Bitcoin (BTC) loopholes set the stage for alternatives
Bitcoin, the world’s best-known cryptocurrency, has a few flaws – and that’s prompted other digital currencies to come up with more viable options, according to a Cornell University professor.
It’s not as anonymous as people think, and “mining” bitcoin is bad for the environment, economics professor Eswar Prasad said. It also doesn’t work well as a currency, he told CNBC on Thursday.
One interesting aspect is that other cryptocurrencies have found solutions to address some of bitcoin’s flaws, said Prasad, former head of the China division of the International Monetary Fund.
Bitcoin mining refers to the energy-intensive process required to produce new coins and ensure that the payment network is secure and verified.
The electricity used during the validation of transactions on the bitcoin blockchain, as well as the mining process, is “definitely not good for the environment,” Prasad said.
Tesla CEO Elon Musk said last month that his electric car maker would stop accepting bitcoin as a form of payment due to environmental concerns, causing the price of bitcoin to drop 5% within minutes.
He has since turned around and said in a tweet on Sunday that Tesla would accept bitcoin in transactions if he could confirm “reasonable” and “clean” use of energy by miners.
Crypto miners use specially designed computers to solve complex mathematical equations that effectively enable a coin transaction to be completed. Miners are rewarded for their efforts by being paid in cryptocurrency.
However, the entire process used to create a bitcoin requires a lot of energy and can consume more energy than entire countries such as Finland and Switzerland, according to the. Cambridge Bitcoin Electricity Consumption Index.
On the other hand, Ethereum – the second largest cryptocurrency sometimes seen as an alternative to bitcoin – offers a different mining method that requires less energy, Prasad pointed out.
Called “Proof of participation”, it is the underlying mechanism of Ethereum that activates the so-called “validators” on the network, if they can prove that they have ether, or a “stake”.
Ultimately, it should eliminate the need for large amounts of computing power required to validate transactions and Ethereum Foundation Says It Will Use 99.95% Less Energy than before.
“It’s going to be a lot less energy intensive and it could offer a lot of the benefits that bitcoin was supposed to offer. It could also make transactions a lot cheaper and faster,” Prasad said.
However, it is not there yet, he added.
2. Not so anonymous after all
Earlier this month, U.S. law enforcement said they were able to recover $ 2.3 million in bitcoins paid to an cyber criminal group involved in the ransomware attack on Colonial Pipeline in May.
The FBI said its agents were able to identify a virtual currency wallet that hackers used to collect Colonial Pipeline payments.
“The main idea of bitcoin… was to provide a pseudonym,” said Prasad. “But it turns out that if you use bitcoin a lot, and especially if you use Bitcoin to obtain real goods and services, then it becomes possible over time to link your address or physical identity to your digital identity.”
What’s interesting, he said, is that there are other cryptocurrencies that are trying to solve this problem and offer more anonymity. He cited Monero and Zcash as examples.
Chris Ratcliffe / Bloomberg via Getty Images
“So bitcoin has really triggered a sort of search for a better alternative and people seem to be looking for a medium of exchange that doesn’t require them to go through a trusted institution like the government or a bank. commercial – but that’s not the case quite there again, ”said Prasad.
3. Doesn’t work well as a currency
In theory, bitcoin was supposed to provide an anonymous and efficient medium of exchange but “it didn’t work in that regard,” the economics professor said.
On the contrary, it is “slow and cumbersome” to use bitcoin to pay for goods and services, and the market is very volatile, Prasad said.
“So you can bring a bitcoin to a store and one day have a cup of coffee and another day with the same bitcoin you can treat yourself to a sumptuous meal. So it doesn’t work well for the medium of exchange,” he said.
Bitcoin has become a speculative asset for people who hope it will rise in value, rather than because they want to use it as a form of payment, Prasad said.
– CNBC’s Sam Shead contributed to this report.