The rapid rise in the price of Bitcoin has brought the world of crypto back into focus, prompting millions to buy the digital currency for the first time. This is a cause for celebration for anyone pushing for mass adoption.
According to David Schwartz, CTO of Ripple, the architecture of the underlying blockchain means that Bitcoin is doomed to miss its most important mission: to provide a system that allows people to freely trade with one another without the involvement of an intermediary.
During a zoom call, Schwartz told TechRadar Pro that the design of the PoW (proof-of-work) consensus mechanism at the heart of the Bitcoin blockchain is such that true decentralization and disintermediation has never been possible.
In a PoW system, miners compete to solve complex math problems as quickly as possible. The first to do so is given the right to validate a block of transactions in exchange for fees and newly minted cryptocurrency. However, Schwartz believes that in practice, these miners are no different from other third-party vendors who skim from above.
“A cryptocurrency should be a one-sided market. The users want a store of value and a medium of exchange, ”explains Schwartz. “But Bitcoin made it a two-sided market.”
“Miners have fought over high transaction fees in the past because that’s their income. The reality is you have a different set of stakeholders trying to get the highest fees they can get away with, and that’s not much different from the way payments work at a bank. “
An alternative way to reach consensus
After Schwartz and former Ripple manager Jed McCaleb identified the problems with PoW, in 2011 they looked for a new cryptocurrency with a different approach, with an emphasis on both speed and decentralization.
“At the time, the philosophy for most people was that PoW was Bitcoin’s secret sauce, but the first cracks in the primer were showing,” Schwartz said.
“We started to think that PoW wasn’t the amazing thing about Bitcoin. It was the fact that all transaction data and transaction rules are public and there is no central operator. “
Schwartz initially credits McCaleb with the idea that PoW could be replaced with something else. And it was precisely this idea that formed the kernel of the core of XRP, the lightning-fast cryptocurrency that is now operated by Ripple.
Instead of using Proof-of-Work or Proof-of-Stake (PoS), a popular alternative that replaces miners with a lottery-like system, Ripple opted for a novel mechanism to reach consensus and secure the network.
(Photo credit: Shutterstock / Wit Olszewski)
The XRP Ledger (XRPL) works with a distributed agreement algorithm that performs the same core function but without the disadvantages of PoW (e.g. unnecessary brokerage and environmental pollution) or PoS (e.g. the need to lock down assets) .
“We have radically minimized confidence in the system and removed the incentive to attack the network,” said Schwartz.
“We designed the XRPL so that the consensus algorithm only fixes transactions. There are no rewards for cryptocurrencies, so the process is collaborative and not competitive. “
When asked why someone joins the XRP network without the incentive of a crypto reward (which still comes at a cost), Schwartz explained that the only reason the network survives is because people care about using it.
“It’s the same thing that encourages people to run full bitcoin nodes. Only the miners are compensated with Bitcoin. When you run a node for your customers, your only compensation is having that node for your own use. “
“There are enough people who want to use that [XRP] System. If not enough people are willing to run the software because they get some benefit from using the network, the project has already failed. “
The main problem with this approach, Schwartz admits, is that the quality of the network participants is not always that high. With no cryptocurrency rewards available, the network attracts a less reliable pool of attendees who are more likely to drop out without notice.
Although the XRP ledger hasn’t gone offline once since it launched in 2012, it’s still a danger that Ripple has worked hard on in the latest version.
Development of the crypto
Although the ongoing SEC lawsuit looms over the XRP project like a ghost, Schwartz and his team are largely disconnected from that conversation, and the unique architecture of XRPL is an important counterexample to the other systems in use today.
Although Bitcoin has been around for more than a decade, the cryptocurrency industry is still in its infancy and the process of maturing requires research into all possible approaches.
The underlying technology has come a long way, as have the alternate use cases (see the rise of DeFi), but crypto is still largely battling the same demons: volatility, limited adoption, and regulatory uncertainty.
However, Schwartz believes that the magnetism of cryptocurrency and the community’s commitment to innovation will lead to technological solutions being found for some of these most pressing issues.
“It’s going to be an interesting growth process for cryptocurrency as regulators have a legitimate interest in preventing things like money laundering and terrorist financing. But mainly [members of the crypto space] want to adhere to these types of measures. “
“In general, defying regulation is not a very good business model. And it has been an obstacle to the adoption of crypto that people have struggled figuring out how to stay compliant. “
Schwartz predicts that in the years to come, cryptocurrency projects will retain their roots in decentralization and disintermediation by allowing users to adhere to local regulations without requiring compliance.