Bitcoin and Ethereum to Face Serious Competition From Lighter Blockchains
In an article that appeared in Forbes, the author goes over several reasons why he feels that less popular or newer blockchain projects could one day unseat the duopoly that the top two players hold today. His argument largely boils down to issues of scalability, confirmation times, and transaction fees. Let’s go over these ideas one by one, and see what’s going on here.
Transaction Fees are a Growing Problem, Literally
Just 12 months ago, transaction fees for bitcoin were so low that they were almost negligible. Proponents of the cryptocurrency often emphasized the lower transaction fees as one of its main selling points.
Fast forward to today and transaction fees, to ensure a quick delivery, can often exceed $200 during peak periods. Given this, it’s plain to see that something has gone wrong.
While the other big player, Ethereum, has done better in the transaction fee space, their fees have increased alongside Bitcoin, just at a slower rate.
As a result, it is only logical that as fees continue to rise, those looking to move money across cryptocurrency networks will look for alternatives. For example, this year Litecoin and Dash both saw explosive growth. These two currencies are well-known for their low transaction fees. By December of this year, Litecoin did see a jump in transaction fees. However, they are still more economical than bitcoin.
Due to its innovative network design, Dash has fared even better than Litecoin. Despite the currency reaching all-time highs of $1,500 or more, transaction fees are still just a few pennies and are often instant. While Litecoin and Dash both have large market caps and are good investments, they are still nowhere near the brand recognition and network participant numbers that Bitcoin and Ethereum have.
The Nightmare of Slow Confirmation Times
The second point of contention in the Forbes piece relates to confirmation times. Bitcoin, by today’s standards, operates prolonged block times. The block takes ten minutes to complete. And while one or two years ago this was more than sufficient, it has become quite a dinosaur. Newer blockchains and other cryptocurrencies either have much shorter block times or use an entirely different system altogether such as relying on masternodes or something similar to resolve scaling issues.
Litecoin, when it was deployed, utilized a 2.5 minute block time which at the time was revolutionary. It is still often fast enough for most usage today, but it is far from instant. The article notes that to see cryptocurrency develop, this problem of transaction times will need to be resolved.
As a result of Bitcoin’s hyper-competitive network fee structure and comparatively slow block time, the network for the last few days has frequently been bogged down by more than 100,000 unconfirmed transactions and sometimes as high as 250,000 (172,000 at press time).
To understand this problem a little better, let’s use an analogy. Imagine that there are three restaurants in a town. One of them serves the best food in the city, however, in order to get in the restaurant you need to wait in a six-hour line. The other two restaurants both offer excellent food, but perhaps are not as famous as the busy restaurant. The other two restaurants only have a five-minute wait to get in or sometimes no wait at all during peak periods. Which restaurant would you choose?
While many would still choose to go to the “best” restaurant – representing bitcoin in this analogy, many others would prefer to avoid the wait and instead be more than satisfied with the other two restaurants, like Litecoin or Dash, in this example.
Scaling is a Serious Problem
Scaling refers to a blockchain‘s ability to handle ever-growing amounts of traffic and transactions. Nikolai Kuznetsov notes the example of CryptoKitties that nearly crippled the entire Ethereum network.
In response to questions about scalability, Ethereum co-creator Vitalik Buterin has his plans for how to handle it. Specifically, he refers to a process known as sharding that he believes will be the ultimate cure for scaling issues at least for Ethereum.
On the bitcoin side, second layer solutions such as the Lightning Network have been proposed, but have yet to be deployed. In conclusion, it is true that these issues can and will push people away from Bitcoin and Ethereum.
However, as these platforms have so much funding and interest in them, solutions will appear eventually. Competition is also very important and is an excellent driver of innovation, and with so many people supporting new and exciting blockchains that have better technologies, alternatives will continue to exist and thrive in a multi-currency system.