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Cryptocurrency Problems, Challenges, and Obstacles

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For those who are new, my name is Jeremiah. I’m not a cryptocurrency expert, nor am I an economist. I
 

The Block

December 20 · Issue #6 · View online
Weekly curated #cryptocurrency news and commentary.

For those who are new, my name is Jeremiah. I’m not a cryptocurrency expert, nor am I an economist. I am an enthusiast who believes that cryptocurrency and its attendant technologies are the prelude to a Cambrian explosion of innovation in “real/cyber-space,” where the digital and physical worlds meet.
This is a weekly email digest comprising a short topical essay about the crypto-space, followed by a manageable collection of curated links.
If you know anyone who’d be interested in this kind of content, they can subscribe here. I’ll be playing around with the format from week to week to see what I like best, and I love feedback, so don’t hesitate to email me.
Without further ado, let’s jump into this week’s topic.

Song of the Week
Losing My Religion
Some of you have expressed concerns about the future of Bitcoin and wonder why I haven’t highlighted those in the same way as I’ve celebrated achievements and innovations in the crypto-space.
That’s valid.
It’s also valid that I didn’t start a newsletter to bash something I believe in.
But it is important to look at all sides (or as many as possible) of a subject in order to judge its efficacy. So, this week I want to talk about the legitimate challenges and obstacles facing Bitcoin (specifically) and cryptocurrency in general.
You Can't Always Get What You Want
Bitcoin has strayed from the original pure vision that it was founded on. Creator Satoshi Nakamoto wrote, “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.” Initially, that is exactly what it was. But then, “mass” adoption happened. As a result, transactions increased significantly, up to 400,000 transactions per day. The network is not scalable at that rate and size. The result is a growing backlog of transactions in the pool that have yet to be confirmed.
To understand why this is untenable, you must first understand the way transaction confirmations work. When someone sends a transaction, it is sent into the memory pool–or mempool–which is just a collection of all the unconfirmed transactions in the Bitcoin network. Miners choose which transactions they want to confirm first. 
Once miners validate a transaction (i.e. confirm that the sender actually has enough bitcoins to send to the receiver), it is added to a new block, which is then published to the blockchain. Other nodes on the Bitcoin network then check the new block’s transactions to ensure the block is valid, before accepting the whole block as a part of its ledger. As you can imagine, this is time-intensive, with average block confirmations taking around ten minutes.
Source: http://www.weusecoins.com/
Source: http://www.weusecoins.com/
How are transactions verified? Miners choose which ones they want to verify first. And how do they decide that? Transaction fees, of course. Any transaction can also be given an optional, custom transaction fee, meant to incentivize a miner to verify the transaction faster, like greasing the palm of a corrupt official in a lawless country.
In a mempool where your transaction has no fees attached to it and there are plenty of transactions with greater-than-zero fees, why would yours get picked? 
At the moment, the average fee-per-transaction is over $3.50, which isn’t ideal for sending micro-payments. And that fee will only grow as the network size increases. And as time passes, and fees increase, it will be harder for Nakamoto’s original vision for a cashless peer-to-peer transactional network to be honored. It might be said that Bitcoin has lost its way.
While there are several solutions to this problem in the works, the fact remains that this is a significant hurdle for the nascent protocol. Mass adoption beyond the die-hard crypto fanbase requires a network that scales according to its userbase and can handle more than seven transactions per second, doesn’t charge exorbitant fees on each transaction, can confirm a transaction instantaneously, and won’t become subject to the centralization problem counter in the original vision of the protocol.
Single Vulnerability
A single point of failure is all it takes to cripple an entire network.
A single point of failure is all it takes to cripple an entire network.
Given that Bitcoin is a wholly digital creation, it seems obvious, if somewhat unlikely, that shutting it down, even temporarily, could happen. We all know when big companies like Amazon or Facebook suffer outages. What most people don’t know is why these outages happen. They generally don’t occur because the company itself has “gone dark.” Rather, it usually has been the result of malicious attack on the internet infrastructure serving those sites, a technical bug that renders those services unable to operate, or even simple human error.
If a Distributed Denial of Service (DDoS) attack is capable of crippling a large portion of internet service in the United States, it’s not entirely implausible that a similar attack could cripple the Bitcoin network. Indeed, this problem has been contemplated and found to be well within the realm of possibility. While the blockchain itself is not vulnerable, attacking the pipeline used to carry the blockchain can be just as effective.
Who Do You Trust?
Bitcoin, and cryptocurrency at large, isn’t trustless (despite the claims), as this really spot-on Medium article tackles. Decentralization does not mean there still aren’t systems and entities between you and the nodes.
What this means for you: unless you’re an engineer and you know how to verify code is and does what its creators claim, you must trust intermediaries. Fortunately, it is open source, so you aren’t trusting a single entity, but you’re trusting thousands of people who can verify software independently. And that generally means that if they say it’s okay, it is.
That’s not to say that bugs don’t exist or that attack vectors have yet to be uncovered. It’s up to the community that believes in the tech to police itself, to be proactive in its development and bounty programs, and to maintain open source work.
But even in a community-vetted software, bugs often escape detection for years. The famous Heartbleed bug, which presented a serious vulnerability in the OpenSSL Cryptographic library (speaking of encrypted systems), had been checked and reviewed by hundreds of cryptography experts across the globe for years before it was discovered.
Ease of Use
Source: https://www.creditdonkey.com/barriers-to-entry.html
Source: https://www.creditdonkey.com/barriers-to-entry.html
It’s not a secret that the largest barrier holding cryptocurrency back from true mainstream adoption is still ease of use. Ignoring the new language that average users won’t know (blockchain, address, private key, et al), wallet software is generally ugly, with confusing interface options and unfamiliar features. 
Moreover, the security aspects of cryptocurrency means a user is presented with a confusing and sometimes frightening presentation of the dangers of losing one’s password, private key, or mnemonic device, and keeping one’s wallet on an internet-connected computer.
Even after mastering terminology and wallet interfaces, the degree of uncertainty when conducting a transaction leaves the user sweating. Has the transaction gone through? If it isn’t confirmed, how can I tell my money hasn’t just been taken from me? How do I know the other person has received my funds? How do I know they haven’t disappeared into the ether? These are valid questions and concerns, and User Interfaces for wallets need to factor them into their builds.
Initially, online banking presented similar challenges, but ubiquity and reducing entry barriers made users more comfortable using these opaque systems. Cryptocurrency has the opportunity to create beautiful and functional wallet and exchange interfaces which benefit and augment a user’s understanding of cryptographic systems, and unlike banking software, which users rarely influence, most wallets are open source and thus subject to community-oriented design.
Government Crackdowns
One looming question is that of government intervention. How viable is a network that could, at any time, be subject to severe government regulation or even a total shutdown. This isn’t speculation, as Chinese users can attest.
There is simply no way to know how governments will react to this new financial beast. Will it be regulated, and if so, to what extent? Will regulation hamstring this libertarian utopian vision before it’s fully realized? Will it become federalized, or will governments attempt to bypass the very features that make it attractive to those whose trust in governments is at its lowest point in a generation?
Source: Pew Research
Source: Pew Research
These are entirely valid questions. In the U.S. alone, the federal government, via its various security agencies, has insinuated itself into mass-market social media applications and platforms, bypassed encryption protocols and undertaken extreme interpretations of privacy laws to gain ostensibly unlawful access to secure systems and to spy on users. Is there any question that the same thing isn’t being attempted with a cryptographic blockchain system distinctly and intentionally designed to prevent that kind of infiltration?
Now imagine what cryptocurrency looks like under a totalitarian system.
So it behooves users and skeptics to examine these concerns and evaluate their merits. The future of the network may depend on the answers.
On the other hand, there is at least some reason to believe that some systems will be resilient to these kinds of dedicated attempts at control. One thing is clear from all this: the future battleground is online, in corporate cloud systems, social media platforms, and peer-to-peer networking and will be a fight between citizens and their own governments, as well as against hackers and other malicious actors.

And now, for something completely different…
This week I’m pleased to bring you a guest post from fellow traveler Rick Cramer. Rick and I have traded crypto insights and tips with each other for a couple years now, and we’ve seen a lot of our predictions realized as the cryptocurrency world has matured. You’ll probably be reading more from Rick in 2018.
7 Truths about Crypto
Source: Youtube
Source: Youtube
One of the first things author Jason Bloomberg mentions in his Forbes magazine article “Seven lies Bitcoin fans tell themselves and anyone who will listen” is, “Many of these fans are spouting misinformation and believe their own nonsense.” He then goes on to spout his own misinformation. Read on to learn the truth about these seven “lies.”
Lie (and truth) #1: Bitcoin is Like Something Else
Mr. Bloomberg asserts that any comparison with actual money, gold etc is a false analogy. He then goes on to argue that that since criminals use dollars and Bitcoin they are too dissimilar to draw such a conclusion, which in and of itself provides evidence that Bitcoin is being used exactly like the dollar. In other words, it is like something else.
Lie (and truth) #2 Bitcoin is secure.
Bloomberg’s entire paragraph here makes clear his own total lack of understanding about the security of Bitcoin. He writes “Bitcoin is a cryptocurrency and ‘crypto’ means secure, right?” Actually it doesn’t. It means “encrypted.” Have Bitcoins been stolen? Yes, from exchanges that were hacked, with the Mt. Gox theft being the most (in)famous, but the protocol itself has never been hacked. Yes, they have been “lost” as well, by people who lost their passwords or hard wallets through carelessness. Those in the know store their cryptocurrencies offline and off a computer, making them as secure as anything in a bank safe deposit box.
Lie (and truth) #3: Bitcoin is money.
Bloomberg refers the reader back to Lie #1 but does not bother to define “money.” One definition is that money is nothing more than a method of tracking transactions. Instead of getting a single receipt that can be lost or thrown out, every transaction ever made using Bitcoin is available as a public record for anyone to see, forever, on multiple computers. Bitcoin would appear to be more like money than fiat currency from this standpoint.
Lie (and truth) #4: Bitcoin has no intrinsic value.
Bloomberg argues Bitcoins “intrinsic value” comes from being mined. This itself is debatable, if not outright laughable. But Bloomberg then reverts back to his Lie #1 by making a direct comparison of BTC to gold and claims this proves Lie #1. Tom Lee, founder of Fundstrat Global advisors, invokes Metcalfe’s law, which says the value of a network is proportional to the square of the number of users on the network. From this valuation the BTC network is still a bargain. The fact that financial giant Fidelity is mining BTC, AMEX has used XRP to transfer actual money from a NY bank to Santander in Spain and there are over 30 companies in the ETH alliance, including Microsoft, tells me someone legit believes there is more than just intrinsic value in crypto.
Lie (and truth) #5: Bitcoin is not in a Bubble.
To use Mr. Bloomberg’s methodology, see truth #4 regarding Metcalfe’s law.
Lie (and truth) #6: You’ve made money on the BTC you’re holding.
Indeed, you do have to sell BTC to actualize your profit, but the very same thing must happen to lock in profit on a stock trade. Even IRAs require vesting before you realize your returns. Oops, there’s another “false analogy.”
Lie (and truth) #7 I’m full of crap.
Bloomberg argues that he is personally attacked whenever making arguments against Bitcoin because they “have no better arguments.” I present no attack on Mr Bloomberg, only “better arguments” and question why Mr. Bloomberg didn’t access readily available information before publishing.
Mr. Cramer has been a crypto enthusiast since 2015. Core holdings include BTC, BCH, ETH, ETC and VTC. He can be contacted at Rcramer3003@gmail.com.
Happenings
Breaking: Coinbase is investigating claims of insider trading on newly listed Bitcoin Cash. This is developing.
CME, the world’s largest futures exchange, launched Bitcoin futures on Sunday, a week after they launched on CBOE.
Ethereum cracked $800 for the first time Monday night and is looking bullish in the near-term.
And Ripple’s (XRP) price spiked 4300% in just a couple days.
The total cryptocurrency market cap surpassed $630 billion.
Bitcoin hedge fund is reaping 25,000% (not a typo) returns. But the fund founder warns Bitcoin could drop by as much as 50% by next week.
And there’s more signalling from the SEC that they’re going to start serious regulations of ICOs. This is roundly agreed to be a good thing.

I couldn’t resist showing this visualization of ICO activity over the past four years. This is like watching bacteria grow in a petri dish. And that’s the stage we’re at in this emerging market.
What 4 years of ICO activity looks like.
Links of Note
Ten Biggest Lies About Bitcoin
Bitcoin Started With All Men. Now Crypto Is Opening Up to Women
Harnessing Energy from Bitcoin Mining to Sequence Genetic Data
What You Need to Know About Managing Crypto-Investments
How Cryptocurrency Has Introduced New Careers In Tech
Central banks will hold Bitcoin and Ether in 2018
People have spent over $1M buying virtual cats on the Ethereum blockchain
This next one is an oldie-but-goodie, and if you’re super geeky or are interested in how the hashing process works, get ready for a pen and paper deep dive!
The Only Good Bitcoin Advice Is Four Years Old
Mining Bitcoin with pencil and paper: 0.67 hashes per day
There’s an old maxim: A sucker is born every minute. And there’s a lesser known but related maxim: Don’t buy Chuck E. Cheese tokens off some guy in the street, even if he insists they’re Bitcoins.
Wrap Up
That’s it for this week. Thanks again for reading. If you find this newsletter useful and interesting and you think someone else would enjoy it, please forward it to them. You can always subscribe or read back-issues here.
If you want to get started with Bitcoin or one of the two major altcoins (Ethereum and Litecoin), sign up for a free account on Coinbase. Once you buy or sell $100 or more of digital currency, you’ll get $10 of free Bitcoin.*
That’s all for this week. Thank you again for reading. Please send me any articles you think would be good for future newsletters. If you have any questions you’d like addressed, feel free to contact me. I do respond to everyone who writes me.
* This is a referral link, so I’ll also get $10 for any eligible signups.
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