The problem with Bitcoin

Introduction: What is a Bitcoin anyway?

Bitcoin has been skyrocketting in price recently, so I thought I'd write a little about its problems. First an introduction to what Bitcoin is. Bitcoin is a blockchain that records transactions in a trustless manner. As a result, anyone can download the entire blockchain and view it and all transactions that have occured between all wallets. How a blockchain is constructed? In Bitcoin's case, it uses a proof of work system. Proof of work is the idea that, by adding something to a blockchain it's very hard to find a hash with specific qualities(In Bitcoin's case this is the number of leading 0s in the hash value). Finding some value to add to this block to find this hash is computationally expensive and to this day, there exists no better method than just going through possible inputs and just searching for a valid result. Once a valid result is found, the miner who mined that block gets some reward.

The purpose of mining is to put work into a blockchain and blocks. The blockchain with the most work put in, is the accepted blockchain, which is where the theoretical 51% attack exists. If a person owns more than 51% of the computational power for mining blocks for a blockchain, they effectively set the accepted blockchain. These blocks are fixed size, and store a list of transactions to add to the blockchain. Additionally, there is incentive for miners to prioritise certain transactions for the block based on the transaction fees that people can pay to miners. I have linked a video for further understanding if my explanation fails to satisfy people.

=> A video by 3Blue1Brown going through it in detail from first principles

Now that we have established how Bitcoin works, let us walk through the issues it has.

Issue 1: Fixed Block Sizes

This issue is simple. Bitcoin's blocks have fixed sizes. There have been proposals to increase this fixed size, as well have it dynamically increase over time. To establish why this is an issue, it effectively bottlenecks transactions. Only 1MB worth of transactions can be transacted for each block in the network. This massively restricts how many transactions can be made when compared to fiat equivalents like paper cash, gold or paypal. It's quite a simple problem to state, but the solution isn't clear.

=> The Block Size Limit is discussed in detail on the wiki.

Fixing this for Bitcoin would be difficult in my opinion. The fix as I see it, is a more dynamic solution that changes according to transaction demand. Even with this solution in place, it only guards against surges in transaction demand, but it doesn't fix the core issue. That issue being block size transaction limits, as the blocks sizes would likely need to be clamped to reasonable ranges still, as to allow people to keep running their own node for the network.

Issue 2: Proof of Work

Proof of work is a solution, but it has a few issues. The first being that the electricity put forward isn't of much use to people in society. It's only useful to the people in the set of people who have put work into that network. I will say this is a moralfag opinion, but considering the nature of current worldwide electricity and global warming, I think it must be stated.

There are other issues too, the problem chosen by Bitcoin for their proof of work system is hashing. This can be effectively handled by GPUs and ASIC machines, but this poses a supply problem to legitmate consumers needing that hardware. This also makes it less egalitarian, as through no fault of the poor, they can't establish their own stake in the network very well(effectively filtering those who can't afford good GPUs or ASICs which cost thousands of dollars).

The final issue with proof of work exists only in theory. I have mentioned it earlier, but a 51% attack could theoretically occur. This is described as when a person owns 51% of the computational power of the network. This is a problem because if a person owns more than 51% of the computational power of the network they can run the hashing algorithms faster than others. This continues to be a problem, as you can then validate correct blocks, and even validate incorrect blocks. As the standard blockchain used is the chain with the most work put into it, this invalidates the standard blockchain.

Issue 3: Privacy

This comes in two flavours. Personal and Systemic privacy. I will discuss the personal case first. Almost all places to purchase cryptocurrency with money require ID. This means that the addresses of Bitcoin wallets and who owns them can be known, and the transactions made can be monitored. The amount of money they have in Bitcoin can also be known. This presents a bunch of issues, firstly that Governments can have a greater deal of information to monitor and regulate the flow of money in the network(far more than they can with cash or with a credit card). In reality, Bitcoin is pretty much the wet dream for any authoritarian Government, as the flow of cash and transactions can be traced, and the owners of that cash can be traced.

This is bad because people know how much you have in Bitcoin. This is also bad because your transaction history is full and public, so anyone can find out that you purchased contraband like weed or other things of the such. It also makes it much easier to tax when everything is so transparent. For this, Bitcoin's blockchain is not fully trustless.

In the personal case, you're affected as this information is transparent and easily regulated by a central authority(your government). In the systemic case, you're affected as it imposes regulations and relates your address with your identity.

This entire problem isn't solved still, but is much better assessed by cryptocurrencies such as Monero and other "privacycoins"

Conclusion

A lot of people invest in Bitcoin simply because others invested in it. Bitcoin has technical issues that are far from solved that even other cryptocurrencies handle and solve better than this. I will list the coins that I think are worth watching. Ethereum as it generalises the blockchain to contracts. Monero as it provides much better privacy. Cardano as it avoids issues of proof of work by using proof of stake. There are others that have higher transaction volume like Litecoin.

Ultimately, I expect Bitcoin to be dumped eventually in favour of technically superior cryptocurrencies that have more merit and qualities.