Can Bitcoin Be Destroyed? The 7 (Unlikely) Paths to Irrelevance

in #blockchain7 years ago

Before we get into the speculation, let's start with the facts – bitcoin has been declared dead more than 200 times.

Despite the fact that the world's first cryptocurrency has operated with near-100 percent uptime (for almost 10 years), it's still fashionable to predict its demise. Even supposedly smart people are known for propagating something I'll call "bitcoin derangement syndrome." They keep predicting bitcoin's demise even though they are daily proven wrong.

But if we assume that these individuals possess a level of intelligence, the only explanation for the failed predictions and emotional arguments is that they never take the time to study and understand how the system works.

In this way, I'd like to help by listing all the possible ways bitcoin could be destroyed.

Technically speaking, bitcoin will live as long as a handful of computers run the bitcoin software on a network. Only one extreme scenario would lead to annihilation. It is likely then that it will still be the top cryptocurrency in the coming years, unless the community destroys itself due to greed or carelessness.

Scenario 1: Armageddon
Likelihood (next 5 years): Close to zero
Impact: Sudden death

If all sources of electricity, internet and data communications were shut down across the planet, bitcoin nodes would not be able to contact each other. The system would be useless.

A temporary worldwide internet shutdown would certainly create confusion among the bitcoin community, but it's important to note that the system would (theoretically) just start again from the longest chain.

Even if hardcore fans or museums continue to run its software forever, bitcoin will never technically be extinct.

Scenario 2: Critical bug
Likelihood (next 5 years): Low
Potential impact: Sudden irrelevance

In this scenario, a bitcoin update could contain a bug on the level of the infamous DAO project (built on the ethereum blockchain), one that puts the integrity of the system at risk.

Even if the community agreed (which is not guaranteed) to fix the code, to install the new version and to restart the system, it would certainly lead to a crash of the price and a fork.

The bitcoin community is aware of the risk: any modification to the code is peer-reviewed and tested, in accordance to the contribution guidelines. That being said, only the NASA is able to produce software code with zero defect.

Scenario 3: Forked to irrelevance
Likelihood (next 5 years): Low
Potential impact: Slow irrelevance

Bitcoin can be forked multiples times if the community disagrees on the path forward, for technical reasons (or "because money").
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The Bitcoin Cash split, which occurred last summer, was not that harmful for bitcoin because it saw the network's nodes and hash power decline. Theoretically, several splits could happen in which this network was further fragmented and its power reduced.

Should this occur, I believe bitcoin would lose its dominance, slowly sinking into irrelevance. Again, it is the interest of the community to not let this happen.

Scenario 4: Joint government crackdown
Likelihood (next 5 years): Medium-to-low
Potential impact: Sudden irrelevance

Governments cannot destroy bitcoin itself because of its decentralized nature. However, they can control and restrict its use in their jurisdiction.

For instance, they can have the bank accounts of crypto companies closed, and they can forbid the creation of any and all related businesses. If only a handful of countries ban cryptocurrencies, the impact will be limited because businesses will simply move to friendlier jurisdictions.

This is exactly what happened after China banned its domestic order-book exchanges last year. And while the likelihood that one or more governments will go after bitcoin in the same way is almost assured, I think a global ban is almost impossible (imagine the United Nations reaching such a consensus).

Besides, bitcoin is already legal in Japan. If the US, EU, UK and China jointly banned cryptocurrencies, that would be very damaging.

However, it is more likely that they will regulate the cryptocurrency market to collect tax revenues while protecting individual investors.

Scenario 5: Major hack
Likelihood (next 5 years): Medium-to-high
Potential impact: Temporary crash

This scenario could occur in a few different ways.

In the first, called a 51 percent attack, a malicious network actor could attempt to hack the protocol itself. This is theoretically possible, but its likelihood is very low.

From the inside, the 51 percent attackers would destroy their own source of profit. From the outside, it would require enormous investment in mining equipment and energy, and again the attacker’s source of profit would crash.

More likely is a hack then on an application built on top of the protocol.

When Mt. Gox was hacked back in 2014 (an example of this attack), it was handling 70 percent of all bitcoin transactions. Today, there are many more exchanges around the world. If one of them was hacked and a large amount of bitcoin stolen, the price would likely crash, but bitcoin would probably recover.

Recently, for example, $400 million worth of NEM was stolen from the exchange Coincheck: the price of NEM only went down by 15 to 20 percent and recovered in one day.

Scenario 6: "Better" cryptocurrency
Likelihood (next 5 years): Medium-to-low
Potential impact: Slow irrelevance

Is it possible for a "better" currency to replace bitcoin? (By "better," I mean more profitable to mine and with lower transaction costs for users, everything else being equal.)

Let's face it: this is more about economics and less about convenience. That cryptocurrency would have to be much "better" to overcome the network effect and brand capital from which bitcoin benefits today.

The fact that it has not happened yet is telling. Besides, for governance and economic reasons (not a technical problem), a "universal" UN-backed cryptocurrency isn't likely to happen within five years.

There is another way economics could play out: if the price of electricity went up very significantly, mining could become unprofitable. Only large pools where electricity is relatively cheaper would remain.

This is a tough cost-security trade-off. Bitcoin would have to find a way to lower the cost of security while maintaining the integrity of the ledger.

Scenario 7: Market fatigue
Likelihood (next 5 years): Low
Potential impact: Slow irrelevance

If crypto startups fail to deliver any tangible value in the real world, people could slowly start to lose faith in cryptocurrencies and tokens. (Something that arguably happened during the bear market of 2015 and 2016).

In this case, the growth of the market could slow down and its value eventually stabilize. The crypto market would lose its attractiveness from an investment point of view, leading to further decline and so forth…

Personally, I do believe that some crypto startups will eventually create value in the real world. In any case, the crypto market is still nascent and we still have time until it gets boring. As history has shown also, the market is always capable of bouncing back.

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Hi! I am a robot. I just upvoted you! I found similar content that readers might be interested in:
https://www.coindesk.com/can-bitcoin-destroyed-7-unlikely-paths-irrelevance/

Would have been more interesting if the scenarios had same factual justification for their likeliness. Good read nonetheless.