Since its inception over a decade ago, Bitcoin has grown from an obscure curiosity for IT geeks to a worldwide phenomenon, revolutionizing the global financial industry in the process. During this time, its network has evolved to keep up with the times—but what changes could be wrought on the underlying technology of Bitcoin technology in the next decade or two?
And, more importantly, does Bitcoin really need to change?
Some assembly required
Even today, Bitcoin demands a certain level of computer literacy from its holders. But when the cryptocurrency was first introduced to the world over a decade ago, it was even less user-friendly. Since then, several useful improvements—such as Segregated Witness (SegWit) and Lightning Network, a second-level scalability solution—have been proposed and successfully implemented, although this process was far from simple.
What is Lightning Network? And How to Use It in 2020
According to Dmytro Volkov, chief technology officer at crypto exchange CEX.IO, Bitcoin’s very own decentralized nature is both a blessing and a curse. On one hand, the absence of any controlling entity makes Bitcoin truly decentralized and community-driven. On the other, it makes it much harder to upgrade.
“It requires a great deal of effort to reach consensus on implementing big changes to the blockchain code.”
“There is an open-source community and development, but it requires a great deal of effort to reach consensus on implementing big changes to the blockchain code. A good example was SegWit, which took a lot of time and effort to implement,” Volkov told Decrypt.
He added that this may be perceived as Bitcoin’s weakness in comparison with other blockchain projects such as Ethereum—which has a native team, author, and community leader, “all of which make complex large-scale changes to Ethereum relatively easy and quick, with high levels of consensus.”
Actual deployment in bitcoin software (beyond just consensus activation) is complex, requires significant changes, and will likely take a while
— Udi Wertheimer (@udiWertheimer) December 11, 2020
“On the other hand, we can see it as a strength of Bitcoin because it offers maximum decentralization in terms of changing the blockchain’s code: changes require truly worldwide consensus, which ensures that only the most wanted features will be added, in the most secure way,” Volkov explained.
Thus, while Bitcoin’s architecture makes the blockchain more conservative and narrower in functionality, it also makes it more simple, secure, and reliable, he added.
What are Bitcoin’s biggest challenges today?
Speaking to Decrypt, Muneeb Ali, founder and CEO of Blockstack, an open-source network for decentralized applications (dapps) and smart contracts, outlined two main challenges that Bitcoin is facing today. First, for it to become the universal reserve currency, Bitcoin must be able to scale to hundreds of millions—or even billions—of transactions. Second, there needs to be a way to safely introduce smart contracts on the blockchain.
“For scalability, it’s pretty clear at this point that the base blockchain is not where you do hundreds of millions of transactions. Higher layers or sidechains will take on that load and settle back on Bitcoin,” Ali explained to Decrypt.
He added that there are several technical directions currently being explored such as Lightning channels, sidechains like Liquid, connected chains like Stacks, and even zero knowledge proof-based solutions that allow condensing a lot of data while keeping it provable.
What are Zero Knowledge Proofs?
“For smart contracts, introducing them on sidechains (like Liquid with Simplicity Lang), merged mined chains (like RSK with Solidity), and connected chains (like Stacks with Clarity Lang) seems to be the way to go,” Ali added.
He also highlighted experimental solutions such as Sapio that are trying to implement multi-step smart contracts on the base layer of Bitcoin.
“I think that significant progress on both fronts can be made within the next 1–3 years,” Ali suggested.
Still not ready for prime time
However, most experts interviewed by Decrypt agreed that many innovative Bitcoin solutions are still in the early stages of their development and are far from ready for mass adoption.
Layer two solutions such as Lightning and Liquid are technically interesting and have potential, said Antonis Polemitis, blockchain specialist and the University of Nicosia CEO. But both are “rather experimental technically and are still working on product-market fit,” he added.
“Unlike Layer one, that can plausibly say that it is a low transaction volume solution, optimized for decentralization, success at layer two would mean high volume. And there are other even earlier stage technologies, like Taproot,” he told Decrypt.
While Bitcoin will likely play a leading role as a long-term value storage method in the cryptocurrency world, it is still relatively slow and has low throughput—and will likely remain this way due to how hard it is to upgrade the blockchain, added Volkov.
“SegWit was a big change to the Bitcoin blockchain, but it didn’t solve the low throughput problem. Lightning didn’t solve the throughput problem either, because it is not easy to use and there are plenty of other alternatives on other blockchains to accomplish the same thing easily,” he explained.
Thus, other blockchains are likely to surpass Bitcoin in terms of speed and throughput (which are crucial for day-to-day transactions) or complex algorithms such as dapps and smart contracts, according to Volkov.
Support for Bitcoin’s Taproot Upgrade Surges to 45%
“Halving the Bitcoin mining reward would likely increase the transaction cost for end-users, so it would give even less motivation to use Bitcoin for small transactions. There is stable, slowly increasing interest from regulators and big investors, so in the long term, Bitcoin will look more like an investment instrument and less like money,” he added.
Polemitis expressed the same sentiment, suggesting that Bitcoin is likely destined to become a store of value rather than a medium of exchange.
“The scaling debate on BTC is over for now.”
“The scaling debate on BTC is over for now,” he told Decrypt. “Layer 1 is going to be small blocks and without a huge amount of transaction volume. There is a form of stability right now between the capacity of Level 1—relatively limited for high volume transactions—and demand for high volume transactions; also relatively limited, given the current orientation of BTC to ‘store of value’.”
What could the future hold for Bitcoin?
While it is nigh-impossible to predict how the blockchain could change even in the foreseeable future—let alone in 20 years, given the pace at which digital technologies are being developed today—the experts unanimously agreed that Bitcoin is likely primed to take center stage in the evolution of the finance industry.
“If I had to guess, and this is obviously nothing more than a guess because 20 years is a lifetime in this field, a success case for BTC in 20 years is that it is the global open settlement layer for both a large number of DeFi services and the machine-to-machine economy,” Polemitis asserted.
At present, there is a long list of technical improvements and new features that could be implemented in the Bitcoin blockchain, Volkov added. However, he noted that reaching a consensus on those changes requires too much effort—all while more convenient alternatives already exist today.
“The future of Lightning remains undefined: it was anticipated to be a good technical improvement, but it is still not widely used, is not easy to use, and has many better alternatives now, plus technically Lightning is still not fully ready. So we do not expect any major technical updates on the Bitcoin blockchain in the next few years,” he surmised.
One tenth of Bitcoin Lightning Network nodes hold 80% of its Bitcoin
Likewise, Ali suggested that Bitcoin will become “the center of gravity” for the whole cryptosphere in the future.
“In 20 years, I think Bitcoin will be the center of gravity for the cryptoasset ecosystem and broadly the Internet. Think of Bitcoin being as pervasive as TCP/IP, a value settlement protocol that is a reserve currency for the world and a record of hashes of internet data and logic,” said Ali.
According to him, various decentralized finance (DeFi) applications, new types of derivatives and stable currencies will likely be built on top of Bitcoin. Simultaneously, private and confidential transactions would be enabled on top of Bitcoin’s base layer.
“Currently, the finance industry is rapidly adopting cryptoassets like Bitcoin. Soon, the migration will come full circle, and Bitcoin plus connected/side chains will become the new infrastructure that fintech and banks run on top of,” Ali concluded.