I’m not worried about Bitcoin scalability, but I am losing sleep over Ethereum

With the recent surge in the Ethereum price (ETH reaching 30% of Bitcoin’s market cap at nearly $5 billion), I find myself reassessing a number of my conclusions, to the point where I’m wondering whether it could overtake Bitcoin as the dominant cryptocurrency at some point in the future.

Because of various network effects, I hold a cryptocurrency maximalist position, believing that one protocol will eventually win +80% of the market.

With that as a given, I currently have a binary view on the ecosystem: either Bitcoin will win, or Ethereum.

  • “Turing vulnerable”, i.e. has a much larger attack surface
  • Less backwards compatible
  • On track towards a more centralized future
  • Transaction finality is less certain
  • Its proposed proof-of-stake mining algorithm won’t be more efficient than proof-of-work
  • Will suffer more blockchain bloat than Bitcoin, leading to more risky design paths such as sharding.

Based on these assumptions, I had until recently projected a path forward where Bitcoin continues to dominate the cryptocurrency market.

  • Bitcoin faces a scaling bottleneck with no clear short term solution
  • Ethereum’s current on-chain tx fees are much lower than Bitcoin’s
  • Its great flexibility makes it attractive to developers
  • Several projects are making the transition to the Ethereum platform, or are creating applications for it: Brave, Storj, Shapeshift.
  • The NY Department of Financial Services (DFS) has given Coinbase official authorization to offer ETH to its customers.

I am still skeptical about the long term merit of the Ethereum blockchain as a store of value (and with that, of its long term staying power), but nonetheless I am seriously considering the following questions:

  • What if the current lull in attacks to the network can be maintained, or if the market comes to accept hard-fork interventionism?
  • What if the market majority wants a more centralized—governed—cryptocurrency?
  • What if Ethereum’s developer community is capitalizing on Bitcoin’s deadlock and is gaining enough momentum to take the upper hand?
  • What if Ethereum solves its scaling conundrum with payment channels? According to Raiden’s team lead, the software is getting close to launch.
  • What if ETH finds a way to make PoS work, and people buy into the good sounding narrative that PoW is more wasteful?

In short, what if Ethereum manages to become a good enough cryptocurrency and thereby wins this protocol war?

At the risk of making an all-too-simplistic comparison, Betamax had better picture quality than VHS. But VHS had a better marketing strategy (rental market), and had tapes that ran the length of a feature film, which was more in line with what the market wanted.

  • Bitcoin has a consistent track record of being an immutable ledger (ideal for long term value preservation), versus ETH’s interventionist history
  • Likely higher developer activity in Bitcoin vs Ethereum
  • Bitcoin has 100 core contributors, ETH has ???
  • Core dev Vlad Zamfir: Ethereum isn’t money, safe, or scalable
  • Legal concerns about ICOs and ETH/ETC launches, SEC fallout possible
  • Buterin’s & Zamfir’s approaches to scaling (Casper) seem to diverge
  • Problematic scaling future, e.g. “mathematical proof that it is impossible to determine the ‘true’ transaction history in a proof-of-stake blockchain without an additional source of trust”, sharding
  • Future inflation rate unknown
  • Uncertain fundamental value proposition over Bitcoin’s modular design
  • Segwit can be activated via UASF, circumventing miners and allowing immediate activation of alpha status lightning payments. (If that fails, Lightning can be implemented even without segwit.)
  • Rootstock could port Ethereum’s tech to Bitcoin.
  • Sidechains are close to production-ready, don’t need segwit and allow for unfettered experimentation with additional features. (In this way, anyone who just wants cheap extra block space can find it on a sidechain.)

If it is true that over time one cryptocurrency will overwhelmingly dominate as the basis for an ‘internet of property’, then a lot of capital is at stake when considering the question who is winning this protocol war, Bitcoin or Ethereum?

  • What are the different challenges for implementing payment channels (lightning, raiden) on Bitcoin vs. on Ethereum?
  • What are today’s non-speculative ETH use cases? (What do people need ETH for?) And, related, what are some revenue generating ETH smart contract based businesses?
  • Are there ways to quantify the differences between Ethereum’s and Bitcoin’s security model?
  • What proxies do we have to assess the aggregate quantity and average quality of Bitcoin vs. Ethereum core development?
  • What are potential analogies with historical protocol wars?
  • What kind of security analysis has been done on blockchain bloat and sharding?

Thanks for reading, I’m eager to hear your thoughts and discuss.

I own BTC, I don’t own ETH (for the time being).

Economist & investor. Mainly Bitcoin.