This is an editorial by Dr Ken Alabi, author of a peer reviewed paper which concluded that Bitcoin and Ethereum follow Metcalfe’s Law of network effects. He is to provide an update on that relationship.
Needless to say, all statements and views expressed below are solely those of the author.
In a prior forward-looking seven-part series, we looked at what an ideal cryptographically-enabled digital currency of the future would look like. Since that series we are already seeing some of the characteristics discussed in those articles embedded in some of the projects currently in development. In this article we look ahead to 2018, to see what can be expected, in terms of the potential progress made in solving some of the outstanding issues that limit cryptocurrency adoption.
Scaling will Continue to be an Issue for Decentralized Blockchains for Much of 2018
Blockchains do not scale by their very nature. If ten nodes or a thousand nodes are processing transactions for a blockchain, only one of them can write a block at a time; which makes blockchain writing essentially a serial process. This is the nature of its original design for security purposes, for instance, to prevent the likelihood of double spending. The result of this is that throwing more resources at blockchains does not increase the scale of transactions it can handle.
Increases in block sizes as is done in some blockchains will allow more transactions to be accommodated but still run into some limit as small client devices would eventually be unable to keep up with the growth in size of the blockchains as transactions increase and blocks accumulate. Some side chain related projects, such as Lightning and Raiden may begin to mature next year but will ultimately not fully solve the problem. This is due to a lack of incentive in the schemes, for enough people to lock up expensive cryptocurrencies to open side chains. The ultimate solution to on-chain scaling would likely be through parallelization of blockchains – something sharding would effectively do. Many of the top cryptocurrencies, such as Ethereum, are projecting that this solution is at least a couple of years in the future.
Some new blockchains have introduced parallelization based on different topologies such as the fine-grained parallelization in directed acyclic graphs (IOTA, ByteBall, Hashgraph,) or true blockchain splitting (Zilliqa.) These projects will prove useful as they mature and gain in usage into the next year. However, we expect the parallelization of blockchains based on block splitting to eventually prove to be more efficient (because they have a chance of optimizing the ratio between the gains in task splitting to the need to reduce the surface of intra blockchain communication between the splits.) In any case, those projects will likely take some time to prove and demonstrate their security; a process which would also extend well into the next year.
Some Blockchain Related Projects will Begin to Mature and Yield True Value
2017 saw the proliferation of several blockchain related projects, and tokens. Many of them will prove to be useless. However, just like during the period of rapid growth in dotcom enterprises in the 90s, we will begin to see some true gems emerge from this period, that would create actual products, services that prove useful long term.
It may be expected there will be more projects related to International value transfer (a currently highly expensive and sometimes slow endeavor involving wire transfer), decentralized micro-loan offerings, monetary services to the unbanked, debit cards that allow fiat to cryptocurrency instant exchanges that completely allow spending cryptocurrency at any store that accepts fiat. This last development is quite significant because it effectively answers the question of how many new businesses in the year have started accepting cryptocurrencies, to potentially all of them. (Turns out that this already started in 2017, albeit slowly, as we saw TenX cards being issued and used in Europe, and just recently while this article was being prepared, Centra cards started shipping in the US and worldwide, allowing holders to spend several cryptocurrencies.)
About a week ago, Vitalik Buterin, co-founder of Ethereum asked if the entire community had earned the roughly $500b of the combined capitalization of blockchain related assets. 2018 will likely see that community earn more of it in actual results and impact.
Liquidity and Volatility of Cryptocurrencies
Significant volatility and value swings will continue into the next year. Recently over the holidays we still saw a 30% swing in the values of the top cryptocurrencies within hours just as the Christmas holiday was about to start. With the commencement of bitcoin futures, and increased liquidity provided by these, more exchanges that are coming online, and more actual use cases that would mollify investment based buying and selling that results in major swings, the volatility will continue to decrease through the next year.
More Institutional Involvement
The bitcoin futures that received mainstream approval in 2017 are just the start. We also saw IBM partner with Stellar to begin a money transfer product pilot in the South Pacific region. The next year should see more institutional and mainstream tech company’s blockchain projects begin to go live. Several banks have been developing blockchain projects. Notable is JP Morgan with their Quorum blockchain offering. We can also expect that other industries may begin to utilize blockchains for some of their loyalty programs, and customers will begin to show preference for loyalty assets that are tokenized and guaranteed by the higher immutability of blockchains. Possibly transferable, and can potentially grow in value compared to traditional coupons.
A Major Bubble Burst or a Major Correction
There is likely to be at least one major correction in the market cap of blockchains. In a previous paper, it was shown that the growth in value of bitcoins as well as several top cryptocurrency assets could be modeled by an S curve or exponential, driven mostly by adoption. The model derived in the study utilized Metcalfe’s law as well as a new network effects law, and showed that the growth is correlated to the growth in the number of unique addresses used daily on the network; data that is easily extracted from the blockchain. An update to that study, including data up until this month, shows that the value has indeed outstripped its adoption. However, the extent is not as great as during the 2014 bubble and as such the correction is unlikely to be as severe.
In addition, it also sometimes takes an event to trigger a burst or correction. In 2014 it was the failure of a major exchange. In 2017 we saw regulatory action from China prohibiting ICOs and exchanges triggering a correction in September. Another major exchange failure or regulatory action such as the classification of most ICOs as security, is one such event that could serve as a trigger. Recent releases from the SEC shows that it could be leaning in that direction. However, the body might also proceed more cautiously in a desire to protect innovation in the blockchain sector, similar to how government early action (or inaction) refraining from taxing Internet sales or curbing development in that technology area might have helped provide space for some of the successes there earlier on. All eyes are on the April meeting of that body.
In general, 2018 is bound to be another really interesting year for the technology, with even greater awareness and adoption than 2017.
The views here are provided freely and could be freely used in whole or part, hopefully with a kind reference to the article. It is not intended as investment advice and should not be used in that capacity.
Short Bio: Ken has a Doctorate in Engineering from Stony Brook, a masters in Computer Aided Engineering, University of Strathclyde, and is an IT professional, programmer, and published researcher with over twenty publications in various fields of technology.