Blockchain experts help, please! These are serious drawbacks of public ledgers like Bitcoin - #1

Hi steemit friends! A professor from Chicago (Evans, 2014 – Economic aspects of bitcoin and other decentralized public ledgers) underlined some limits of public blockchains such as Bitcoin. Below I am going to report them one by one, with some explanations. Is there anybody reading that is able to answer these claims? How is the blockchain community going to address these criticalities? Are you aware of any solutions? Thanks for helping!!! 

Current claims that public ledger platforms can conduct financial transactions more efficiently ignore the inefficiencies associated with the incentive and governance systems and the likely costs associated with regulation of these platforms and complementary service providers such as vaults, wallets, and exchanges. Let’s see some of them.  

  -1) Volatility of a public blockchain’s crypto    

Some of the public-ledger platforms have adopted rules that result in the supply of coins converging to a finite limit. The Bitcoin protocol, for example, sets the maximum number of coins at 21 million and has an algorithm that determines the rate of increase towards that long-run equilibrium (see https://en.bitcoin.it/wiki/Protocol_rules). Once that limit is reached miners no longer receive any awards of coins for providing services. Their compensation, if any, would then be based entirely on transaction fees. Other platforms, such as Dogecoin, have adopted rules that allow for a steady increase in the maximum number of coins.   

The finite supply and constant-increase rules prevent the public ledger platform from having any discretion over the supply of coins. Coin supply is hardwired into the protocol.    

However, this is a problem. In fact, there is no central bank deciding the quantity of money circulating in the economy: the quantity of money is not established by demand and supply of the currency in the entire system; moreover, the central bank cannot either prevent or control high inflation or deflation periods by changing the quantity of money in the system. It follows that cryptos are very volatile at this stage, as empirical evidence shows. And the market value would likely fluctuate because of unanticipated changes in economic conditions, high speculation, the development of competing currencies, and other issues involving the platform.    

Bitcoin resembles (digital) gold. One of the problems with gold, which was a physical currency with a fairly finite supply, was that its value fluctuated considerably when it was the standard.   

This volatility poses a much more serious barrier, however, to the adoption of the so-called “coin” (e.g. bitcoin, dashcoin, z-cash, etc.) as a general-purpose currency. Senders and receivers want to know the value of the funds they are sending or receiving. They therefore gravitate towards currencies that are stable and avoid currencies that are unstable. People and businesses in countries with unstable currencies often use other stable currencies such as the dollar for trade.    

Unfortunately, while it is possible that the value could become more stable in the long run it is still likely to be more volatile than the government-sponsored of most developed countries. That is because there is no central bank to intervene to make it stable.   

  -2) Hard governance of a public blockchain   

The fact that the supply of coins in a public blockchain is completely mechanist has implications on its governance.    

Let’s assume that an enterprise like many start-ups behind cryptos follows the typical public ledger protocol and incentive system.    

The company would have to release coins following a mechanistic rule rather than varying the supply based on the demand for coins. As a result it would lose any control over the price of the coins and then, no control over the value of the awards given to the miners working for its blockchain for confirming blocks.   

The transaction fee is the other possible lever for motivating miners. Whether the platform can set or adjust the transaction fee depends on the protocol the platform has adopted and the governance system. A quite rigid setting. Moreover, the problem of no control on the price of the coin (and then, on the final value of the fees) still remain.   

 The existing public ledger platforms could adopt more flexible and centralized governance systems. But attempting to do so could run into opposition from the community that supports these platforms including the miners. New public ledger platforms could also arise that could rely at the outset on flexible and centralized governance systems. Whether they could secure the same amount of interest on the part of the community and users is not clear.   

There are still two critical points I would like to pose to your attention guys, but I think now it is time to rest a bit; lot of points to focus on already … I will continue in the next post :)  

 Thanks for reading and getting inspired by @ispira 

References:

 -All pictures are of public domain (or mine) 

-Evans, 2014; "Economic aspects of bitcoin and other decentralized public ledgers"; University of Chicago Law School