Cryptocurrencies are an existential threat to the world of authoritarian centralized control. They enable censorship resistance through decentralization and provide a true digital asset transformation.
Bitcoin’s underlying technology is unparalleled in all of human history, it offers us great benefits that are hard to ignore. The four key dimensions of a Cryptocurrency are decentralization, security, privacy, and scalability. Let’s dissect each one of them.
This is one of the crucial aspects of a Cryptocurrency. There are incentives that require miners to compete to keep each other honest. Geographic decentralization is mainly driven by the fear of State regulation and that it might change overnight shutting down miners. Protocol development and implementation require that we avoid following a single business model and instead create an open standard that incentivises business to compete on their products, services and delivery. This removes obstacles and pressures that can be caused by centralisation, such as the cost of entry and the shill known as intellectual property.
Bitcoin uses Proof of Work(PoW) algorithm, This is proof of setting fire to money or resources, By mining, someone is saying they believe so strongly in Bitcoin that they are willing to burn their deflationary State issued currency to acquire a piece of the pie. From a design perspective, you require mathematical proofs of cryptography that are well known and understood. To achieve this we need a community of researchers and engineers to ensure we have thoroughly battle tested implementation. Not some mediocre unproven algorithm based on an unsolved problem that will be solved one day.
In order to be completely private we require the following.
- No personal identity
- No known recipients
- No known asset types
- No known values
- No linkable transaction history
Yet still, have the ability to verify the integrity of the network. Achieving all of this may be impossible but we can potentially improve on some of these. Research like Confidential Transactions and projects like mimblewimble continue to improve things. The improvements on privacy enables greater fungibility and in turn, censorship becomes difficult or impossible. Maybe most important is ensuring that the network remains permissionless and people are free to transact and leave without fear of suppression.
This is the most controversial of the requirements. It is also the one component most coins seem to change in an effort to distinguish themselves. Unfortunately, it is not an easy valve to just turn up. By changing the base chain to allow scalability you compromise on other aspects like decentralization. A useful currency requires scale, as 7 billion people need to be able to use it every day. Ideally, the core aspects should remain unaffected by a scaling solution and Bitcoin has decided to take a layered approach to ensure none of the other aspects are neglected.
We are only a decade into our journey with Cryptocurrencies and have seen some amazing technological breakthrough happening, however, there are still many improvements on the horizon, To some extent, this is due to the enormous amount of development work in cryptography that this new economy has unleashed.
In our next article, we will look into the future and see what is yet to come.