Are cryptocurrencies heading toward mass adoption? They very well could be by becoming a mainstream form of payment within the next 10 years, according to a 2018 report released by two British academics.
Digital currencies, which rely on innovative technologies like the blockchain, are the "next step" in money's evolution, claimed William Knottenbelt, a professor of Applied Quantitative Analysis who teaches at Imperial College London, and Zeynep Gurguc, a research associate in the Innovation and Entrepreneurship Group at Imperial College Business School.
These two academics are not alone in their optimism. Several other market observers have offered commentary on how digital currencies are benefiting from growing use. "What we're witnessing now is crypto finally gaining long-overdue recognition by businesses, state authorities and the financial world — most importantly, by respected traditional banking and fintech institutions," said Alexander Ivanov, CEO of public blockchain platform Waves.
Barriers To Adoption
Digital currencies will need to overcome several challenges in order to obtain widespread adoption, market observers have noted. Knottenbelt and Gurguc, for example, identified six specific obstacles that cryptocurrencies must overcome in order to experience broader use.
A TechCrunch article written by Neil Haran, a cryptocurrency enthusiast and angel investor, also spoke to variables holding back mainstream adoption, specifically price volatility and its causes.
Here are some of the challenges outlined by these market observers:
There are some major drivers of cryptocurrencies' ongoing price volatility, such as their markets being driven largely by speculation, because many investors want to purchase cryptocurrencies and sell them at the highest possible price.
The inability that some digital currencies have to scale could easily deter consumers from embracing them. Bitcoin, the first digital currency to scale, is one such example. This cryptocurrency was designed to process seven transactions per second, a far lower number than other payment methods like Visa, which can handle 24,000 transactions per second. Bitcoin was designed to have 1MB blocks.
To expand the capacity of the bitcoin network, some industry participants advocated increasing block size. While this proposal can seem straightforward enough, key stakeholders disagreed about how large the blocks should be. After several proposed solutions failed to obtain the needed support, the bitcoin network implemented some upgrades, including Segregated Witness and the Lightning Network. These updates improved the network's ability to process transactions.
Digital currencies have complicated underlying technology, and understanding this technology can require an investment of time and energy. This could diminish cryptocurrency's chances of enjoying mainstream adoption, because having products that are user-friendly is integral to widespread acceptance.
"Blockchain technology in its current form is very difficult to use," said Shawn Wilkinson, founder and chief strategy officer at storage startup Storj. He emphasized that in order to use Bitcoin, a person must understand how public and private keys work, and then they must go through several steps in order to both obtain the digital currency and then leverage it in transactions.
The regulatory environment surrounding digital currencies is highly complicated, as jurisdictions frequently take differing approaches to supervising cryptocurrencies. Having such a highly fragmented landscape makes the entire digital currency space seem more uncertain, which is unlikely to give them incentive to get involved.
Bitcoin could have a very difficult time gaining mainstream adoption unless government officials coordinate to create universal regulations.
Hard forks are permanent changes in the protocol of a digital currency—and they provide additional uncertainty. Take Bitcoin, for example, which was designed to have a hard cap on the number of units that can exist at any one time (21 million units). However, through a hard fork, the community could change this and set the hard cap to 42 million, therefore altering a fundamental characteristic of the digital currency.
Another practical consequence of hard forks is that they could potentially split a digital currency's blockchain in two, creating two rival chains. This could provide additional uncertainty, as users and investors would need to figure out which chain is best for them.
When creating digital currencies and their environments, developers, technologists and entrepreneurs must consider how they will use incentives to impact behaviour, noted Knottenbelt and Gurguc.
Bitcoin's protocol, for example, compensates miners for verifying transactions, making it worth their while to incur the costs of specialised hardware and electricity. Unless these incentives are created in a thoughtful and deliberate manner, it will leave the system open to exploitation by certain users.
Cryptocurrencies could potentially achieve widespread adoption, but achieving this milestone will require them to overcome several key obstacles. By surmounting these challenges, digital currencies could make themselves far more appealing to users and investors while also creating a better situation for everyone interested in the space.