Why the crypto crash does not matter

Most public and permissionless blockchain platforms can never work without the underlying cryptocurrencies fuelling the network.

Most public and permissionless blockchain platforms can never work without the underlying cryptocurrencies fuelling the network.

In October 2017, the discussion on cryptocurrencies and blockchain was in full swing. Malta was already being referred to as ‘Blockchain Island’ and making the right noise internationally from a regulatory framework perspective. In contrast, some banks were busy trying to prevent anyone from buying cryptocurrencies.

At the same time, those who wanted to buy cryptocurrencies were busy finding ways to work round these policies. More worryingly – and perhaps herein lies the reason why the banks took the stance they did – people who were typically not technologically inclined found a sudden interest in Bitcoin, and we even had adverts on local media talking of investing in a “machine that can make money out of thin air”.

Some were making outlandish value predictions involving extreme increases, and others were making similarly outlandish predictions of an unprecedented crash. While the prices of cryptocurrencies did crash in January 2018, the value is still somewhat higher than it was at that time, so it looks very much like these debates are going to go on for a very long time to come.

Many of those intrigued by blockchain from a technological standpoint welcomed the overall increase in interest, albeit with a lot of caution, even if the feeling was that several of those buying cryptocurrencies still misunderstood what the implications are. Most cryptocurrencies push forward the idea of decentralisation between parties that lack trust on a public ledger that anyone can download, view and access. As these are storing digital coins and tokens that hold value, pure cryptocurrency applications can be seen to be some of the biggest (even if unofficial) bug bounty programmes to ever exist for the technology.

Unfortunately the aura of mystery the technology holds for a number of people has led to claims that while blockchain should be embraced, cryptocurrencies as a whole should be shunned. This argument is however rooted in misconceptions as most public and permissionless blockchain platforms can never work without the underlying cryptocurrencies fuelling the network.

At a most basic level, they en­sure that the smart contract can be executed while miners, without whom the transactions would never be verified, are rewarded for dedicating their resources to confirm transactions.

Several technical challenges need to be overcome, most notably scaling

If we consider the Ethereum platform, at present the most popular blockchain platform, and its Turing-complete smart contracts – meaning that in principle, they can solve any computational problem – the cryptocurrency plays an even more crucial role as it also ensures that no smart contract will use more resources than it needs to. This is done by requiring all smart contract executions to pay a corresponding fee, called ‘gas’ on the Ethereum platform, for every computational operation they perform.

While this is often a small amount in terms of value, it is an effective way of preventing someone from publishing a smart contract that executes forever, with the risk of bringing the whole network down to its knees by clogging resources. It also makes running DDoS attacks, where miners get overwhelmed with irrelevant transactions to prevent wanted transactions from getting verified, rather expensive and im­practical for the attackers.

The story is somewhat different when it comes to the private blockchain, such as a supply-chain management solution between entities in a consortium. In this case, elements of mining and fees are not needed as the identity of each participant is known, so the incentive that the cryptocurrencies represent is generally not required. In fact, consensus algorithms are often drastically different in this scenario with proof-of-authority, rather than proof-of-work or proof-of-stake, being the go-to option on Ethereum in a private context.

Nevertheless, it is important to emphasise that the problems that can be solved by a public blockchain are often different in nature to those of their private counterpart.

The importance of distinguishing between cryptocurrencies and blockchain is that the use of cryptocurrencies on their own does not justify the scale of potential that the underlying technology has, even if it is also important to acknowledge that cryptocurrencies are a core part of it.

While the extreme rise in popu­larity that cryptos have experienced are proving just how robust the concept is, in that the technology itself is still going strong, such increased activity has uncovered several technical challenges that need to be overcome, most notably scaling.

And that is why the big question when speaking about the technology is not whether bitcoin or any coin or token will reach one value or another, but whether these technical issues will be successfully overcome.

Encouragingly, the outlook is a positive one, as while the technical solutions for them are by no means easy problems to solve, there is significant pro­gress being registered, and the general feeling is that it is only a matter of time before these prob­lems too are solved, giving a further boost to having applications for the masses that use a blockchain to work more efficiently.

Matthew Scerri is senior manager at KPMG Software.

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