What is the relation between belief and technology in the context of cryptocurrencies? What is more important for success? Read our take on the topic.
The very beginning
If you asked me how is it possible that cryptocurrencies have been invented then I would tell you that the internet is the reason why it happened. The Internet is a major scientific achievement that disrupted many industries. For example, newspapers and journals have been issued by big publishers. Individuals had no public medium that could be used for publishing their articles or spreading their opinions. The Internet demonopolized the press industry. Nowadays, everybody who has the internet can publish articles and opinions. The power of big issues has weakened. Research in the information technology industry continued and many inventions in cryptography allowed us to use internet banking. It was very significant for cryptocurrencies since people began to trust digital numbers and believed that they have value. It was not necessary to hold banknotes in hands to be able to pay. Internet banking can be considered as the beginning of the demonopolization of currencies and it was probably the unintentional beginning of cryptocurrencies.
Satoshi Nakamoto put together a few technologies and launched Bitcoin. Bitcoin is a public decentralized network that is in the hands of the whole community. Nakamoto’s intention was to create independent digital money. In the beginning, the belief was very important to adopt the public network. The technology was also important but if we simplified it a bit, it was sufficient that it worked seamlessly. People did not face the issues with scalability and when Alice sent BTC to Bob then the transaction was received within minutes and settled within an hour. It was fantastically fast in comparison with bank transactions at those times.
People often believe more in dreams and wishes than reality. People from the crypto punk community started to believe that they have invented their own money. There is a strong factor that started to support the belief. The rising price of BTC coins. People believe that they will be rich if Bitcoin succeeds. It is a nice dream and some people are already rich thanks to Bitcoin. Other people organically come and want to join the club.
We think that belief is more important than technology at the moment in the case of Bitcoin. Technology did not change much over the last decade and with the influx of newcomers, it is evident that Bitcoin is not ready for the mainstream. Transaction fees rise to dollars and settlements can take days. Consumption of electricity rises with the rising price and there is no upper bound to restrict that. The belief is sometimes blind. People are not able to use Bitcoin in the way it was originally designed. They can basically hold it and dream about a better future in which Bitcoin becomes the money of the world. Some people are not able to admit that it will never happen without further extensive development. We are not talking about Lightning Network that is going to solve all Bitcoin troubles. It is also a false belief. We are talking about issues with decentralization, tough government restrictions that can bring transaction censorship. The reality is that people buy and hold BTC via centralized services. If they pay by BTC in a shop then it happens via centralized services. If they want to use BTC for something else then for holding then they need to tokenize BTC coins and use them in the Ethereum network. The market capitalization of Wrapped BTC (WBTC) is nearly 2B at the time of writing the article. We can conclude that the belief is stronger than technology in the case of Bitcoin. It is actually good and we do not want to say that Bitcoin will not succeed. We also believe that Bitcoin has the potential to become a store of value. On the other hand, we expect that many projects surpass Bitcoin technologically. Cardano will definitely be one of them.
Let’s talk about technology
Bitcoin has been put together from many pieces that have an interesting past and there is a lot of science behind it. Let’s have a look at some of them.
A protocol similar to the blockchain was firstly proposed by David Chaum in 1982 in his dissertation “Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups.”. The original idea was improved by Stuart Haber and W. Scott Stornetta who described a cryptographically secured chain of blocks in 1991.
Proof-of-Work was firstly described in 1993 by Cynthia Dwarf and Moni Naor in their scientific work dedicated to the creation of an anti-spam solution. The sender of an email had to prove to the recipient that the sender’s computer spent a little computation power. If spammers wanted to send a bunch of emails then the amount of computational power could discourage them to do so since it could be quite expensive.
Cryptocurrencies would never be invented if cryptography did not exist. Cryptography is older than computers but for cryptocurrencies, public-key cryptography is the most important. It is a major invention in the branch that brings many new possibilities. In 1976, a young student Whitfield Diffie and his Stanford professor Martin Hellman devised a system that allowed an unlimited number of people to communicate with total privacy. Shortly after that, in 1988, Shafi Goldwasser, Silvio Micali, and Ronald Rivest invented the digital signature. It is the mechanism that is used for signing transactions in cryptocurrencies. Bitcoin uses Elliptic Curve Digital Signature Algorithm (ECDSA). The concept of usage of elliptic curves in cryptography was firstly independently proposed by authors Neal Koblitz and Victor Miller in 1985. ECDSA is to be replaced in Bitcoin by Schnorr signatures. Schnorr’s signature was invented in 1989 and its patent expired in 2008.
Another important cryptographic tool is a hashing function that is used in Bitcoin for the mining algorithm and for hashing the public addresses. Bitcoin uses a hashing function named SHA-2 that was designed by the United States National Security Agency (NSA) in 2001.
As you can see, Nakamoto has used many old technologies in Bitcoin. It must be said that these technologies might work fine in the next decades. On the other hand, technology evolves rapidly and research and science never sleep. Every technology gets obsolete one day and will be superseded by a newer one. It is not an option but sometimes a necessity. Once the efficiency of quantum computers gets improved it will be probably necessary to completely replace cryptography. Once more people will want to use cryptocurrencies we will need scalable networks with fast and cheap transactions. Once people ask how decentralization can help them to solve some problems we need to have functionalities that will really help. We need it soon, not somewhere in the distant future when another piece of technology will be delivered or improved. We need it at the moment when people will wish to adopt decentralized technologies. It can be in the next decade.
The IOHK team has explored every single piece of many cryptocurrencies to be able to improve it. Besides others, the most significant improvement is the consensus mechanism Ouroboros PoS. The major problem of cryptocurrencies nowadays is low scalability. It does not matter so much in the case of Bitcoin as people want to hold it and wait for a dreamed future. Scalability is an important feature for Cardano’s mission. The IOHK team decided to deliver a globally decentralized network that will allow us to get rid of middlemen. To achieve such an ambitious goal, many other technologies had to be designed and implemented. Many of them are still under development. To name a few, Cardano will have smart contracts. Atala Prism allows us to work with a global digital identity. Stable coins isolate us from volatility and allow people to really use cryptocurrencies for payments. Competitors of the Cardano projects are not other projects. They are rather the current centralized social and financial services. To be able to compete with centralized services, we need superior technologies. A technology that provides people with the same user experiences but it will be decentralized. It is a big challenge. That is why Cardano has been being built for a long time. It was necessary to improve every single part of cryptocurrencies and it would not be possible without research and science.
What do we need more?
Do we need more belief or technology? We think that mass adoption of cryptocurrencies is not possible without a technology that is capable of attracting new people and providing solutions for their troubles. At the moment, Cardano is more about superior technology than about belief. It is a younger technology and many people tend to put it together with many failed ICO projects. It is a very wrong perspective. The reality is that only very few cryptocurrency projects have strong fundamentals. Cardano is definitely one of them.
Belief in cryptocurrency projects is something that can be increased only via a network effect. People will hear about Cardano’s mission and will be interested in it. They will try the technology and find out that it works seamlessly. It can be a slow process and take a few years. Bitcoin has been here since 2009 and its adoption is relatively low. There is a strong belief that Bitcoin is a hedge against the system and people are willing to buy it despite high transaction fees. People are also willing to use Ethereum services to pay high transaction fees. We have seen many failures and stolen money and despite all that, people still believe that Ethereum will be part of our future. We expect that technology will begin to be more important than belief in the next decade.
The belief was a very important aspect for the rise of cryptocurrencies and it gets us to the point when we need a technology that would enable further adoption across industries. We think that Cardano is better positioned for the next decade than Bitcoin since at the moment it is relatively easier to attract new users than to technologically innovate the protocol. We are not talking about the market capitalization of projects. We are talking about mass adoption in the sense of daily usage. We think that the real value goes hand in hand with usage and adoption. If Cardano succeeds in getting rid of us middlemen then we can say that the definition of success has been accomplished. Will be the market capitalization higher in the next ten years if Cardano succeeds. It is a very probable assumption. Will the market capitalization of Cardano be higher than Bitcoin’s capitalization? To be honest, nobody knows and who cares. The mission of both projects is different and thus also their definition of success. The belief in Bitcoin will probably push the market capitalization up. That does not mean that people cannot use Cardano or other projects as a decentralized financial backbone of the world. Bitcoin will not probably have smart contracts and does not help us in the supply management industry or tokenization of other digital assets. It is not the mission of Bitcoin. On the other hand, would it be useful to use Cardano for tokenization of assets and decentralized exchanges of them in our digital future? Definitely yes. Bitcoin is not here to struggle with the requirements of authorities and be compliant with regulations. Cardano is built also for this purpose.
The question cannot be answered objectively since the opinions of people are different. It is more useful for someone to buy BTC and hedge against the printing of fiat currencies. For someone else it can be more useful to use stable coins and avoid bank accounts or even have a chance to use payment networks. Disrupting the current centralized services, institutions and authorities could have a much higher impact on society than a new digital store of value. It can be said that Bitcoin is not far from its goal and its destiny is more realistic. In the case of Cardano, the goal is more distant and uncertain. There will be probably more obstacles on the way. On the other hand, if Bitcoin succeeds, then decentralization as a concept will be demanded by people. In our view, at the moment, technology is more important than belief.
The “hodl” narrative is closely related to the belief in a better future. Cryptocurrencies are not used on daily basis and have not solved any real problem of majorities. Financial freedom will be possible only if the technology is prepared for it and allow billions of people to use it on daily basis. When we have such technology we can begin to realistically talk about that. We do not have it now. We believe that Cardano can be the project that will be mass adopted for its superior technology. It will not be only about holding ADA in a wallet but about using decentralized technology on daily basis. It should be the ultimate goal for all projects and they can support each other. The success of one will help others.
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