What is the Future of Distributed Ledger Technology?

The full article was originally published by Vik on Medium. Read the full article here.

This article describes my thoughts on the evolution of permissionless distributed ledger technology (DLT). Of course it’s just an attempt catching the reality.

What started 10 years ago with Bitcoin was like the big bang of the DLT space – the birth of the blockchain. For many years, the applications based on blockchain were limited to a pure digital means of payment, a cryptocurrency with great vision giving everyone access to the financial system in a self-sovereign fashion.

Only in 2013 when Ethereum came up with Smart Contracts and DApps, the development quickly took its course towards tokenizing businesses. Most still have to deliver and proof themselves valid as they were mainly ITOs based on whitepapers and promises. Nevertheless, the full potential of the blockchain has become visible in the last two years and now extends to all areas where data and values ​​are involved, with revolutionary features:

  • Distributed ledger and decentralized system (but where does centralization ends and de-centralization starts?)
  • Tamper-proof and trustless (more accurate: minimal amount of trust)
  • Fast with low-cost transactions
  • Cutting out expensive intermediaries
  • Empowering users (own your data)

While decentralization is always a hot topic with different approaches, there is a general problem in the increasing centralization of hashrate. If individual mining pools have the majority of the hashrate over a blockchain, then we can no longer speak of decentralization. In the coming years we will certainly see a variety of new approaches facing this issue.

Although blockchain based cryptocurrencies started out with seemingly great superiority over traditional financial systems (free, decentralized, many times faster and with just some pennys of transaction fees), it is already struggling in early adoption days with scaling issues and rising transaction fees. For example, Bitcoin fees peaked at around $ 55 in December 2017 and Ethereum fees at around $ 4.1. And we still haven’t seen any major adoption in the real world. It was all happening inside a speculation bubble mainly through moving coins around exchanges. This new money flowing into crypto was already enough to bring the most mature blockchains to their limits. So we are far away from any usage on wider scale.

Design by Sabri Goldberg

What I’m thinking about in particular is that fees and miners, even with a successful scaling of a blockchain, will be a major disadvantage over the next generation of DLT and for which I can not see any solution, because it is the essence of blockchains.

We are in a transition phase between our traditional intermediaries and true peer-to-peer transactions with no middleman at all, unless we want to choose a third-party for managing our finances.

Miners are just a new type of digitalized middlemen who are partially converted into code and charge fees for their services for which they compete with others. Of course this is how consensus on blockchain works and how it maintains security. But they are still between me and you, if I try to send you a coin. Through this consideration, they correspond to our old economy of intermediaries. Though, it’s still a big advancement regarding trust and
efficiency. But at this threshold it is only a bridge to the real future economy that I see upon us.

Mining is also no longer worthwhile for the “simple people”, as it was originally intended. Only the ones with a lot of capital earn (a lot of) money. There is a similarity between banks and miners: both process transactions and charge fees for their sevices. Both can achieve high position of power and influence. Does this sound familiar, especially to mining pools like bitmain? Thus leading into centralization and security risks (51% attacks) to any network, which brings us to the initial problem of maintaining decentralization. So we see that at least these points – decentralization and fees, through which mining pools grows, are closely related and again — they are by design part of the blockchain.

Design by Sabri Goldberg

What if the problems get solved?

Suppose the successful scaling of blockchains will come in the future where it can compete with Visa or Mastercard (about 2.000 transactions per second) and suppose that these transaction rates will not be achieved by highly centralizing a blockchain. Finally, suppose that transaction fees will be around at some pennys. Then there will still be a huge amount of summarized fees paid to miners/miningpools/hubs day by day, making them richer. This does not sound like a revolution to me, it’s just the old system continuing in a new guise.

Why blockchain based cryptocurrencies will never free the poor people

One will argue that fees are the incentive for mining and securing the blockchain and for us in the western countries, paying some pennys tx fees doesn’t hurt much. But does this count for the rest of the world?

From the slightly red down into deep red, the average annual income of the countries listed below is less than $ 10.000. That’s about 83 % of world’s population! And not to forget: that’s the average including the rich, means there are people with far less money for everyday life.

From https://www.worlddata.info/average-income.php

To make this picture of our income ratios even clearer, below are the poorest countries of our world:

From https://www.worlddata.info/average-income.php

People who were previously excluded from the financial world, or just unable to participate on a worldwide scale due their low income, can now manage their money independently on the blockchain. But it does not take much to see what economic damage fees are causing when every penny matters.

Is this the price for free money and self-sovereignty?

Or is it no longer free money for these people if they have to work all day to pay the fee for one single transaction (Madagascar $ 1 median daily income)? How many transactions usually occur during the month? For these people, cryptocurrencies will never be accessible through the blockchain fee model. And the system, the gap between poor and rich, remains intact. How can a cryptocurrency based on such a model become a global world currency?

What if…

… there is a cryptocurrency that essentially contains all the properties of the blockchain, but requires no transaction fees?

As technological innovation never stops, the blockchain as the first DLT will not be the end of the progress. We will see a lot more of smart “ledgers” upcoming. It is important not to stop at the first development stage, but to remain as open as possible to new innovations.

But we need fees as incentives to secure the network?

The ones who are familiar with a new generation of DLT based on a directed acyclic graph have already recognized the turn to the IOTA protocol. It’s an absolutely valid question how to incentivize running a node if there are no fees in the game. But before answering this question, let’s summarize how a design-change can eliminate miners and fees and still provide consensus:

While the blockchain separates users and miners, creating conflicts between the interests of these two groups, the IOTA tangle combines the two by requiring users to confirm transactions in order to make them.”

In other words: help others (by validating two previous tx) and others will help you (by confirming your tx). This sounds more like a healthy environment than it can be with conflicts and competition.

From https://blog.iota.org/a-primer-on-iota-with-presentation-e0a6eb2cc621

I am personally running an IOTA full node just to support the network in this early development stage. And there aren’t even high hardware requirements:
You can already run a full node on a Raspberry Pi that consumes less power than a light bulb (financial transactions on less power then a light bulb!).

What even came before IOTA was born is the recently unveiled Qubic project where IOTA serves as the messaging and payment system for the real innovation: With Qubic you can sell your computitional power on the IOTA network (and many more), thus ultimately incentivizing running a node. It’s about even using old computers which will become a part of a distributed global supercomputer solving useful tasks. Everyone can participate and generate passive income.

This shall be enough on the future outlook for IOTA, although there’s a lot more to research with oracles, ternary system and economic clustering… but let’s get back to topic.

The future is smart

What already happens today and will intensify in the near future, is that data from the innumerable sensors and different networks sorrounding us will be collected and analyzed, enabling deep learning and the rise of artificial intelligence (Data is the new oil). A machine economy is emerging, which will lead us into areas such as autonomous driving and smart cities. Our everyday life will change radically, just as it once changed through the internet.

An endless sea of connected smart devices with the need to send data

What the world really needs is a protocol that enables this machine economy and forward the internet of things. And best of all with all the features of a blockchain, but without its limitations. With no miners and fees. With a secure and quantum-resistant network allowing partition tolerance (offline transactions) — and that actually scales.

What does the emerging machine economy have to do with cryptocurrencies and fees?

The protocol which enables daily billions of free, encoded data (privacy) and value streams (true micro-payments are a necessity) in the machine economy will become a global industrial IoT standard and thus, bringing its token (it’s obviously not a coin anymore) to a worldwide adoption. This protocol will be brought by the leading tech giants itself to our everyday life with such a wealth of use-cases and benefits, thereby adding value to the token itself and turning it into a established “cryptocurrency” of the machine economy. Digital gold.

To make that clearer, imagine that machines will do many times more transactions than we humans do. We will inevitably communicate with machines and vice versa.

From https://huffingtonpost.com

It gets quite obvious why a machine economy will never play out on a fee model. Devices need to send data streams continuously and free of any charge. Millions of transactions each minute would just blow off every blockchain instantaneously, leading in rising fees. Micro-transactions could never work.

I personally believe that there will be hundreds, even thousands of cryptos and tokens circulating in the future. Blockchain will certainly have a permanent place for certain applications. But the protocol completeley eliminating miners and fees will bring wealth and access to the new economy for even the poorest people on the world.

Technological and mental challenge

This path is riddled with many technical challenges and it’s always easy to criticize an early stage technology rather then imagine its full potential, especially when one has invested early enough in some blockchain projects and got strongly convinced about the right decision. But technological advancement does not stop where I become millionaire or where my imagination ends.

Disclosure: I am invested in IOTA and several blockchain projects. None of this is meant as an investment advice. As always, think for yourself and DYOR.

Thanks for reading!

PS: Except all the mentioned points, sustainability is probably one of the biggest issues and with current mining, solving math-puzzles and wasting energy par excellence, one even can see more why it has no future. But this point would be just too much for this article 😉

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The full article was originally published by Vik on Medium, where people are continuing the conversation by highlighting and responding to this story.

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