Once upon a time there was Bitcoin and nothing else. History was being written by Satoshi and a few illuminated minds that posted the most interesting ideas in the Bitcointalk forums and IRC channels. Almost every cryptocurrency idea I’ve heard of had a seed in some of these heated online discussions. During 2009 improving every part of Bitcoin seemed to at the reach of the hand: changing the scripting system, the proof-of-work function, the block format and more. Then the conservative era begun: Bitcoin value had risen considerably and much more money was at stake. So there was no room for destabilizing changes anymore. During 2010 ideas were still discussed, but not implemented. But as powerful ideas cannot be contained so during 2011 alt-coins came into existence. Apart from Namecoin, which was something different than a mere cryptocurrency, the first alt-coin code changes were all minor; only the economic constants, such as the money supply, were changed (Devcoin, lxcoin, l0coin). Multicoin allowed simultaneous management of multiple block-chains, mainly to experiment with different economic constants. Soon other more extensive changes appeared, such as using another proof-of-work function (Tenebrix, FairBrix, Litecoin). All these projects changed no more than a hundred lines of the parent Bitcoin fork. During 2012 cryptocurrencies started making deeper changes in the code, using proof-of-stake instead of proof-of-work (PPCoin, NovaCoin, PeerCoin). But still no cryptocurrency took more than a month of work to be programmed, since there was no business model that could pay for the development of entire new codebases. Pre-mining was seen as a scam rather than an investment in the development team, since no profound innovation had been achieved and no codebase had been started from scratch.
The first non-Bitcoin based currencies were created during 2013 (Ripple, Nxt, MasterCoin, Counterparty). Three promising new cryptocurrencies will be launched during 2014: NimbleCoin, BitSharesX and Ethereum. With the exception of NimbleCoin, all non-Bitcoin based currencies adopted either an IPO business model or the pre-mine business model to pay the founders and support the development after launch. NimbleCoin seems to be the only one that still tries to bootstrap based on an equal opportunity for all members of the community. Some of these currencies (often called “2.0”) add new features not related to payments: Smart contracts, betting, prediction markets, shares, distributed exchanges, user defined assets, contracts for difference, dividends, Decentralized Autonomous Organizations (DAOs), distributed storage and gaming. Innovation seems to have been primary directed to provide a more extensible cryptocurrency and more features. Nevertheless this may not be what users require today. To be accepted world-wide, users will demand cryptocurrencies to satisfy their everyday needs in term of usability. They will demand the cryptocurrency to allow them buy some croissants in the local shop with a standard smartphone in a few seconds so they can keep walking without even worrying about transaction confirmation time. Also, considering the deflationary properties of Bitcoin, and the expected rise in fees, users will soon demand lower transaction fees, which is also strongly tied to better scalability and lower mining energy waste. Energy efficiency will also be demanded for ecological reasons. More experience users will demand higher transaction privacy and more politicized users will demand higher decentralization. As I see the ecosystem right now, these are the main improvements users will demand, more than any new embedded financial instrument. Here is my wish list in order of importance:
- More merchants accepting the coins (specially retail stores)
- Lower price volatility
- Faster payment confirmations
- Lower fees (more transactions per second)
- Less energy waste in mining
- More decentralized
- More private
- More features
- More extensible
It’s interesting that the two last innovation areas, which in my opinion are the less solicited by the general public, are the ones where most money and time has been invested. This may be because they are the most “geeky” and futuristic use cases. To summarize I present diagram with the current roads to innovation in cryptocurrencies. Bitcoin it is a very well-balanced and conservative design and it’s plotted right in the middle. I tried to plot how the current and past cryptocurrencies have positioned themselves in the innovation landscape. In each category I have chosen the most innovative ones and highlighted the best cryptocurrency (IMHO). Note that Ripple is not part of the comparison because it still relies on private servers and so it has an unfair advantage. If it were truly open and yet secure, it will probably win in most categories. Also note that faster payments confirmations is not equal to lower block intervals: certain coins with low block intervals have greater confirmation times because of stale block rate and frequent chain undoes (such as Quark). When comparing new features, I’m comparing cryptocurrencies with the features built-in and supported by the core development team. Ethereum can emulate practically every feature, but special scripts must be developed and maintained for each feature added, so it wasn’t chosen in that category. There is another category I haven’t included because it has too few members, which is “More Security”. It comprises mainly the GHOST protocol.
In following posts I will briefly describe the innovations each cryptocurrency has brought in each category.