Stress on the phrase “right now.”
We all know what they are by now. They are decentralized digital currencies based on blockchain technology. Note the term “currencies”. Ask yourself, are they really used as currencies right now? The answer is a resounding “no”.
Everyone and their mothers are getting into crypto thinking it is an investment. And as long as people continue to think that, it will never lose its volatility and be suitable to be used for transactions.
Ever since stocks such as $GME and $AMC saw a meteoric rise, people have gone ham while investing in anything they can. The general public at some point was deluded into thinking pouring ludicrous amounts of their hard-earned money into cryptocurrencies, more so than any stock, was the smartest thing to do. The media and popular figures such as Elon Musk are to be blamed for implicitly selling everyone on the idea. Now everyone’s driven by a fear of missing out (FOMO).
The volatility of all digital currencies is through the roof. This is exactly like the Tulip rush and the Gold rush of the past. They have been turned to mere pump and dump schemes. Even celebrities such as Kim Kardashian have been pushing extremely sketchy coins onto their gullible followers. And this won’t end anytime soon. Because of all this, people have started to treat it as a non-performing store of value, which is not necessarily true.
Some cryptocurrencies boast being “stable coins” such that their values do not fluctuate wildly as they are tied to a fiat currency such as the US Dollar or any other currency. However, these coins are not “decentralized” in a true sense. Moreover, they are not used in a widespread manner as well.
If things do not change anytime soon, it will end up as a failure. If we want to fully utilize the capabilities of blockchain to improve how we conduct transactions today, we need to ensure that more and more people, as well as institutions, accept it as an alternative form of currency.
However, the most obvious way to overcome this problem would simply be that individuals and institutions increasingly begin accepting cryptocurrencies as a form of payment in the near future. This would increase their circulation and force everyone to accept a set amount as the prices to avoid menu costs.
Another possibility involves the price of cryptos reaching a plateau at some point in the future. However, this would occur much later around the point where their mining would reach its final stages (for the ones which have a finite supply such as BTC, LTC, THETA, ETC, and so on).
It would be great if this is the only problem cryptocurrencies face. Another reason why cryptocurrencies have not been fully realized is that they require a lot of energy in the mining process. You may be able to recall the Elon Musk tweet declaring that Tesla will not be accepting Bitcoin as a form of payment unless the miners shift towards more sustainable energy practices. May I add that Bitcoin mining (which is still ONE of the countless cryptocurrencies being used today) consumes half the energy of the United Kingdom in a year.
A possible solution being explored is shifting the validation process of “blocks” from “Proof of Work” to “Proof of Stake”. Those terms might be unfamiliar to you, so I will try to explain them as concisely and effectively as possible. Most cryptocurrencies today use the concept of proof of work–which involves solving complex mathematical and computational problems (also known as cryptography) which takes a while to complete (around 10 minutes in the case of Bitcoin). The problem this creates today is that the computers of today have gotten a lot more powerful, so the computational problems have been made more complex as well. This results in significantly more energy being used.
Proof of stake, on the other hand, aims to replace the current method of validation by placing an amount of cryptocurrency at stake for the person who is volunteering to validate a transaction. Here, the person who does so earns a fraction of the cryptocurrency being sent over. This allows cutting the energy intake by a great margin. As with proof of work, the higher the computational strength, the more coins you can mine. Similarly, the more coins you put at stake with proof of stake, the more coins you earn. Hence, proof of work, the current way of validating a transaction, incentivizes the hoarding of computational strength while proof of stake incentivizes the hoarding of coins.
As a result, people fear that the users who hold vast amounts of coins will amass more coins with the process and will increase the divide as they may gain more power over the cryptocurrency. As of right now, Ethereum is looking into implementing proof of stake in $ETH.
When we finally start utilizing these cryptocurrencies as “currencies”, only then we will reap their benefits such as protection from inflation and freely being able to conduct transactions without any middlemen such as governments and banks. In addition, when cryptocurrencies show the potential of blockchain, we will start utilizing it in different applications. I firmly believe that blockchain is a dark horse amongst the “next big things” in the tech space right now. It will continue to have great uses in cases where data is transferred rather than copied with a high likelihood of fraud, meddlesome intermediaries, and a requirement for high throughput.