Over the course of 2019, Bitcoin’s price has risen roughly 135%. Following reports from Adamant Capital and Delphi Digital that Bitcoin had likely been bottoming for the current market cycle, the price surge started around the beginning of May. An open-source Bitcoin wallet could be a good option to store these and keep them safe.
Still, Bitcoin has a long way to go before reaching its full potential. Even though the crypto asset is often marketed as an anonymous, decentralized, apolitical version of digital money, there is much more that can be done for it to fulfill the cypherpunk vision of anonymous digital cash.
The following is a realist’s perspective on what Bitcoin can realistically provide today to its users.
- The Bitcoin network is not anonymous
In addition to being anonymous and fungible, digital cash should also be a lot like real cash. Without these features, it is not as real as its real-world equivalent. A considerable amount of Bitcoin is currently traceable. Several blockchain analytics companies are able to track flows of Bitcoin between users and write reports on the state of the Bitcoin network based on this data. A system intended as digital cash should not permit this to happen.
There have been some advances in making Bitcoin more private by Wasabi Wallet and Samourai Wallet, but there are still many limitations due to the current consensus rules that prevent making Bitcoin private. To create a more user-friendly experience, it may be helpful to use a system like Confidential Transactions, which masks transaction amounts.
The introduction of Confidential Transactions is unlikely to happen until quite some time after Bitcoin launched, but Schnorr signatures have the ability to provide businesses with a competitive advantage.
Furthermore, the Lightning Network, a second-layer payment protocol, is capable of improving privacy by broadcasting transaction information to fewer people and publishing less transaction data on the blockchain.
A substantial portion of Bitcoin’s potential value and utility stems from the hedge it provides against a cashless society where governments and big financial institutions track everyone’s financial activities. Therefore, improving Bitcoin’s privacy should be a big priority for developers and users.
In spite of this, Andrew Poelstra, a Blockstream mathematician, has explained that Bitcoin users tend to resist experiments involving privacy that could compromise security, stability, and a transparent calculation of the amount of Bitcoin in circulation.
2. Centralization of mining occurs at mining pools
Bitcoin’s key selling point is that it has a dynamic, potentially anonymous system for determining where transactions should be sent. This is the reason why Bitcoin functions as a censorship-resistant digital currency in the first place, and it’s also why Facebook’s upcoming “cryptocurrency” product likely belongs in an entirely different category altogether.
However, the current state of mining is characterized by large pools that can easily be identified. Recently, reports suggested that Binance and mining pools collaborated to push for a reorganization of the blockchain in response to the Ethereum hack. However, these reports were somewhat overblown. Keeping mining pools in coordination may not be the best solution. This kind of organization may also be used to censor transactions that a government deems unsavory or to use their own mining pools to censor.
Bitcoin was never meant to operate this way.
BetterHash, a proposal by longtime Bitcoin developer Matt Corallo, may help address this issue of centralization around mining pools. BetterHash’s main strength is that it allows miners picking their own transactions to be included in blocks by directing their hashing power to a centralized mining pool. The meaning is that if someone wishes to control what types of transactions can be included in a new block, they will need to collude with 51% of individual miners rather than with the mining pools that represent 51% of the network hashrate. In addition to improving privacy for transactions, better privacy would also make censorship and other bad activities less likely from miners or mining pools since they would be unable to differentiate between them.
3. Centralization occurs at exchanges
The third reality check for Bitcoin relates to the recent price hike. Since December 2017, most Bitcoin-related activity has been shifting from personal wallets to centralized exchanges, as more and more people have become more interested in speculation than anything else. Bitcoin was intended to be electronic cash, but that’s not how it’s used by many people; Coinbase once disclosed their holdings of roughly 10% of Bitcoin at one time.
In the context of Bitcoin, holding so much of the supply on behalf of others is problematic given how centralized third parties like Coinbase, which essentially function like traditional financial institutions, act. There is no doubt that these kinds of centralized entities have a history of hacking, though exchanges have improved in their capacity to deal with these types of incidents over time.
Moreover, Bitcoin has been nicknamed “digital gold” for a reason. It was created out of a strong anti-regulation ethos. In both cases, though, if a government wanted to outlaw Bitcoin, one of the first things they would probably do is seize the Bitcoin and other cryptocurrency stored at local exchanges – just as Franklin D. Roosevelt seized gold individually back in 1933.
In fact, one of Bitcoin’s most compelling features is that it’s almost impossible to confiscate since it can either be carried on a piece of paper, on a hardware wallet, or even in the head as a memorized phrase. The removal of this feature happens when one hands over control of one’s Bitcoin to a bank.
Centralized exchanges also have a key issue with privacy due to their anti-money laundering and Know Your Customer policies. Further, users also entrust exchanges and other custodians with verifying that the Bitcoin network is following its rules.
In addition to these issues, Bitcoin users are also uncomfortable with the way that Whole Foods and Starbucks recently implemented “acceptance” of Bitcoin.
Finally, more decentralized exchanges with non-custodial options are coming to market. Spark was an exchange powered by the Lightning Network, and Arwen is a solution allowing users to trade without having to give custody of their coins to a third party.
The existence of these non-custodial exchanges is a positive step, but Bitcoin users should instead mostly transact peer-to-peer in order to lessen the impact of these security holes.
In terms of privacy and decentralization, Bitcoin appears to be moving in the right direction (and thus being more valuable as digital money), but it is also clear that there is much still to be done. Thankfully, Bitcoin’s current consensus rules do not have to be altered in order to accommodate helpful improvements such as the Lightning Network, which continues to grow.