurrencies, as there are effective methods of storing them to avoid these problems. Hardware wallets are a convenient and secure solution for protection.
In turn, several companies offer storage services in which our deposits are stored in the safest way, that is, offline. Some wallet solutions also allow you to create backups to restore access in case of loss. Any measures we can take are always welcomed by cautious investors.
- BTC is unfriendly to low-tech users
For many of us, it is enough to read a few manuals, download the software and start buying and selling Bitcoin. But it is very difficult for others, especially representatives of the older generation, to use this technology. They are also repelled by what is not supported by the banking institutions or the governments they have lived with all their lives.
This combination of things necessary for use is a high barrier for many people. And, unfortunately, this excludes them from the future. Therefore, the community needs to work to improve the level of education in this sector and promote the use of Bitcoin and cryptocurrencies for rapid widespread distribution.
- Cybersecurity skills required
Those of you who are reading this article probably know how to create a wallet and send and receive cryptocurrencies. But this is far from taking the necessary steps to ensure the safety of your funds.
The huge growth of cryptocurrencies in 2017 attracted the attention of many people, but not with due attention to the necessary minimum knowledge in the field of security. Terms such as crypto wallet and cold storage may seem strange to many.
Again, it is important that the community gives these aspects top priority. But it is also important that each of us find time to research and educate ourselves on these issues. We cannot remain passive while someone solves our problems, we must take an active position.
There are services such as escrow services that will do everything for us, albeit for a fee. On the other hand, we can accept this challenge ourselves. Whatever path we choose, we must do it to be protected from the threats that lurk in this world.
- Impractical for retail use
This problem is related to two aspects that we considered earlier: slow transactions and large fees. Because of this, it is very difficult for us to sit in a restaurant and order pizza for a few dollars or euros, since commissions take away most of this price. There is also the detail that we will have to wait 10 minutes for our transaction to be confirmed, which makes many types of commercial activities impractical.
And these 10 minutes are the best scenario, because there are people who had to wait for hours and days to get their BTC into their wallet. There are third-party services for this, for example, a payment processor bitpay.com , which act as intermediaries, simplifying this process.
It takes the risk that someone, for example, will spend your funds twice, and thus offers the best experience for all parties. The advantage is that they have a large number of nodes around the world and thereby reduce the risk. This is an interesting solution, until eventually the blockchain itself will not be able to solve this problem.
- Lack of a mechanism to protect the user from fraud
Payment and credit card processing companies protect consumers from unscrupulous sellers with a feature called chargeback.
In the traditional system, if we can prove that we paid for a product or service and the seller did not deliver it to us, we can open a dispute, which ultimately, if we win, will lead to a refund of our funds. This happens to all traditional companies in this sector, and is a very important weapon for consumers.
Unfortunately, Bitcoin does not provide such protection, so you will have to make purchases more carefully. This is due to the fact that transactions on the cryptocurrency blockchain are irreversible. This is not so bad for traders who often fall victim to fraudulent refunds, but unfortunately not for honest customers.
The only way to solve this problem at the moment is to be very careful with who we send the funds to. There are no plans to change the principle of the technology to allow reverse payments, this is part of the essence of cryptocurrencies.
- The Bitcoin Blockchain Problem
The main problem of the Bitcoin blockchain is scalability. This is due to the consensus mechanism mentioned above, which does not allow the same fund to be used twice in different transactions.
As a result, we have slower transactions and higher fees – problems that get worse when popularity peaks.
This is undoubtedly the biggest problem of both cryptocurrency and the technology that underlies it and allows it to be used. If we want more decentralization, then we need more nodes to agree on which transactions are accepted in the chain. Although this can lead to slowness and high costs for users.
As we have seen, there are ideas to solve this problem, we will have to see if they are good enough for this and whether they will come in a timely manner, at least before a competitor takes his place.
Conclusion
As you can see, Bitcoin is not perfect, it has many problems that are important to know and understand. But even so, it’s amazing what he has achieved and what he can achieve in the future. With a lot of use cases that can significantly improve our lives.
We hope that this guide has helped you better understand the problems you will face in the future, and now you have information that will help you make much smarter decisions.