Bitcoin May Not Be the Future, but the Technology Behind It Might Well Be

A lot has been written about Bitcoin lately, as the value of the cryptocurrency keeps surging at breakneck pace, which has made many people consider it as an investment option. At the time of writing — it would’ve likely changed by the time you read this — one Bitcoin is valued at nearly $19,000, or approximately Rs. 12 lakh, up from under $1,000 in January this year. While the frenzy continues, many experts including the famed investor Warren Buffet are warning against buying Bitcoin as an asset.

Gadgets 360 caught up with Ari Juels, Professor Computer Science at Cornell University, who is working on areas such as cybercrime, and creating new and secure technologies based on blockchain. Before coming to Cornell, Juels was the chief scientist of RSA Security, which was acquired by Dell.

One of the things that Juels brings up is that at this point, Bitcoin isn’t just a risky investment, but it’s also not useful as a currency, which was its original purpose. Instead, he adds, Bitcoin is actively harming the planet.

«Bitcoin consumes an enormous — unconscionable from an environmental perspective — amount of electricity to achieve a transaction rate far lower than that needed for a real payment processing system,» explains Juels, adding: «One irony here is that my colleague Markus Jakobsson and I coined the term ‘Proof of Work’ in a 1999 paper that was partly about how to recycle the work.»

«Proof of Work» as defined by Jakobsson and Juels is data that is difficult (i.e. costly and time consuming) to produce, but easy to verify. This is the underlying concept of blockchain/ Bitcoin, which makes it possible to «trust» a decentralised ledger/ currency — but it’s also becoming a bigger and bigger challenge to accomplish.

Beyond this, there’s also the question of how decentralised Bitcoin really is. Although it’s theoretically possible for anyone to «mine» Bitcoins themselves by using their computer to carry out complicated calculations (the Proof of Work), at this point it’s practically impossible to generate a full coin anymore. Just about six months ago, one Reddit user decided to use a Bitcoin miner on his 2014 MacBook Pro, which he uses for video editing. After 33 hours of mining at full performance, he had earned 0.00000001 BTC. That means that at the current exchange and mining rates, if his laptop were running non-stop without doing anything else, it would take approximately 100 days to reach 1 cent. It would take over 27 years (10,000 days) of computing power to mine $1, at the present exchange rate.

Instead, most Bitcoins are being mined by specialised groups using dedicated hardware and drawing enough electricity that the balance between potential earnings and the expenditure on hardware and infrastructure has to be carefully managed. The activity — and the reason it’s growing in value — is because of exchanges; middlemen that end up replicating existing financial structures.

«Bitcoin isn’t really very decentralised today, with massive holdings controlled by a single firm, Coinbase, and a high concentration in mining power,» says Juels. Beyond that, there are also security concerns to using Bitcoin, he points out. «Bitcoin offers relatively weak confidentiality. The Transaction Graph, that is, record of who sent what money to whom, is publicly visible. This is helpful in limiting its criminal uses, but is problematic for a variety of reasons.»

Juels says that Blockchain technology itself, and cryptocurrencies in general have tremendous promise, and praises Bitcoin for taking them mainstream, but believes it won’t be the final form that gets adopted as an actual currency. «Bitcoin lacks the performance to act as an effective payment mechanism. And unlike, say, gold, it requires continuous maintenance in the form of wasted natural resources, chiefly electricity,» he explains. «There are efforts afoot to address these issues, but strong entrenched interests and fractious governance have proven obstacles to its evolution. Bitcoin may persist simply because it has so much momentum, but for all the brilliance of its design, it’s not a well engineered store of value.»

Juels points to alternatives that are less demanding, and explains that a decentralised model can be made to work in other ways. «Some assert that this expenditure of resources is the cost of Bitcoin decentralised trust model, but there are emerging alternatives, such as Proof of Stake and Proof of Space/ Retrievability, that don’t have this unfortunate side effect. Permissioned blockchains also don’t produce this kind of waste.»

«One of the main security concerns of the finance industry regarding blockchains generally is confidentiality,» he continues. «Blockchains’ value proposition is their transparency, which seems at odds with the properties required to conceal critical business intelligence. Researchers are developing new ways to address the tension between transparency and confidentiality.»

This is one of the areas that Juels and his colleagues are looking into. «That’s what our Solidus project aims to do for the traditional finance industry,» Juels explains. «Solidus provides strong transparency, in the sense that all users’ account balances are present on the blockchain in encrypted form — thus supporting the needs of auditors. At the same time, Solidus uses cryptographic innovations to conceal the system’s transaction graph. It’s unlike, say, Zcash or Monero, in that those systems aim at peer-to-peer use and don’t provide auditability, a requirement for the traditional financial industry.»

Bitcoin is at an all-time high but should you still invest in it now? We discussed this on Orbital, our weekly technology podcast. You can listen to it via Apple Podcasts or RSS or just listen to this episode by hitting the play button below.