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The meteoric rise in the price of Bitcoin has brought renewed attention to the world of crypto and driven millions to purchase the digital currency for the first time, which is cause for celebration for anyone pushing for mass adoption.
However, according to Ripple CTO David Schwartz, the architecture of the underlying blockchain means Bitcoin is doomed to fail its most important mission: to deliver a system whereby people can transact freely with one another, without the involvement of any intermediary.
Over a Zoom call, Schwartz told TechRadar Pro that the design of the Proof-of-Work (PoW) consensus mechanism at the heart of the Bitcoin blockchain is such that true decentralization and disintermediation was never a possibility.
In a PoW system, miners compete to solve complex mathematical problems as quickly as possible. The first to do so earns the right to validate a block of transactions, in exchange for both fees and newly minted cryptocurrency. But Schwartz believes these miners are, in practice, no different from any other third-party that skims from the top.
“A cryptocurrency should be a one-sided market; the users want a store of value and a means of exchange,” explained Schwartz. “But what Bitcoin did was turn it into a two-sided market.”
“Miners have historically fought for high transaction fees, because that’s their revenue. The reality is that you have another set of stakeholders who are trying to charge the highest fees they can get away with, and that’s not much different from the way payments work at a bank.”
An alternative route to consensus
In 2011, having identified the problems with PoW, Schwartz and former Ripple executive Jed McCaleb sought to found a new cryptocurrency on a different approach, with a greater focus on both speed and decentralization.
“At the time, the philosophy for most people was that PoW was Bitcoin’s secret sauce, but the very first cracks in the foundation were beginning to show,” said Schwartz.
“What we were starting to think was that PoW wasn’t what was amazing about Bitcoin. It was the fact that all transaction data and transaction rules are public and that there is no central operator.”
Schwartz credits McCaleb with first coming up with the notion that PoW could be replaced by something else. And it was this idea that formed the kernel at the core of what later became XRP, the lightning fast cryptocurrency operated by Ripple today.
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 for achieving consensus and securing the network.
The XRP Ledger (XRPL) operates on a distributed agreement algorithm that performs the same core function, but without the downsides of PoW (e.g. unnecessary intermediation and environmental toll) or PoS (e.g. the need to lock up assets).
“What we did is radically trust-minimize the system, eliminating the incentive to attack the network,” said Schwartz.
“The way we designed the XRPL is that the consensus algorithm just puts transactions in order. There are no cryptocurrency rewards, so the process is cooperative as opposed to competitive.”
Asked why anyone participates in the XRP network (which still involves some cost) without the incentive of a crypto reward, Schwartz explained the network survives exclusively because people find value in using it.
“It’s the same thing that incentivizes people to run Bitcoin full nodes. With Bitcoin, only the miners are compensated; if you run a node for your customers your only compensation is that you have that node for your own use.”
“There are enough people who want to use the [XRP] system. If there aren’t enough people willing to run the software because they find some value in using the network, the project has already failed.”
The main issue with this approach, Schwartz concedes, is that the quality of network participants isn’t always as high. With no cryptocurrency rewards available, the network attracts a less reliable pool of participants who are more likely to drop off without any notice.
Although the XRP Ledger has not once fallen offline since launching in 2012, this is still a pitfall Ripple has worked hard to mitigate in the latest version.
Evolution of crypto
Although the ongoing SEC lawsuit looms like a spectre over the XRP project, Schwartz and his team are largely divorced from this conversation and the unique architecture of XRPL provides 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 nascent stages and the process of maturation requires all manner of approaches to be explored.
The underlying technology has already come a long way and so have its alternative use cases (look at the rise of DeFi), but crypto is still largely battling the same demons: volatility, limited adoption and regulatory uncertainty.
However, Schwartz is convinced the magnetism of cryptocurrency and the commitment of the community to innovation will mean technological solutions are found to some of these most pressing questions.
“It’s going to be an interesting growing up process for cryptocurrency, because regulators have legitimate interest in preventing things like money laundering and terrorist financing. But most [members of the crypto space] want to comply with these kinds of measures.”
“Generally speaking, it’s not a very good business model to be in defiance of regulation. And it has been a drag on the adoption of crypto that people have had difficulty figuring out how to remain compliant.”
In the years to come, Schwartz predicts, cryptocurrency projects will preserve their roots in decentralization and disintermediation by providing a way for users to adhere to local regulation, but without mandating compliance.
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