The issue of scalability first became apparent in 2017 or so when Bitcoin started to be very actively transacted through the blockchain as it was getting much more traction due to the sudden uptick in price.
During those days, the limited block size immediately became apparent as people either had to wait for a couple of hours to have their transaction confirmed by miners or had to pay extra in terms of transaction fees to quickly have them appear on their wallets.
Ever since this became an issue, ICOs, IEOs, and STOs quickly shifted their Whitepapers to focus on how well they would be solving the scalability issue. Almost all of them were mentioning increased block sizes for better storage, and therefore much more time for the miners to create additional blocks.
Soon enough, it became apparent that larger block sizes don’t necessarily solve the bottleneck issue. Should the coin have more than enough traction, it will still cause some kind of “traffic jams” before a new block is added to the chain.
The only thing that was solved by increasing the block size was the frequency of these “traffic jams”. For example, if Bitcoin has a block size of 1MB and the traffic jam occurs every single day, an alternative to Bitcoin would have a block size of let’s say 30 MB, therefore the traffic jams would occur every month.
But as coins continue to grow in size, mining becomes more complex, which adds additional costs to those who operate these farms. Halvings also need to be considered. For a miner, it does really seem that the system is rigged against them.
As the complexity increases, their demand for computational power rises, therefore their costs for better equipment and more electricity go through the roof. Then they’re hit with a halving that basically destroys 50% of their income, thus making them half the size they were supposed to be with the same amount of investment that they made.
Scalability is Crucial for Adoption
At that point, it becomes quite redundant for a small scale miner to work on pennies, as they never know when a price drop may occur and send them into the minus, with very little funds saved as backup due to the hardships of working for a profit. This is why we see everybody run to countries like Iran or Georgia, where electricity is dirt cheap compared to developed nations.
As long as mining is profitable, and enough people have the incentive to do it, the scalability of a particular blockchain has the potential of remaining intact. At that point, it becomes acceptable to experience small bottlenecks once every month.
But without these miners and less frequent bottlenecks, cryptos will never see global adoption. Why? Because they will simply lose all of their value.
Let’s ask ourselves. Why do we use cryptos? Well, they’re fast, almost instant in fact, they’re cheap to transact and they’re decentralized, right?
Well, the complexity of mining is now forcing people to pay a bit extra to have their transaction be verified first, the decentralization argument is slowly losing its grip as well, as governments start becoming more and more demanding on the trading information, and large corporations start creating conglomerates similar to the Libra.
All in all, cryptos are left with the instant transaction feature, which is slowly but surely, being matched by online wallet providers like PayPal for example. Should banks finally reach a point where they can verify a transaction from overseas within a day or so, cryptos may lose their value completely. Because why go through the headache of exchanging fiat into cryptos, just so that you have to wait the exact amount of time for it to process? Might as well go with fiat right? It has better liquidity.
Will there be Global Crypto Adoption?
Although it’s very healthy to fantasize about a future where everything finance is embroiled in cryptocurrencies, it’s very unlikely to happen in the current state of events. This is not anything new to those actively developing new blockchain projects, and most understand that their project will not be the next global thing.
Right now, we’re in a phase where everybody is trying to innovate. Over time, these innovations can culminate into unlimited scalability, true decentralization and actual anonymity for the users. But problems are sure to occur.
The most “crypto-friendly” countries such as South Korea and Japan are already cracking down on anonymous transactions, due to allegations of money laundering and terrorism financing. Nobody is arguing that it’s not possible, but everybody is saying that it’s not probable.
Why launder something out of the country, which you will need to liquidate, and therefore be found one way or another? Most money laundering cases happen with cash, and cash only, at least the ones that are not discovered.
The future where crypto is king will come eventually, but we have a long way to go before that happens. On this road, we will have to reach milestones such as no bottlenecks in the transaction system, a one-step-ahead policy in regards to banks and existing fintech solutions, relatively stable markets and national stablecoins.