Bitcoin block limit - trade-offs and outcomes

The discussion on the Bitcoin block limit is nothing new. A number of people have weighted in on this subject, myself included almost two years ago. So while the topic is not new, I still hear it being brought up every now and then. Since I came up with a novel approach to dealing with this issue that doesn't get mentioned that often, I figured I would make a blog entry on this subject.

But first, lets discuss what the problem is and what are its implications.

The problem

As some of you know, the Bitcoin blockchain was initially designed to have a limit of 1MB per block. This was done due to prevent the bloat and abuse of the network. However, if this limit is strictly enforced, the Bitcoin network would only be able to support a small number of transactions, about 7 transactions per second (compared to Visa's 2000 tps). Clearly, this won't be enough for a payment network that is supposed to replace the banks and credit cards. Either we will increase this size in some way, or we will see Bitcoin become a much different network.

The outcomes

Depending on whether the block size is increased or not and by how much would dictate how the Bitcoin network is shaped. Lets look over some possibilities.

Block size remains rigid

In this approach, the 1MB block size is rigid and remains unchanged. When we start hitting this limit, the miners will be able to pick and choose which transactions to include in the block. Rational miners will pick the transactions that pay them the most in fees (proportionally to their size), thus there will be a bidding war to get into the next block.

Due to the increased cost, fewer people will opt to send transactions themselves, either leaving Bitcoin entirely, or by performing some off-chain settlement. Wallet services such as CoinBase could become more like banks - offering their customers settlement with other people on their platform and other platforms that accept off-chain settlement.

In this scenario, Bitcoin becomes a settlement method for large bank-like wallets and large corporations.

Block size limit is abolished

A polar opposite of the previous approach. The block size limit is completely abolished and miners can create arbitrarily big blocks. While anyone can create a transaction for cheap, the network would soon be attacked by malicious entities trying to push the limit. Someone could decide to generate a 1GB block for example and cause the network to grind to a halt while synchronizing.

Quite quickly running a full node becomes a luxury or a business. We see more reliance on Stratum-like supernodes. The functionality of the network is dictated by them.

In this scenario, the Bitcoin network turns into something like the modern Internet - only big players can access it directly and everyone else has to rely on something like Bitcoin-Internet Service Providers.

The middle-ground

As with all things, we will probably see some middle-ground. We will probably have some limit in place but it will be systemically raised over time as the network grows. As to how it will be done, we will see.

That being said, I would like to describe an idea I had awhile back as to how to remove the block limit, while still disincentivizing the miners from creating large blocks.

An economic solution

The miners have a financial incentive to include any transaction with a fee into the block they are mining, since the cost to do so is negligible. Now, if the miners had a cost associated with adding those transactions in, the problem would solve itself. The miners wouldn't be able to include an arbitrary number of transactions in, while they would still be flexible to include a large number of well-paid-for legitimate transactions.

The question is - how do you make the miner pay? Obviously, you can't just enforce a transaction fee that would go back into the block. This would lead to the miner paying themselves in bogus fees.

There are two approaches to take - either the miner can pay in Bitcoin, or in their hashing power.

To pay in Bitcoin, the miner would have to destroy some BTC permanently. This would be the only way to ensure they are actually paying the fee. This approach would mess with the distribution curve of Bitcoin and decrease the amount of coins in circulation. Generally, a lot of people wouldn't like this approach and it's not too elegant.

To pay in the hashing power, the difficulty of a given block would have to scale with its size. Say, up to 1MB would be 1x the expected difficulty, 2MB could be 2x, 10MB 10x, etc. This would mean that only the transactions that pay proportionally more than the current block reward over 1MB would be profitable to include into the block. The relation could be linear, quadratic, or any other shape as needed to create work-reward ratio. As such, while there wouldn't be a strict block size limit, the miners would most likely be mining 1MB blocks until people would be paying enough to noticeably subsidize the miners for their effort. All in all, a more elegant solution.

Conclusions

The problem of the Bitcoin block size limit will have to be addressed in the coming years. If the problem is properly handled, we could see the network continuing to function as normal. There are many approaches that can be taken to address this issue.

The rise of fiat-denominated cryptos

Bitcoin is a great invention. It allows people to transact with anyone in the world in under an hour, requires no personal information and is secured by the power of math rather than people with guns. That being said, Bitcoin and a number of other cryptos bring with them the "issue" of being new currencies, not tied to anything else. While we can argue pretty much indefinitely whether that is a good or a bad thing (I personally see it as a backup in case the governments start failing and we need a new gold standard), it is unavoidable that we will see new services and cryptos that take a new spin on this "problem". We might very well soon see the rise of fiat-denominated cryptos.

Hedged accounts

Probably the simplest transition from a Bitcoin into a fiat-denominated crypto can be achieved using hedged accounts. Last year we've seen Locks from Coinapult, and this year CoinJar introduced their Hedged Accounts.

The concept is quite simple - you deposit your bitcoins into a wallet service that enables hedging and you lock your coins at the current price to whatever the service provider offers. They, in turn, promis to deliver you the exact value of the hedged coins based on the future market price. So if you lock your coins to $1, you will receive $1 in the future no matter whether the coins appreciate or depreciate. Moreover, since they provide the service, they get to dictate the current exchange rate, spread and so on.

While you can expect most of the companies that provide this service to actually trade the Bitcoin in and exchange them for the commodities they are hedging, or at least take some options on futures, you should be weary of more risky ventures. I have seen someone trying to set up a company offering hedged accounts without doing any conversion on the grounds of "we believe Bitcoin will appreciate in value, so we will be always solvent" (before they were laughed out of the conversation).

Moreover, I am yet to see anyone offer a hedged account that allows its clients to treat the hedge like an actual, spendable currency. In other words, even if I lock my 1BTC to say, $100, I can't send someone else in the same network exactly those $100 without unlocking my BTC, sending the BTC over and re-locking them and losing money on two conversions. Similarly, I am yet to see a hedging option that allows me to withdraw the underlying currency (so in our example - cashing out a $100 bill rather than some BTC).

All in all, hedged accounts appear like foreign-currency denominated accounts in some banks - while you can ask the bank to hold the currency of your choice, they will dictate the exchange rate and terms by which you can redeem your money. Useful in some circumstances, but not so much if you need a business solution.

Cryptos with a fiat floor

The next step in fiat-denominated cryptos are the cryptos with a fiat floor.

As I discussed back in 2013, when you have a fixed-amount currency like Bitcoin and a potentially infinite currency like USD, you can only establish a floor price for Bitcoin, never the ceiling. That is to say, if I am willing to buy 21M BTC for $21M, you know Bitcoin will never sell lower than $1/BTC, thus Bitcoin will have the floor value of $1. Easy enough. Now, with that out of the way, lets talk about our new ideas.

There are a few examples in this field. a bit obscure Coinaaa (cryptocurrency tied to NOK), Brock Pierce's a bit more well known RealCoin (tied to USD), and the subject of a pretty recent controversy PayCoin.

So how does all of this work? Usually, you would have a premined altcoin that is fully owned by one entity (with maybe a dash left for the miners to mine). That entity would then sell the currency at a fixed rate, whether it's 1 Coin for $1 or anything else. They would also buy the currency back at a similar or even identical price. Provided the company isn't malicious and they keep the required reserves, you would have a nice and solvent fiat-pegged cryptocurrency. It would be better than hedged currencies, since you could actually pay people without having to convert it back and forth.

However, unless the coin supply is flexible, you can only issue so many coins before you run out of the pre-mined amount. Not to mention that mining such currencies puts an extra expense on the coin operators - either forcing them to mine by themselves, or subsidize the miners by backing the mined coins as well.

Moreover, like with all things crypto, the moment you have to trust someone, the moment you can get screwed. As the story of GAW and PayCoin goes, if a business is not committed to its floor from the start and you don't see the money they are backing their coins with, you may end up with worthless coins in your pocket.

All in all, cryptos with a fiat floor is a step in the right direction. While we can pay people in the currency of choice, relying on Bitcoin-like architecture gives us some limits.

Fiat IOUs

This is essentially a more refined model of the previous concept. Instead of premining an altcoin and pegging its value to a fiat currency, we use the flexible model of Crypto 2.0 IOUs. The best example of this approach would be Ripple and its many fiat-backed currencies.

In this model, just like before, we have companies that create their own currencies and sell them for fiat at a predictable exchange rate. Instead of calling them "RealCoin" or "PayCoin", they are simply referred to as USD, EUR and the like. The currencies are created during deposit and destroyed when they are redeemed, thus their supply is more flexible. Just like before - you can use them for payment and settlement.

Generally, it's a model that does away with all the abstractions and works pretty much like a bank. When you put your euros into a Fidor bank you don't suddenly convert them to "20 fidors", they are still Euros in a rigid 1:1 exchange rate. Moreover, in networks like Ripple, those currencies are tradable for any other currencies and allowing for many other neat things.

That being said, the usual caveat applies - we are trusting a company to secure our funds. If the company is insolvent (such as WeExchange), you lose your money. I suppose if the company securing your funds is the actual government issuing the currency (MintChip comes to mind), this point might be getting a bit moot.

All in all, Fiat IOUs are usually better than cryptos with a fiat floor, since their supply is flexible and the currency is not bound by Bitcoin-like restrictions.

Distributed and counterparty-less fiat-denominated cryptos

The last category worth mentioning are distributed and counterparty-less fiat-denominated cryptos (what a mouthful!). Essentially, they are like Fiat IOUs but without a single entity backing the money.

They can take two forms - fiat voting pools and crypto fiat futures.

First approach is based on Open Transactions' idea of Voting Pools. This essentially means that there are multiple gateways / exchanges / backers of a given currency each holding enough money to cover the other parties defaulting. In Bitcoin world, this would be easily achieved with a multisig. In a fiat world, you would probably need some agreement with a bank to guarantee some deposits between multiple parties (similarly to how a central bank protects against bank runs and so on).

While this approach changes the risk model of a Fiat IOU from centralized to distributed, it's still not entirely decentralized. Other than that, it's pretty much a really good solution to create a fiat-denominated crypto.

The second approach is like BitShares' BitUSD. Instead of having a central or distributed entity issuing fiat-denominated cryptos, you have a futures market that creates a new currency that is pegged in value to fiat or commodities. While the process by which this happens is still a bit of an economic magic to me, it boils down to some people going short and some people going long on the BTS-BitUSD exchange rate. This creates the BitUSD asset that can be transferred like any currency. Provided the market works well, BitUSD should be worth about the same amount as an USD.

However, there are some criticisms of BitUSD. First of all, the supply isn't too flexible (if someone wanted to put $1B into the system, the current network couldn't handle it instantly due to the new assets needing to be created first). Secondly, there is a possibility of the market essentially collapsing (if enough margin calls were executed too quickly due to a sudden price swing). Lastly, the asset needs to be exchanged for fiat at an exchange - it can't be directly withdrawn like Fiat IOUs.

All in all, we come to a fork in our road. On one hand, we can have distributed fiat-denominated cryptos backed by multiple entities, or counterparty-less fiat-denominated cryptos. It would be rather hard to refine the concept any further - if a crypto is to be a fiat IOU, someone needs to hold the fiat money to allow you to withdraw it. If there is no counterparty, the crypto is unbounded, but it can't be freely withdrawn.

Conclusions

All in all, it seems like we are only beginning to see what the fiat-denominated cryptos have to offer. In the coming years we will probably see this form of cryptocurrency rise into some popularity due to the stability they offer. While I still hold my Bitcoin and enjoy the rollercoaster ride it is giving all of us, fiat-denominated cryptos might be more appealing to the crypto newcomers.

Money as a motivator

Over the years people used a lot of different things as a currency - gold, cowry shells, beads, livestock, or even some large rocks. Some people want to return to some of those standards or create a new one with Bitcoin or other technologies. However, we should be cautious when making that decision as it may have a broader impact than is initially obvious.

Currency motivators

A currency can either be created artificially scarce by a monopoly (national banknotes and coins), or manufactured in one form or another by anyone (gold, beads, livestock). If a cost to create a new unit of currency is smaller than the actual cost of the currency, you have an easy business model of manufacturing the currency (for example, mining gold). While rational at first, if the currency becomes more and more valuable, the cycle becomes self-sustaining and people start creating the currency for the currency's sake. This becomes more and more absurd the longer you think about it. Instead of creating things people need (consumer products, services), we create things that are only used as liquidity, not the final product. Let me give you some examples...

The gold business

Gold has been used as a currency for a long while and to this day still remains a valuable commodity. As such, there is a constant demand to produce more and more gold to satisfy the market.

At the moment it costs about $600-$960 to mine and produce an ounce of gold (with that ounce selling for about $1200). At the same time, producing something like a gold wedding ring creates about 20 tonnes of waste. Looking back at "Redefining currency" post, practical uses of gold are dwarfed by its use in investment and jewellery (which is likely due to gold being expensive in the first place, ie if gold wasn't expensive people wouldn't make jewellery out of it).

As such, gold appears to have long gone into the self-fuelling cycle. If the supply stored in Fort Knox was released to the market and used for building electronic circuits instead of speculating, we wouldn't see numerous gold mines digging up the last specks of gold from the ground.

The Bitcoin business

We can see a similar parallel in the Bitcoin world with the progression of mining technology. We have people making big warehouses and creating the latest microchips just to mine some Bitcoin before their machines are made obsolete in a few weeks. Similar to gold, Bitcoin fuels its miners with the newly minted coins in each block.

One positive about Bitcoin is that all the mining power is at least used for securing the network, giving it more meaning than gold mining...

Other businesses

This phenomenon is not unique to gold or Bitcoin. It's a natural progression for pretty much every currency backed by anything. If we had a global economy using cowry shells as a currency, we would see large cowry snail farms taking up huge plots of land. We would have entire industry focused on producing the most cowry shells the fastest, cheapest and so on. If we had an economy based on Rai stones, we wouldn't be using limestone to make buildings or pyramids, we would cut every piece of it into round discs with holes in them and try to figure out where to put all of them.

Money is the motivator

Whatever we decide to use as a currency, we should keep in mind that it will motivate people to go to extremes to create more of it and store it in bulk. So while our current model of debt-based money might be bad, I'm glad we don't have something based on the basic things people need to survive like air or water, or we would see entire governments draining the oceans and bottling the air just to make sure they have the most of it while they die of dehydration and suffocate in the thin atmosphere...

Ripple as middleware

As many people may know, the current banking system is a mess when you're dealing in multiple currencies. We have disjointed networks dealing in local countries, the eurozone, and international banking on a wider scale. Using Bitcoin means having to hop onto the currency and off of it on two exchanges. There is friction at every step and companies have to focus on creating big end-to-end solutions rather than focusing on just the part they can do really well. However, I believe all of this can be simplified if we used a system like Ripple as a middleware layer.

The current situation

Currently, there are many disjointed markets out there. If you want to exchange fiat currencies, you go to a forex. If you want to buy Bitcoin, you go to one of the numerous local exchanges. For altcoins, you will most likely need to go to one of the handful websites that specializes in them. All in all, there are many problems in efficiently dealing with say, exchanging precious metals for altcoins.

Ripple as a solution

While Ripple might not be able to completely replace centralized markets that have high transaction volume and extremely low latency, it could be a good enough approximation for a lot of the projects out there.

First step in doing this would involve the creation of various gateways for the currencies we wish to use, be it USD, gold or whatever else. Since the gateways can focus only on one thing at a time, creating them is more straightforward than bringing newer and newer exchanges onto the market. If you can only handle Bitcoin but can't make a trade engine or handle fiat, you're still in business.

The second step would be copying the existing markets into Ripple through automated arbitrage bots. For example, you could take Bitstamp's USD-BTC market and post trade offers in Ripple to mimic it, although with lower granularity. When a trade is made on the network, the bot would offset it at the exchange and create profit. Given enough bots, we can represent any number of financial exchanges inside of Ripple, no matter what currency they're dealing with.

The third step would be building services that use Ripple as middleware for their payment network. Say we want to tackle Europe<->Canada money transfers. We would connect to a gateway in Europe and a gateway in Canada. When we see a Euro payment on one end, we send it to the first gateway, use the Ripple network to trade it for Canadian Dollars, and send the money out on the other end as needed. Provided we have some floating balance on both ends, we just completed an international wire transfer in 5 seconds at a fraction of the cost.

The last step would be...

Optimization through competition

Obviously, the markets will only use a product if it’s competitive and affordable. Nobody will want to pay a premium to use one product over a cheaper one with the same features. However, the beauty of this approach is that all components are interchangeable and the best ones will win.

Looking at our BitPay example, their business can be broken down into the following components:

• The frontend gets the current exchange rate and accepts payment for the goods from the user, eventually forwarding the coins to the exchange
• A server offsets the trade at an exchange
• A banking component withdraws fiat from the exchange and pays the merchant in their currency of choice

In Ripple those components could be run by different entities:

• A system like BitPay would accept customers’ coins and use Ripple to pay the merchant. They could trade the coins directly for any fiat or any other currency on Ripple, and once the funds are secured, release the payment.
• Trades would happen atomically in Ripple. No matter how many currency hops it requires, a trade could be made with one transaction. The Ripple network will find the most efficient route on its own.
• Any trades happening in the Ripple system would be offset by independent bots arbitraging between Ripple and various exchanges (forex, Bitcoin exchanges, etc.)
• Merchant payouts could be handled by dedicated gateways or payment processors working with the gateways. Say, any funds deposited to a given Ripple address could be paid to a specified bank account at the end of the day.

Since the system does not require one company to handle all of those steps, multiple entities can be competing against one another to build the most efficient pieces of the puzzle, and the system as a whole would benefit. If one arbitrage bot is replaced by another that has a tighter spread - the prices go down. If someone makes a direct market between two distant currencies - the network will route through the new path, saving money. If a new payment processor comes along, they don’t need to reinvent the wheel, they use the established network and focus on making a better product. All of the components are interchangeable, and the most efficient ones will win in the end.

Possible applications

Here is a list of applications that can easily use Ripple as a middleware money network, given enough development in the space:

• Payment processing between any currencies (BitPay, Coinbase, PayPal)
• Exchanges (using Ripple as an exchange engine)
• Remittance and other international payment networks (Western Union, PayPal)

Near future developments

If our guess is correct, we expect to see the following projects to start appearing in the Ripple space in the near future:

• More fiat gateways. They should appear in places financially close to big exchanges making payments between them easier. Alternatively, big exchanges will become gateways as well (like BitStamp)
• Given efficient gateways, arbitrage bots will appear converting every Bitcoin exchanges’ market into Ripple. We’ll see BTC-e’s LTC/USD market reflected in Ripple, BTC China’s BTC/CNY market, and many more
• Arbitrage bots will start appearing next to large forex markets, bringing in efficient fiat<->fiat exchange rates into Ripple
• Given some of those, payment processors like BitPay will start appearing in the Ripple space offering payments to any currency accepted by the merchant
• Either gateways will start offering new and convenient ways to convert people's traditional money into Ripple IOUs (say, through credit cards or other automated systems), or we might see companies like Coinbase appearing to offer this sort of services for them

Conclusions

As I wrote in a previous blog post, cryptos will succeed if the banks are failing. Due to the many inefficiencies of the current international payment systems, it is very likely that a system like Ripple would be used more and more as a common middleware to enable interoperability between many networks.

Recommended reading:

• "Executive Summary for Financial Institutions", by Ripple Labs

The need for a new measurement of value

As many of you might be familiar, there are a few key functions money needs to perform in our society. While the exact list may vary, here are some of the functions listed:

1. Medium of exchange
2. Measurement of value
3. Standard of deferred payments
4. Store of value

Today, I would like to talk to you about the measurement of value function of money in the context of the "Currency Wars".

Measurement of value

Money being used as the measurement of value (or a unit of account) means that we use the money units to denominate how much other things are worth. It is useful to have this standard reference because then we can compare things that would be otherwise hard to compare. While it might be easy to estimate that a loaf of bread is worth about a few buns, since they both fulfil a similar role and are essentially interchangeable, it is much harder to compare how many loafs of bread would be equivalent to a book in a pure barter system.

With money, everything is compared to the same unit of money, be it dollars, euros, bitcoin or otherwise. As such, everything has its own price and all of the prices are easily comparable, making everyone's life that much easier.

Currency wars

The topic of currency wars is rather big, and I don't think this post will do it justice. I recommend the book "Currency Wars" by James Rickards to learn more about this subject.

The short of it is, that a currency war, also known as competitive devaluation, is a competition between countries to achieve a relatively low exchange rate for one's own currency in comparison to everyone else. While at first it may sounds like a silly idea, after all, the stronger your currency is the more you can buy after all, it does make sense when you think about the state of your domestic industry.

If one's currency is going up in value relative to everyone else's, you will have more imports (you can buy more), but less exports (your products will become more expensive for everyone else and thus less attractive). In order to stay competitive on the global market, you want to reduce the cost of producing your goods. You can either do that through a long process of technical innovation and so on, or you can go the fast route and make your currency worth less. Since your money will be worth less, the wages you have to pay your employees are smaller, the cost to run your company are smaller, and thus your product gets cheaper.

This can be quite insidious, as it essentially means cutting everyone's wage without their consent or knowledge. One dollar today is worth less than one dollar last year and so on. Here is some rough overview of how much $1 is worth as expressed in 1913 dollars:

[source]

New measurement of value

As the money all over the world is fluctuating in value, its use as a measurement of value is a bit ridiculous once you think of it. You could compare it to trying to measure a height of a wave on a stormy sea in relation to other waves. We need a new form of measurement of value that would form a solid ground amidst the currency wars storm.

The reasoning as why we would want something like this is simple - for a lot of people, they would want to be earning the same value performing their jobs and pay the same value for their goods and services, no matter how much their local currency is fluctuating. This would allow them to detach themselves from the monetary policy of their countries that are doing their best to run it to the ground. Having an absolute measurement of value would promote real growth and innovation in becoming more and more competitive, rather than fake growth brought about through inflation.

As for what this measurement would be, this might be a bit complicated. If it was a commodity like gold, everyone would start hoarding it and its value swings would affect the economy. It cannot be a national currency, since those are too easily printed and manipulated. It cannot be a currency like Bitcoin, since it can be too easily gamed through a cycle of hoarding to increase its value and releasing to flood the market. I doubt there is anything that could be used as money in traditional sense that could be used for this purpose.

At the same time, none of this matters if we don't make it a currency. If instead, we take the VALUE of anything, be it $1 today, 100 years ago, 1BTC from January 1st 2015, or some handful of magical beans, and use that VALUE as a new standard for measurement of value of everything else, it would become like a metre stick (of for folds on imperial system, a yard stick) for the economic world. A metre is not a measurement of anything in particular, it's not a metre rod of iron, or a metre of water, it's a metre no matter what it's measuring. Similarly, our new Value Stick could be use to measure how much a dollar is worth and how much a euro is worth without actually being anything in particular.

So instead of seeing tags with dollar prices, we could see tags with Value prices, and an exchange rate of Value to dollars or any other currency, perhaps computed on the spot, like in BitTag:

Conclusions

In a world where countries go out of their way to change the value of their currency, we need a new standard for the measurement of value that is independent of any national currency, commodity or otherwise.

Crypto success vs. Bitcoin success

After researching a lot of Crypto 2.0 systems (tiny.cc/Crypto), I started thinking about whether some systems could surpass Bitcoin. We have a lot of proponents of a world with only Bitcoin, only some Bitcoin copy, or all of the cryptos going the way of the dodo. While I'm personally a proponent of the Singularity of Money concept (a world with many interchangeable currencies), it is still interesting to ponder whether Bitcoin or cryptocurrencies in general will gain mass adoption among the general population.

Thinking about this for awhile, the conclusion seems to be that

Cryptos will succeed if the banks are failing. Bitcoin will succeed if the governments are failing.

Let me explain why.

People want faster horses

A lot of you should be familiar with the quote allegedly by Henry Ford - "If I’d asked people what they wanted, they would have asked for a faster horse". A similar sentiment can apply to cryptos. People don't want a new currency, they want their old currency to be better and faster. People are used to thinking in USD and Euro, not Bitcoin or Dogecoin. It would take a lot of mental effort for people to switch over to a new currency, and that might be a large barrier to overcome, not to mention the issues of price stability and so forth.

At the same time, if you have a system that offers what the banks offer only better, you are very likely to be able to compete with them. This is why PayPal and Alipay are very likely to be used for online payments, while bank wires in North America are not as popular.

Banks surround themselves with a lot of policies and discriminate against their customers. International payments are a pain, credit cards are outdated and the whole system is filled with inefficiencies. As such, if you'd have crypto systems that allow you to pay in your national currencies only better and faster than a bank, those systems are likely to succeed in the modern world.

It is very likely that the 2.0 systems that allow people to deal directly with their local currencies without jumping through random hoops will thrive in the near future. Ripple is already positioning itself to be "the internet of money" and appealing to the current financial systems.

While Bitcoin and similar systems might be a part of the solutions used, it might also be seen as an unnecessary step when it comes to money exchange not denominated in BTC. However, there are some cases where Bitcoin might be the solution needed

Governments failing

If a national currency is stable, people want to use that currency. If the national currency is not stable, people want to get rid of it and use something else. If you're in a country like Argentina or Venezuela with an inflation rate of 10% or even 60%, or perhaps have experienced the Cypriot financial crisis or the more recent fall in the price of Russian Rubles, you might be thinking to yourself "I don't want to use this currency any more".

At times like these, we start looking at alternatives - gold, dollars, franks, etc. However, those can be seized or frozen. A more modern alternative would be to look at cryptos.

And herein lies the strength of Bitcoin. While it might look unappealing to the western world, it offers an alternative to people that are losing it all. It is apolitical, not controlled by any government and is easily transportable. As such, in a world where the governments fail everyone with their monetary policy, Bitcoin and similar currencies have a room to thrive.

Conclusion

It is very likely that cryptocurrencies will succeed in the near future due to the stagnation in the modern world. However, for Bitcoin to become widely adopted, we would need to see entire regimes start to fail and people wanting to take their economy into their own hands.

How to kill a currency

A lot of people have spelled Bitcoin's doom in the past. From a 51% attack to some other vulnerabilities, a lot of technical pitfalls are well known and documented. There is a whole Wiki page on this subject, and I even wrote a master's thesis on the subject. So while Bitcoin looks like it's around to stay, there are many other cryptocurrencies emerging nowadays that can be wiped out in some interesting ways. Lets discuss some of them.

Destroy the value of a currency

First off, a quick recap of the obvious for completeness sake:

The traditional 1.0 copycoins are perhaps the easiest to bring down. Their network is secured by the miners (in case the coin uses PoW) and in return the miners get paid in coins they mine. However, if the value of the coin was attacked, the miners wouldn't have any incentive to mine it. They would need to be subsidized by the people running the network. As I discussed before when talking about Quark, a repeated 51% attack coupled with double-spending various crypto-to-crypto exchanges would quickly ruin the coin's reputation and get it removed from all services, thus destroying the coin's value.

Now with that out of the way, lets talk about some new stuff.

End the "blockchain bloat"

The topic of blockchain bloat has been a heated topic in the Bitcoin community for a few years now. It started with SatoshiDice sending a lot of 1 satoshi transactions, and the topic got more interesting with the advent of Bitcoin 2.0 technologies. By "Bitcoin 2.0", I mean Crypto 2.0 platforms that use the Bitcoin blockchain as a store of their data. For example - Mastercoin and CounterParty. While those systems use the Bitcoin blockchain because they can rely on it being a universally stored immutable record, at the same time they are reliant on the network accepting and storing their extra data. This could be their potential downfall.

There are some people out there that could be called "Bitcoin purists". They create transaction blacklists to hamper the propagation of transactions from Bitcoin 2.0s and other blockchain bloaters. While those blacklists might be effective if there are a lot of nodes running this code (which is rather unlikely), a more insidious attack would be to convince the mining pools not to include data from the Bitcoin 2.0 platforms. As mining becomes more concentrated in big pools, and the mining profit margins become thinner and thinner, a few pools might welcome a subsidy from a purist or a 2.0 competitor.

Moreover, due to how Bitcoin works, this blacklisting can be quite easy to execute. Someone wishing the bloaters gone could check each block for those transactions. If there were no such offensive records in the given block, the attacker could just send the subsidy to the address from the coinbase transaction. This way one can reward censoring pools without even knowing who the parties involved are. You just have to let them know the rules of the game through an email or some public announcement.

To counteract this, the Bitcoin 2.0 would have to rely on the goodwill of the honest pools, increased transaction fees to give the pools an incentive to include their transactions or a direct subsidy from the 2.0 developers to the pools to let their transactions in.

All in all, this seems like an easy way to carve out your competition in the future if the competition between the Crypto 2.0 platforms will start to become more and more fierce.

Unenforceable embargoes

Many countries use the banking system and the flow of money as tools in their political regime. There is a lot of pressure to keep some countries, such as Iran or North Korea, from being able to deal with the rest of the world. However, in a decentralized Crypto 2.0 system, either everything goes or the system goes. This may very soon create a situation where the unstoppable force of innovation from the crypto space will meet with the unmovable object of nationalistic policies. In the end, only one will be able to prevail.

This issue affects a system like Ripple and Stellar the most. In those 2.0s one can freely trade between any pair of currencies. This means that if say, we have USD issued by a bank from the States and IRR issued by a bank from Iran, one can trade the USD for IRR just as easy as one would trade USD for EURO.

As the systems don't distinguish or discriminate between any currency or issuer, this makes the monetary sanctions unenforceable in the system without completely shutting the network down.

If this issue would ever come up, this would probably be the biggest legal battle a crypto system would have to face. Can a company develop a software that is by its very inclusive nature allowing some people to break the law? Can such a system be allowed to exist and run? Perhaps a combined pressure from a hegemonic government and oligopolistic banks would be enough to drive the crypto scene underground. However, given another outcome, we would see that the emperor has no clothes and progress cannot be stopped...

Conclusions

There is more than one way to kill a crypto. You can either attack its value to grind it down to dust, pay the miners to censor it into oblivion, or challenge the status quo and see what remains after the battle.