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“Where do cryptocurrencies go from here?” seems like a question that’s repeatedly hurled into the air quite frequently these days; the answer, almost needless to say, never finds a solid ground and remains fluttering in the wind. Yet, there are still some serious weather forecasts out there that can point out to the general direction that the crypto wind is blowing.
One such case is a recent research (PDF) about cryptocurrencies in general, and more specifically about Bitcoin, conducted by Dr. Zeynep Gurguc and Prof. William Knottenbelt from Imperial College London. The research concludes that cryptocurrencies – led by Bitcoin – could “transition into mainstream use and be adopted by a wider global audience,” but for that to happen cryptocurrencies still need to jump over several major hurdles along the way.
The researchers determine three main roles that cryptocurrencies need to adopt in order to become a mainstream method of payment:
- Medium of exchange
- Unit of account
- Store of value
Presently, the researchers resolved that cryptocurrencies are already employed as a store of value; there are still, however, a number of obstacles to overcome before they could serve the other two functions.
These are the challenges that cryptocurrencies need to surmount, as analyzed by Dr. Gurguc and Prof. Knottenbelt:
- Regulation vs reputation: Regulation plays an important role in correcting informational asymmetries and negative externalities when a market is susceptible to potential deficiencies. A good reputation system employed by the network makes the system resilient to manipulation and gaming; and creates a safe environment for network participants to interact and reveal their preferences truthfully.
- Privacy and trust: While it is intuitively appealing to use blockchains to provide a transparent single source of truth, it is often desirable for there to be different levels of privacy available to stakeholders when it comes to accessing details of specific transactions, smart contracts or personal data. This is a particular challenge for public permissionless blockchains like Bitcoin and Ethereum which expose all transactions, smart contract code and state, thus potentially enabling privacy erosion and forms of industrial espionage based on blockchain analysis.
- Volatility: Volatility can be both a technical and an economic challenge, and is currently a major hindrance to cryptocurrencies becoming a widely adopted payment system as it creates difficulties relating to all three functions of money, but especially the function of store of value. Even though problems faced in traditional financial systems such as ‘bank runs’ are relatively similar to those being faced by crypto-exchanges, the very high volatility of cryptoassets has the potential to negatively affect perceptions and hamper their use in all kinds of longduration transactions.
- Scalability: Issues relating to scalability could delay/prevent blockchain’s capability to transform businesses, economics and governance. Many foundational public permissionless blockchain protocols do not scale to high transaction volumes on account of being limited in terms of transaction throughput by design. Entire classes of application use cases, especially those based around micropayments, are rendered economically unsound by higher transaction fees, forcing businesses based on those use cases to migrate to other technologies.
- Incentives: Incentives are crucial to sustain any economic or contractual relationship, since they induce people to act in a particular way in an economic or business situation. DLTs (Distributed Ledger Technology) offer a new avenue for ecosystems to self manage and coordinate without the need of a central authority. In this context, the fields of game theory, mechanism design and behavioural economics are particularly useful tools and offer unique insights into designing incentives that will ensure the sustainability and growth of an ecosystem and the associated business models.
- Usability and adoption: DLT businesses, cryptocurrencies and cryptoassets need to invest in ‘design thinking’ as user-friendly design is at the core of any successfully adopted technology. This facilitates the engagement of two main audiences – individual users and bigger organisations. For adoption to grow beyond technically-savvy audiences and include a broader base of individual users, accessibility of blockchain-related technologies plays a crucial role.
If so, the research does acknowledge the almost unfathomable potential of cryptocurrencies, and Bitcoin in particular. But currently it’s also very clear that cryptocurrencies are still not ready to become mass mainstream method of payment, as there’s a crucial necessity for significant progress in various vital qualities and aspects that can only then enable a mainstream adoption to occur.
But hey, crypto enthusiasts, you didn’t think it would be that easy, did you?