Why Bitcoin might not be the future

Jessica McLaren, Staff Writer

If you are a regular attendee of the world wide web, you have surely seen the term “blockchain” used in reference to cryptocurrency at least once — if not hundreds of times. Blockchain technology, which allows for data and information to be shared without a central authority, has been praised in recent years for its transparency in peer-to-peer (P2P) transactions and other monetary exchanges. However, the recent upsurge in decentralized, untraceable banking poses the question: when did we stop trusting banks?

Although not directly correlated with the rise of cryptocurrency, the 2008 banking crisis indubitably had an impact on the way that we utilize and depend on financial institutions.

For many Americans, the turn of the 21st-century signified an era of opportunity, abundance and prosperity following the remarkable technological growth of the 1990s. During this time, homeownership quickly became a matter of social and economic status — an emblem of stability and affluence as families began to settle down and embark upon their American dream. To ensure that every family had access to this luxury, the federal reserve lowered interest rates and banks began to distribute “low-risk” mortgages like candy. 

As the federal reserve continued to lower interest rates, reaching a record low of 1% in 2003, the housing market endured exponential growth until it reached its peak in early 2007. At this time, financial institutions in the U.S. held more than $1 trillion in securities and other fungible assets backed by subprime mortgages, which are granted to individuals with poor credit. As a result, interest rates began to skyrocket and many Americans found themselves with a home they could no longer afford. 

Ultimately, the 2008 banking crisis was deemed to be a consequence of economic deregulation that allotted for predatory and fraudulent transactions. Even today, many Americans carry a deeply rooted sense of mistrust in centralized banking institutions as they often execute similar shortcomings.

In a centralized system, the entire hierarchy of pathways is directed by a single commanding server. Accordingly, the success of any and all network operations will inevitably be contingent on the prolonged fidelity of the host network. In fact, most web services available today, such as online banking and streaming sites, operate using a centralized network. In most cases, minimizing the number of governing servers can help cut down on costs and resources and ensure consistency across all interfaces by reducing conflicts of interest.

However, in establishing that centralized networks do, in fact, allow for a more streamlined user interface, we can identify that they are not ideal for cryptocurrency. If the computing power is concentrated at the top, so is the liability. This means that even slight disruptions to the central server can elicit server crashes, data loss and other malfunctions in the inferior nodes, sometimes inhibiting their ability to run at all.

While they may be convenient, hierarchical systems require strong network connections to efficiently interpret and process user requests. In other words, centralized networks are delicate and can only host a finite amount of traffic before users begin to experience delays. Further, focusing all of your security efforts on just one network can pose significant privacy and security risks to both clients and users if the center of the grid becomes compromised.

On the other hand, a decentralized network distributes authority across several pivotal structures that can actively sustain network connections in the event of a cyberattack or other type of malfunction. Launched in 2009, Bitcoin was the first digital currency to successfully decentralize its networks by eliminating the need for a third party to validate individual interactions and affairs. 

Bitcoin was unique in its ability to authenticate each exchange by weaving the front of every new data sequence, called a hash, with the tail-end of its predecessor. This technique — described as a blockchain — was first used to digitally notarize contracts and other documents online but has since rediscovered its purpose in authorizing cryptocurrency markets. 

Put simply, Bitcoin is an expression of online funds sourced by the energy used to calculate extremely complex calculations called data blocks — a process referred to as “mining.” The currency’s value is established through a consensus that these data blocks represent “proof of work” that is worth a particular monetary amount. In general, the consensus agrees that if a data block can’t explain its hash placement, it is presumed by the majority to be null and void. 

The value of the resulting data sequence is then amplified using an automatic lottery process in which a data block is randomly selected to be added to the blockchain in such a way that can’t be reproduced. The lottery, which occurs every 10 minutes, is performed with the sole intent of creating scarcity and value that can be translated into units of Bitcoin. To preserve this value, the lottery code has specified from day one that production is not to exceed 21 million Bitcoin; this means that unlike soft currencies like paper money, Bitcoin is not subject to inflation. At the time of publication, only around 19 million have been mined and completion is not expected until the year 2140.

While the blockchain itself is relatively straightforward, its economic implications are not. For example, cryptocurrency can be used as a tool to help slow inflation, similar to gold. Although it isn’t exactly tangible like gold is, Bitcoin is still considered to be a hard currency since its value swings according to demand. Once purchased, it can be either stored, exchanged for goods and services or converted to another currency.

However polished Bitcoin may be in facilitating P2P transactions, we run into some issues when we try to apply it across wider markets. Because Bitcoin has no true intrinsic worth, its value is extremely volatile as it is entirely reliant on supply and demand. As a result, it experiences extreme market fluctuations that can be difficult to accurately predict. Furthermore, cryptocurrency must be limited in its supply in order to retain its value, which can cause major economic instability in the face of a crisis. 

Ultimately, it is extremely unlikely that Bitcoin will ever expand to the point where it replaces modern-day banking. Nonetheless, blockchain technology has proven to be extremely versatile in eliminating the need to “trust” a financial institution with your money and it is only a matter of time before we see major developments in the movement towards decentralized banking.