The meteoric increase in the price of Bitcoin has re-ignited interest in cryptocurrency and prompted millions of people to buy it for the first time, which is a cause for celebration for those calling for widespread acceptance.
However, according to Ripple CTO David Schwartz, the underlying blockchain’s architecture means Bitcoin would struggle to achieve its most significant goal: to have a mechanism that allows people to trade openly with one another without the need for a middleman.
During a Zoom call with TechRadar Pro, Schwartz explained that the Proof-of-Work (PoW) consensus process at the heart of the Bitcoin blockchain is designed in such a way that true decentralization and disintermediation is never possible.
Miners compete to solve complex mathematical problems as quickly as possible in a PoW environment. In return for payments and freshly minted cryptocurrencies, the first to do so wins the right to validate a block of transactions. In fact, however, Schwartz claims that these miners are no different from any other third-party that skims from the top.
“A cryptocurrency should be a one-sided market; consumers want a store of value as well as a means of exchange,” Schwartz explained. “However, Bitcoin turned it into a two-sided market.”
“Historically, miners have fought for high transaction fees because that is how they make money. The truth is that you have a particular group of stakeholders seeking to charge the highest rates they can, which isn’t all that dissimilar to how bank transfers work.”
A divergent approach to negotiation
After recognizing the flaws in PoW, Schwartz and former Ripple executive Jed McCaleb set out to create a new cryptocurrency with a different strategy, focusing more on speed and decentralization.
“At the moment, most people thought PoW was Bitcoin’s secret sauce,” Schwartz said, “but the very first cracks in the foundation were starting to show.”
“We were beginning to believe that the great thing about Bitcoin wasn’t PoW. It was the lack of a central operator and the fact that all transaction details and transaction rules are public.”
McCaleb, according to Schwartz, was the first to propose that PoW could be replaced by something else. And it was this concept that sparked the creation of XRP, Ripple’s lightning-fast cryptocurrency.
Ripple chose a novel method for achieving consensus and protecting the network rather than using proof-of-work or proof-of-stake (PoS), a common alternative that replaces miners with a lottery-like system.
The XRP Ledger (XRPL) is based on a distributed agreement algorithm that performs the same core feature as PoW (e.g. excessive intermediation and environmental toll) but without the disadvantages of PoW or PoS. (e.g. the need to lock up assets).
“What we did was dramatically reduce the system’s confidence, removing the motivation to attack the network,” Schwartz explained.
“The consensus algorithm in the XRPL is designed to simply place transactions in order. Since there are no cryptocurrencies to be won, the mechanism is cooperative rather than competitive.”
When asked why someone participates in the XRP network (which still has a cost) without the benefit of a crypto reward, Schwartz clarified that the network exists solely because people trust it.
“It’s the same incentive that encourages people to run complete Bitcoin nodes. Only the miners are paid in Bitcoin; if you run a node for your clients, the only reward is that you get to hold the node.”
“The [XRP] device has a sufficient number of users. The project has already failed if there aren’t enough people willing to run the app because they trust the network.”
The key problem with this approach, according to Schwartz, is that network participants’ output isn’t always as good. Since there are no cryptocurrency incentives, the network attracts a less dependable pool of users who are more likely to drop off without warning.
Despite the fact that the XRP Ledger has never gone down since its inception in 2012, this is a flaw Ripple has worked hard to address in the latest update.
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Despite the fact that the continuing SEC litigation hangs over the XRP project like a specter, Schwartz and his team are completely divorced from the debate, and the unique architecture of XRPL serves as a significant counterexample to the other systems in use today.
Despite the fact that Bitcoin has been around for more than a decade, the cryptocurrency industry is still in its infancy, and the maturation process necessitates the exploration of a variety of approaches.
While the underlying technology and its alternative use cases (such as Defi) have advanced dramatically, crypto is still plagued by the same issues: instability, restricted acceptance, and regulatory uncertainty.
Schwartz, on the other hand, believes that the allure of blockchain and the community’s dedication to innovation will lead to technical solutions to some of these most pressing issues.
“Cryptocurrency will go through a fascinating maturation phase since regulators have a legitimate interest in preventing money laundering and terrorist financing. However, the majority of [cryptospace members] want to follow these kinds of rules.”
“Generally speaking, defying regulations is not a good business model. People have had trouble finding out how to stay compliant, which has slowed the acceptance of crypto.”