Home Technology What is Crypto’s downfall? Its complexity

What is Crypto’s downfall? Its complexity

What is Crypto’s downfall?  Its complexity

AAs in many financial markets, bitcoin and other cryptocurrencies have seen their value plunge so far this year. A handful of projects like Terra have imploded before our eyes. This sequence of events has many investors and onlookers wondering if there is a viable future for the asset class that was so bullish just a year ago.

The pandemic has brought an influx of new bitcoins and other asset investors, many of whom have lost big this summer. Most have failed to understand the risks partly due to naivety, but also due to the increasingly complex crypto ecosystem, which makes it harder to understand.

Jameson Lopp is the co-founder and chief technology officer of bitcoin security provider Casa. He was previously a software engineer at BitGo and has written extensively on cypherpunks and bitcoin.

The warning signs were there for those of us who have been around for more than one market cycle. The reality is that every project is its own unique animal, and not all are designed to withstand the myriad threats that lie ahead.

While it will take some time for sentiment to recover, it’s premature to dive into bitcoin and the like just yet. There may still be potential to be discovered there. In the meantime, there are several red flags to watch out for when checking out other projects.

Many were scams to begin with

When Bitcoin started in 2009, it was in a league of its own. Since then, it has become a store of value and a censorship-resistant network with a market capitalization recently valued at over $1 trillion. Even with the recent crash, I think Bitcoin’s potential remains as bright as ever. I can’t say the same for all of his imitators.

Today, there are over 20,000 cryptocurrencies, digital assets, tokens and projects – all promising to be the future of finance. Each takes certain elements of Bitcoin’s design – blockchain, decentralization, economy, mining, cryptography – and modifies them to suit a different use case. As a technologist, I enjoy the experimentation that takes place in crypto. I’m less interested in the hype.

See also: Timothy C. May: Enough with the ICO-Me-So-Horny-Get-Rich-Quick-Lambo Crypto | Reviews (2018)

When people are interested in cryptocurrency, they often feel compelled to find “the next bitcoin”. Entrepreneurs quickly realized this fact and started issuing altcoins and tokens without even a whitepaper. This has created a vicious cycle of pump and dump scams that do not reflect the hard work of many of us in the industry.

bitcoin vs “the next bitcoin” pic.twitter.com/uGQ5n0n7cb

—Jameson Lopp (@lopp) July 3, 2022

If you have fallen victim to any of these schemes, I suggest you use this bear market as a time to reflect and learn more about the underlying technology and its merits, starting with Bitcoin. Bitcoin has a proven track record, but I don’t rule out the possibility that some value will emerge from the many attempts at crypto innovation. Scientifically, you cannot prove a negative result. Time will tell us.

Moments of pleasure in centralization

A lot of engineering is dealing with trade-offs, like the need for speed and security. Bitcoin was designed as a decentralized network that processes blocks of transactions every 10 minutes, more or less.

Over the years, many parties have sought to improve this design in various ways. Some have tried to increase the number of transactions in each block. Others went after faster transactions. A number of projects have attempted to plug other real-world data into a blockchain to create sophisticated markets like derivatives.

These efforts have struggled to overtake Bitcoin as the dominant store of value because they typically introduce some form of centralization. Centralization is very effective, but it undermines your efforts if your goal is to democratize finance and empower people.

See also: Bitcoin and the rise of Cypherpunks | Reviews (2016)

Centralization hurts projects because it tends to corrupt incentives for their respective communities. For example, an altcoin project could make it difficult for everyday users to run a node and participate in the network, or they could create a tight circle of validators as transaction gatekeepers. If a validator curates data to power a blockchain, he or she could be a single point of failure through corruption, collusion, or outright attack.

The success of Bitcoin is based on its decentralization. Users can participate in the network without having to trust each other. They only have to trust the rules of the network protocol, which they can verify with the software of their choice. This decentralization is why bitcoin became a form of currency.

Too complex to complete

Complexity is the enemy of security. The more moving parts you add to a system, the more likely it is to fail. Building a magic smart contract platform isn’t necessarily much use if you can’t prevent outages. Sometimes impressive white papers don’t translate into effective projects. The perfect can be the enemy of the good.

Discipline is underrated in technology. It is difficult to create a system that works as well as Bitcoin. It is designed to do one thing and one thing only: be good money. The incentives around money creation and wealth security are no mystery to us.

A grand vision requires a grand implementation, and that’s hard to deliver in a decentralized way. Building an open, permissionless network is like building a plane while you fly it, and developers need to be careful not to direct economic incentives in the wrong direction. Every step of building something should be checked for stability and security against internal and external threats.

In addition, complexity increases risks for users. Many private keys have been lost due to user error. As co-founder and chief technology officer of House, a bitcoin security provider, I strive to find ways to accommodate users from all walks of life. Simplicity is king.

Bitcoin is changing the world as a tool for individual empowerment. As for crypto, the unknowns are growing every day with each new project. The space has grown to such an extent that no individual can verify the technical nuances of each project, so it is reasonable to maintain some curiosity. As you venture into the crypto verse, strive to balance optimism with realism and you’ll be well on your way to finding turn to digital (strength in numbers).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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