Bitcoin As Modern Money – Why Is It So Easy To Destroy?br>
As a form of money, cryptocurrency is slowly proving to be a failure. You wouldn’t know it listening to the very vocal community of blockchain enthusiasts and crypto bros, but it’s true.
Let’s take bitcoin, for instance. It is nowhere near as widely accepted as traditional currency and credit cards. You can’t really use it at the grocery store, to pay your non tech-savvy neighbor back or for paying traffic meters when parking downtown. Sure, the price of bitcoin is impressive, even in light of its current slump. But what good is it if you can’t actually use it as a universal form of currency? Perhaps, more importantly, how long can it hold onto its value if you can’t actually use it as a transactional currency?
Sure, we might be able to solve the above with greater adoption. Yet there is another, perhaps more subtle, reason bitcoin struggles as a form of money. The poster child of cryptocurrency is too easy to destroy.
It is all too easy for bitcoin to disappear as a result of human error. Even discounting theft, there are several ways for bitcoins to become inaccessible or lost: sending to a valid, but unattended wallet address; mistyping 34-character hexadecimal keys; lost passwords to cold storage devices; and lost public-private key pairings. Physical money largely navigates these issues when converted into a digital form of payment, but bitcoin, a purely digital currency, is just as easy to lose as a five dollar bill. And maybe even easier to set on fire.
Great for Robots, Not so Much for Humans
Bitcoin was engineered as a decentralized digital currency unable to be easily influenced by a central authority, but it has limitations for everyday users that are worth acknowledging. For one, human error is often not able to be corrected in blockchain-powered currencies due in large part to two specific features: private-keys are irretrievable and transactions are irreversible.
Let’s contrast this with modern banking. If you lose or forget the password to your online bank account, there are steps in place by your bank to make sure you aren’t locked out of accessing your money forever. Resetting the password to your bank often requires multiple steps to verify your identity but then you’re back in business.
This is not true for Bitcoin, which utilizes a digital wallet to store your cryptocurrency. If you lose your password to the wallet, or otherwise are unable to access the device where it’s stored, you’re out of luck. Your Bitcoin is as good as destroyed.
Another way human error can burn your crypto is if you copy and paste, or incorrectly type, the 34-digit hexadecimal key incorrectly when interacting with your wallet. These hurdles may seem like reasonable risks for an avid bitcoin supporter or technologist, but in terms of behaving like money, it’s too big of a hurdle for a wide swath of the population.
Destruction and Theft are Both Possible
As long as you don’t lose your private key, bitcoin is safe inasmuch as no one can access your coins. But let’s talk a little bit about theft. The bitcoin address ecosystem is theoretical, with wallet keys being generated according to a formula; therefore, valid addresses exist that don’t belong to anyone. Additionally there are people who have generated keys that they don’t use, or keys that they haven’t saved. Therefore you can send bitcoin to a valid address, but if that doesn’t belong to someone who actively uses the wallet and has retained access, the bitcoin is gone. It went to a unmanned address, and it’s unrecoverable. In other words, it’s destroyed.
Fraud is especially rampant in crypto because these transactions are irreversible, and 34-character keys are not human readable. Let’s suppose, for example, a charity is raising funds through a bitcoin donation drive. To steal everyone’s money, a bad actor simply has to hack the website that provides donation instructions and change this long unreadable address to their own.
Bitcoin Versus the Future
One of the basic tenets of money is that its value stays relatively consistent, meaning it doesn’t fluctuate wildly on a day-to-day basis. When it does, there can be severe economic crisis for certain populations and people turn to more stable currencies. It’s clear that bitcoin hasn’t reached price stability yet with the value swinging wildly by thousands of U.S. dollars, sometimes on a daily basis. While the causes of these fluctuations are diverse and complex, until the fluctuations cease there are large amounts of wealth that are regularly destroyed due to significant drops in the price.
Bitcoin is also susceptible to another kind of loss of value: a hard fork. Cryptocurrencies are maintained purely by consensus. If there is a disagreement and the blockchain experiences a fork, significant value can be lost overnight.
For example, say that Facebook wanted to take over the bitcoin blockchain. Users are susceptible to the potential of loss of value through a hard fork. Since cryptocurrencies are maintained purely by consensus, if there is a disagreement and the blockchain experiences a fork, value can be lost immediately. As recently suggested in a MIT Technology Review article, if Facebook could convince a large enough group of their (2.2 billion) users to run a proprietary bitcoin wallet, they could essentially rewrite the rules of the game. Cryptocurrency blockchains are secure only to the degree that there is confidence in their decentralization, core teams and mining algorithms; signs of weakness in any of these pillars can cause destruction of value.
How to Fix Crypto Going Forward
If cryptocurrency is to succeed as transactional currency, it will need to evolve. This means building digital wallets and user experiences that are easy enough for the everyday population to use confidently, including considerations for user error and other complications that make digital wallets difficult for practical use.
An evolved crypto needs to rethink its incentives for mining and awarding coins, as the current model for bitcoin can be manipulated to favor the resource-rich and technically-savvy. Crypto will need to lean into a community of people who want to use digital currencies for its intended purpose rather than a way to amass a virtual fortune and drive investment portfolios.
The possibility of a bright future exists, but to get there currencies like bitcoin will need to become far more indestructible.
Adil Wali, Founder and CEO, Merit
Adil Wali is a passionate entrepreneur, a copious pair programmer and product visionary with a proven track-record of building businesses and the web applications that drive them. In the last ten years, he has helped envision, build and maintain applications that have executed over $850 million transactions. As a champion of agile software development and agile product design, Wali has built teams that have spanned a total of 19 countries. Previously, he was co-founder and chief experience officer at ModCloth.com, and currently he is the founder and CEO of Merit, the world’s first invite-only cryptocurrency.