More Than Just a Digital Currency
From an outsider's perspective, cryptocurrencies seem like a series of digital currencies, some with the potential to shake up the financial system and others without. In reality, not all cryptocurrency projects are digital currencies but are instead projects that seek to leverage blockchain technology’s absolute security or decentralized system to create systematic change. Due to the sheer variety and complexity of various projects, it is not feasible to build all aspects of the new system from scratch, which is why there are a number of different cryptocurrency platforms being developed, such as Ethereum, IOTA, and Qtum.
When it comes to cryptocurrency platforms, the undisputed current leader is Ethereum. Ethereum is a protocol on which over a thousand projects are currently being built, and the platform itself is continuously iterating and improving on itself. However, the rise and adoption of alternate cryptocurrency platforms suggests that there are weaknesses in Ethereum.
The Competition Between Platforms
Ethereum is perhaps one of the best-known names in the industry with a tremendous amount of capital pouring into its development and testing. While the most prominent and best featured, Ethereum is crippled by lack of scalability due to its bottleneck in processing operations. In order to support the multitude of projects being built on its back, Ethereum needs to be able to process a growing number of operations per second but currently fails to do so due to its small 10-30 transactions per second throughput.
When it comes to operation throughput, the largest competitor in the field is IOTA. IOTA created a platform that operates on a majority-consensus model rather than Ethereum’s total-consensus model, allowing for significantly faster transaction speeds and much higher operation throughput. In fact, IOTA’s platform can process anywhere between 14,000 to 81,000 operations per second, which is orders of magnitude larger than Ethereum’s. The drawback is that IOTA has had severe security issues in the past and is still running a centralized process as its decentralized network is still being developed.
The Drawbacks to Proof-of-Work Processing
One of the biggest issues facing cryptocurrencies is how transactions are processed. Today, the vast majority of cryptos use a process called Proof-of-Work (POW), which requires a computer to use a huge amount of processing power in order to solve a problem and complete a service or transaction. Upon solving a problem, the computer receives a “block reward.” In other words, people can mine for cryptocurrency by committing processing power to solve problems, and solving a problem first results in obtaining a Bitcoin or Ethereum token.
POW systems were created as a means of preventing spam since they require computers to commit processing power for each transaction. The issue with POW systems is that they consume large quantities of energy with the Bitcoin network alone accounts for 0.14% of global power consumption, which is more than the power consumption of several developing countries put together. Since the first “solver” of a problem receives the reward, the POW system is disproportionately skewed towards large-scale mining operations, which can commit more processing power to solve problems faster. Also, the complexity of problems increases as more processing power is available, making POW cost even more to run in the future.
The Rise of Proof-of-Stake
Fortunately, an alternative system for processing blockchain transactions has risen: Proof-of-Stake (POS). On a basic level, POS completely eliminates the need for solving problems so as to validate transactions or mining for crypto. Instead, new blocks are generated in a deterministic way, depending on who holds what percentage of total tokens. The most prominent win for POS is energy efficiency, huge amounts of processing are not required in a POS network. In fact, POS is widely viewed as the future of transaction protocols – as evident in the fact that Ethereum is slowly transitioning from POW to POS protocols.
A Working Proof-of-Stake Platform
While the majority of cryptocurrencies processes are still using Proof of Work, there are some platforms that have implemented a working Proof of Stake protocols. One of these platforms is Qtum, a platform looking to simplify the process of development by allowing for the use of almost any coding language. The system has a working proof of stake protocol and is already being embraced by the crypto community: the platform already has over 3,400 nodes across 50 different countries.
In fact, it's the first working Proof-of-Stake platform that allows for smart contracts. The implications are significant because POS protocols give a small increase in processing throughput while using only a fraction of the energy that POW processes use.
The slight increase of transaction throughput lies in the fact that it no longer requires a problem to be solved to push the transaction through. There is little to no time associated with crunching problems to solve a problem, which means a decrease in the amount of time the transaction must “wait” while it is being solved. A seemingly small change, however, any slight improvisation in the overall throughput of a platform makes a big difference.
Qtum is not being developed in a vacuum; there are ten major backers who have opened up their network of connections to accelerate its development and infrastructure. A top accountancy firm is guiding the project’s governance structure as well.
Part of the reason Qtum has been picked up so quickly is the ease of using the platform, as it allows for the use of almost any coding languages to develop projects on its platform. Other competitors, such as Ethereum, require learning and using a proprietary language which makes adopting the platform more difficult.
The Future of Proof Protocols
While transaction throughput is one of the most significant barriers to widespread blockchain adoption, a growing concern is the energy footprint these networks use. The current de-facto proof protocol is Proof-of-Work, which accounts for a massive amount of energy usage. The skyrocketing energy use has had a tremendous impact on the energy economy of certain countries, and it is clear that it is not a sustainable solution.