The concept behind a peer-to-peer digital currency that's controlled by the people rather than a private central bank is highly appealing in this day and age of ever-rising inflation. But the practical use of cryptocurrency is a completely different story, particularly with Bitcoin, which a new report says simply can't be properly scaled for widespread use.
The Bank of International Settlements (BIS) says that, when it comes to using Bitcoin as money, the sheer amount of energy and computing power required to complete transactions is too astronomical to work on a global scale. Some major changes to the platform would thus be necessary, in other words, to make using Bitcoin as simple, easy, and quick as, say, using credit instruments Mastercard or VISA.
Entitled "Beyond the Hype," the BIS report highlights, among other things, how making a payment with Bitcoin is incredibly slow. The Bitcoin system can only handle a handful of transactions at one time, compared to the tens of thousands that VISA and Mastercard can process in just one second. This makes using Bitcoin to pay for groceries, as one example, a sheer impossibility in the event that thousands or even millions of users are trying to do so at the same time.
Part of the problem is the current iteration of the Bitcoin ledger system, which is verified and updated among a pool of Bitcoin users that collectively confirm each transaction, as opposed to a single, centralized entity. This peer-to-peer model requires a whole lot of energy, and it just takes more time than the more traditional payment systems that most people are used to using.
"The ledger recording transactions can only be changed by a consensus of the participants in the currency: while anybody can participate, nobody has a special key to change the ledger," the report explains, adding that there's a "cost" to updating the ledger each time, known as "proof-of-work."
"This is mathematical evidence that a certain amount of computational work has been done, in turn calling for costly equipment and electricity use," is how the report defines this concept. "Since the proof-of-work process can be likened to digging up rare numbers via laborious computations, it is often referred to as mining. In return for their efforts, miners receive fees from the users – and, if specified by the protocol, newly minted cryptocurrency."
Even if everyone wanted to use Bitcoin as money, the greatest technologies in the world likely couldn't support it
As appealing as this user-based model might be, it also comes with other costs, including gross inefficiency and enormous electricity consumption. At the current time, the Bitcoin platform can only process about 1/1000th the total number of transactions that VISA can process, making it more of a payment novelty than something that everyone can eventually use in lieu of Federal Reserve Notes and other forms of traditional currency.
"At the most basic level, to live up to their promise of decentralised trust, cryptocurrencies require each and every user to download and verify the history of all transactions ever made, including amount paid, payer, payee and other details," the report adds.
"With every transaction adding a few hundred bytes, the ledger grows substantially over time. For example, at the time of writing, the Bitcoin blockchain was growing at around 50 GB per year and stood at roughly 170 GB."
What this means in practical terms is that the only way for Bitcoin to ever have the scalability of something like VISA, there will have to be an unprecedented number of high-power personal computers all around the world running at all times, and constantly being upgraded to the latest and greatest, in order for the system to keep up. Is this actually possible? Time will tell.
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