Will Bitcoin Always Be #1?
Posted on 07-01-2020.
The king of cryptocurrencies, Bitcoin has the largest market capitalization, the highest price, and the most famous name of the 2000+ coins that have followed in its wake.
And yet, the cryptocurrency is not invincible. Despite being the first fully-functional cryptocurrency with a head start in the race towards adoption, other challengers are catching up. Ethereum's thriving DeFi ecosystem threatens to garner more usage, and others like Litecoin could also give the reigning cryptocurrency a run for its money.
If Bitcoin is indeed one day replaced with a new coin, it will likely be due to certain weaknesses that are already beginning to show
Bitcoin is a very thirsty cryptocurrency. The process of creating new coins—or mining—requires lots of energy. In fact, some studies show that Bitcoin uses more electricity than small countries such as Ireland
This is because Bitcoin relies on the Proof-of-Work algorithm, a way of achieving consensus on the network through “mining”—the solving of complicated cryptographic puzzles using high-powered computer hardware. This makes high energy consumption unavoidable.
If mining was cheap and didn’t require a significant investment of energy, then anyone could get involved in the network without a high stake, putting the network at risk from bad actors.
Although devoting large amounts of electricity to solve cryptographic puzzles in the name of security is not necessarily unsustainable if the energy comes from a renewable source like hydropower, this may not always be the case—which might mean the cryptocurrency community decides to move away from the Proof-of-Work consensus algorithm.
Ethereum—the second-largest cryptocurrency by market cap—has proposed a solution to high energy consumption. Instead of using Proof-of-Work, Ethereum is planning to change the consensus mechanism to another method called Proof-of-Stake with the Serenity upgrade, otherwise known as Ethereum 2.0. Proof-of-Stake replaces the mathematical puzzles of mining with staking—a different way to validate transactions and achieve distributed consensus that uses significantly less energy.
As a relatively new asset class, Bitcoin is still finding a foothold in the market, and nobody can agree for too long on exactly how much a single Bitcoin is worth. This creates volatility, making the cryptocurrency very popular with speculators, and also helping it gain popularity as stories of Bitcoin millionaires hit the headlines.
But while volatility has helped Bitcoin mania, it has hindered levels of adoption. This instability can deter businesses or individuals who might otherwise be interested in accepting the cryptocurrency.
As Bitcoin grows and more liquidity pours into the crypto-space, the volatile cryptocurrency should start to stabilize. But until then, another class of coins promises to unleash crypto’s real-world potential and even topple Bitcoin. Stablecoins, which are “pegged” to a national currency like the dollar, bring a steady price that makes them convenient as an everyday means of exchange.
The rapid growth of Tether, which recently surpassed XRP in market capitalization, is one of the biggest threats to the dominance of Bitcoin.
If a cryptocurrency is to be widely adopted, it needs to be able to process a significant number of transactions. VISA, for example, handles an average of 150 million transactions
every day and can process more than 24,000 transactions per second.
All the benefits of Bitcoin—decentralization, security, and low transaction fees—make transactions on the blockchain slower, and Bitcoin is currently able to process about seven transactions a second. When the network is overloaded, each of these transactions enters a queue, and at peak times delays in Bitcoin transactions can reach several hours.
That’s why Bitcoin developers are scrambling to build effective scaling solutions. The Lightning Network
, for example, is one scaling solution that allows more transactions to take place at the same time on the network by adding a “second layer” on top of the existing blockchain.
But unless Bitcoin can scale fast enough, other cryptocurrencies threaten to offer a better alternative. Dash, for example, offers very fast transactions using its Instantsend
feature, and XRP was judged as the world’s fastest cryptocurrency by Weiss Ratings
One of Bitcoin’s key selling points, as explained in Satoshi Nakamoto’s whitepaper
, is low transaction fees. Although Bitcoin’s transaction fees
remain low—often less than 0.25 USD per transaction—some cryptocurrencies are able to offer an even cheaper solution.
Paradoxically, as more people use Bitcoin, and the popularity grows, the network gets more clogged and transaction fees can rise. Until Bitcoin has a scaling solution, congestion on the network is likely to cause spikes in transaction fees, which gives other cryptocurrencies the advantage in terms of cost.
Although transaction fees are highly variable, Litecoin
, XRP, and Ethereum all typically offer lower costs than Bitcoin.
The Future of Bitcoin
Much of Bitcoin's ability to overcome these challenges depends on the progress of scaling solutions. Numerous proposals—from CoinPool to MAST, Dandelions, and drivechains—promise to bring scalability and other benefits like privacy, to the Bitcoin mainnet.
The integration of these protocols, and the maintenance of key tenets like the supply cap and block size, is likely to determine the ability of Bitcoin to retain its crown.
Written by Kieran Smith, cryptocurrency analyst contributing to eToro, OneZero, and Brave New Coin among other publications. He provides content strategy and copywriting services for cryptocurrency companies at Bitcopy.
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