LESSON 2: Disadvantages of Cryptocurrencies [For Beginners By A Beginner]

calum (55)in #cryptocurrency • 7 years ago (edited)

For Beginners By A Beginner
The principles in this article also apply to blockchain technology on a wider scale outside of just cryptocurrency applications.

What are the disadvantages of cryptocurrency?
Fragility
Their high security could also potentially lock you out too! If you lose your paper wallet, your hardware wallet or even your software wallet then your coins are irretrievably gone forever. If someone gains your private key then there is no central management system to prevent them from doing whatever they want. If you send coins to the wrong public key (or even one that doesn’t exist) then it is not refundable and there is no way to contact the private owner of that public key to politely ask for your coins back.

Updates and Forks
The nature of decentralisation makes it rather difficult to update, develop or fix bugs within the system. This is because there is no central authority to officially make that decision nor is there a single server to update. Instead, blockchains usually result in forks. This is where the miners (or some of them) update their systems to incorporate a software development.
In a ‘soft fork’ this results in the mining pool containing at least two different software versions that are compatible with each other. A ‘hard fork’ is where the new mining software is not compatible with older software and so either all computers run the new software or a novel cryptocurrency is formed because the upgraded miners break away from the old blockchain to establish a newly developed one. Usually whichever software is adopted by the majority of miners is the one that keeps the original name.
A major example of a hard fork is when a security hole in Ethereum was exploited by a hacker to steal a large quantity of cryptocurrency. The security hole was fixed and the stolen coins were returned to their original owners via a software update, however a minority of miners disapproved of this centralised tampering of the system and so formed Ethereum Classic – a hard forked derivative of Ethereum.

51% Attack
In theory, if someone managed to donate enough computing power to constitute 51% of the network then they could modify the algorithm, then fork and take over the blockchain. However, this is protected by two principles.

The cryptocurrency would instantly become worthless if just one person owned it (thus stealing it would serve no purpose).
To carry this out on a well-established network like Bitcoin would currently cost over $2.2billion in computing hardware.

Other Issues To Consider
Some cryptocurrencies are already finding solutions to the problems listed below. These lists are in no way exhaustive.

Issue: Privacy.
Anyone with your public key can easily use the blockchain ledger to find out the balance of your wallet (you may prefer to keep that private).
Fix: Encryption of public keys. See Bytecoin, Navcoin and Zcash.
Issue: Energy.
The ‘proof’ mechanisms used by the networked computers can be very energy intensive.
Fix: New proof mechanisms. See Burstcoin and Litecoin.
Issue: Mining.
Some wealthy corporations have specifically built incredibly powerful machines for high throughput mining, meaning there is now little profit in mining for the layman. These machines use Application-Specific Integrated Circuits (ASICs).
Fix: ASIC-proof cryptocurrencies. See Litecoin and Vertcoin. CLAMS is a cryptocurrency that underwent no mining at all and instead ‘airdropped’ the entire economy randomly amongst Bitcoin, Litecoin and Dogecoin owners in 2014.
Issue: Block size.
As usage increases, the blocks are filled quicker and the whole network slows down.
Fix: Increased block size (or adaptive block size). See Monero.
Issue: Scalability.
The network lags during periods of high load. Under mass adoption, the competition for incorporation into the blockchain means miners only accept transactions with much higher fees. Payments with insufficient transaction fees may consequently never be incorporated into a block and simply left without expiry on the network. Furthermore, there is much discussion surrounding the activation of SegWit and acceptance of the proposed Lightning Network. These could tackle the scaling issues by increasing the block size (SegWit) and adding a second layer to the Bitcoin network where processing of transactions is outsourced to the Lightning Network for increased speed. However many argue that this puts trust in a third party institute, which is precisely what Bitcoin was trying to circumnavigate.
Fix: See BitcoinPlus (designed for scaling), Vericoin, Viacoin and Decred (has expiry feature).
Issue: Power to the miners.
Miners technically have a form of centralised control as they decide whether to update bug fixes or developments and so control the direction of the cryptocurrency, potentially selfishly.
Fix: Community voting systems. See Bytecoin, Dash and Decred.
Issue: Volatility.
As the only thing defining cryptocurrency price is speculation (without any asset in the real world to underpin it), the price can fluctuate wildly. This currently makes it too difficult to form a stable economy.
Fix: Mass adoption should stabilise these fluctuations. See Tether and Nautiluscoin (has an in-built system to counteract volatility).
Issue: Blockchain bloat.
This is caused by the indefinitely growing size of the public leger as it stores every transaction ever made on the blockchain. This file size could become too huge to easily handle on the networked computers. The bitcoin blockchain is already at >120GB. Will blockchain progression outpace advancements in storage technology?
Fix: Some encryption methods can reduce the amount of information required (similarly to how JPEG file sizes are reduced in comparison to the raw image file). See Factom, Vcash and PascalCoin (not dependent on historical transactions to function).

This is the second article in my ‘For Beginners By A Beginner’ series for all the fellow newbies trying to understand this crypto world. I personally found it difficult to learn without a central source of information, so here I attempt to offer one. Even if it acquires no attention on Steemit, I hope it remains on Google and is useful to any eager newcomer whom stumbles upon it.
There will undoubtedly be errors and misunderstandings in my text, so do add corrections and additions in the comments section below. If I choose to incorporate them I will reference your username and upvote your comment.

Lesson 1: Introduction to Cryptocurrencies and Blockchain Technology