As I describe in this recent post, a blockchain needs to be build up from a strong foundation to become resilient enough to overcome the threats that come with maturing. The foundation NEEDS to be store of value to enable a huge security level on the main chain. This is the ONLY way to attract as much computing power as possible within the limited capacity of the blockchain. Secondary features can be build on top of it, when you start with the secondary features there will be a day that the construction collapses under it’s own weight because it is not build up properly.
The days of smooth sailing for altcoins are passed, now they will be tested in heavy weather
Bitcoin is the only cryptocurrency that is build up from a strong foundation, all others started with secondary features because it sells better
Threats that come with maturing
When a successful cryptocurrency is become mature some serious threats will pop up. Bitcoin has been through the maturing process known as the scaling debate, survived and came out stronger. Altcoins have had their childhood without major problems and are just starting to mature. All of them will face headwinds in the years to come.
The time of smooth sailing has past, now you will be tested in heavy weather
Scalability
When a cryptocurrency becomes popular and more people start to use it there will be a heavier load on the blockchain and capacity limits will be reached. Blockchains doesn’t scale easily and scaling will be a slow process or tradeoffs have to be made. All of these tradeoffs make the blockchain less blockchainish and harm the base properties and thus decrease security and decentralisation.
Security
When the value of a cryptocurrency goes up it becomes a bigger risk for the status quo and more people will try to compromise or destroy it. Greater funds will be allocated to reach this goal and more powerful entities will be involved. In the recent years no major security issues took place and investors were mostly focused on fancy features. I promise you that when the value rises the pressure on the security mechanisms will increase dramatically.
All alts will be stress tested on security and scalability when they mature. How interesting their features are doesn’t matter at that point, if they fail they are doomed.
Blockchain not Bitcoin
Since 2014 a consortium of banks have been investigating blockchain technology without Bitcoin backing it and have spend hundreds of millions of dollars in the process. Now, 4 years later it is slowly becoming clear (for them lol) that a blockchain can’t function without decentralisation and incentive structure of the currency backing it, because that are exactly the features to create a gigantic security level without a single point of failure.
I think after ‘blockchain not Bitcoin’ also ‘altcoins not Bitcoin’ will fail because they all ignore the basic features that gives a blockchain it’s amazing properties, they are mostly focussed on features on the surface. It took years to find out that blockchain without Bitcoin doesn’t work and for alt coins it will probably take longer because at least they have an incentive structure behind them. Also don’t think that the huge amount of investment in alt coins is a proof of success, it only proves that the proof against it is not delivered YET. Mall-investment is very normal in a new industry.
http://fortune.com/2018/06/07/blockchain-firm-r3-is-running-out-of-money-sources-say/
Many weaknesses in alts are already being exposed
In the previous months many alts started to face their first problems and weaknesses started to reach the surface. I think this is only the beginning, because when a new bull market starts the blockchains will be under heavier load and the honey pot for attackers will increase. I see huge vulnerabilities in all the top 4 alt coins, and when a major failure of one of them happens it could ripple through all the alts and the dream could be over. Investors will finally focus on security and decentralisation and Bitcoin will be the only sane investment left.
Ethereum
Ethereum has so many weaknesses that I suspect that it will not be here to stay. The price may rise in the short term, but it will almost certainly run into a huge failure one day and the value will vaporize. The mistake that Ethereum made is that it implemented complicated features on the main chain what greatly increases the attack vectors, makes scaling extremely hard and greatly increases the chance of bugs. Furthermore, by forking after the DAO hack decentralisation is totally destroyed. In my opinion it is a mess and while it grows the mess will only become bigger and bigger. Possible failures:
- Scaling: The block size of Ethereum is way to big and nodes are already unable to keep synchronised with the network and dropping off. The only way to avoid total centralisation followed by eventually a collapse is to limit the block size, but this will skyrocket the fees and make the network unusable.
Security: As described above the nodes of the network are centralising, so easy to compromise or attack. Also Vitalik became a real leader when he decided about the rollback after the DAO hack and he can be (or is already) compromised by a government. Furthermore, the onchain code is way to complicated, so hacks of Dapps take place regularly.
PoW to PoS: Ethereum is planning to change from PoW to PoS, but this could be very risky. Firstly, PoS is not proven on that scale yet and probably way less secure than PoW. Also, miners will obviously not agree with the change so a network split is very likely. What will happen with all the ERC-20 tokens? A huge mess ahead?
Ripple
Ripple is not decentralised and the supply of new coins on the market is totally dependent on the CEO (Ripple should not be categorised as a cryptocurrency in my opinion). When Ripple becomes really valuable it is almost certain that the CEO (and thus the network) will be compromised or arrested (and the network taken down) by a government. Ripple will now be a fiat value transmitter or be totally gone.
Bcash
The biggest short term risk for Bcash is a 51% attack or big double spend event or a bug in the recently introduced op-codes. For the longer term big blocks and centralisation will cause problems (as started already in Ethereum). Also code for a hardfork is never carefully written and tested, you can guess what the results can be. This means that any time a major hack or network crash can take place and when adoption finally happens the network can be compromised or simply fail.
EOS
EOS is having it’s exiting time already before main net is live. When block producers failed to launch the network the solution came from an emergency meeting, this proves that there is no decentralisation at all. Especially in the coming days a failure because of a bug or not functioning consensus system is possible and in long term the lack of decentralisation will almost certainly cause failure.
Lightning Network is becoming an altcoin substitute
Lightning Network could finally be implemented on Bitcoin after the Segwit upgrade and since the beginning of this year it is being rolled out. This can disrupt all the cheap, fast and anonymous alt coins because a transaction is dirty cheap, instant and onion routing anonymous. On top of that the coin with the biggest network effect (BTC) can be used, so there are more parties to transact with.
In the last month, only half a year after Lightning main net was launched more advanced possibilities are being explored and this will really compete with the more advanced alt coins like Ethereum. LN can be used to build Ethereum like Dapps. Exchanges, casino’s, video games, etc can be LN powered but increased use will not clog up the blockchain, drop off full nodes and skyrocket fees. It will not influence the blockchain in a negative way, it will only increase the security by increasing the overall value of the network and thus the hash rate. The top ten Dapps on Ethereum are almost all possible on LN and the first LN killer app Satoshiplace overtook the entire top ten in popularity within weeks.
Watch this and use your imagination. You will see that 2nd and 3rd tier alt coins can be substituted by LN with extremely low and stable transaction fees, almost unlimited capacity, gigantic security and the biggest network effect.
My outlook
Many alts are being successfully attacked and weaknesses are been exposed in the recent months because they face the growing pains as a part of the maturing process. Since alt coins are not properly build up from the foundation they all will collapse under a certain load and the load will increase by increased adoption and value.
I suspect that many alt coins will fail in the next bull run because they can’t handle the increased load and probably a bigger one will be among them. This could easily cause the next bear market (imagine that ETH or XRP get hacked or stops working) and cryptocurrencies with strong basic features like security and decentralisation will rise from the ashes.
Oh, I think there is only one: BITCOIN.
Investors will not look at fancy features anymore but wait patiently until they are build into sidechains of the most secure and decentralised blockchain on earth. Bitcoin will become the internet of trust and value and all shitcoins will be history like intranets are today.
PS, I describe this scenario to play out in the coming bull run, but it can take much longer too. The only thing I am very certain about is THAT it will happen whether it takes 1 year or 20 years. This means alt prices can still go up for a while, so they could be a good short term speculative bet, but don’t forget to cash out in time and HODL your profits in the more certain investment BTC.
Disclaimer
This is no financial advice, just my view on the market.
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