Some big developments are happening in crypto-space. Next month, the Chicago Mercantile Exchange (CME), one of the biggest options and futures exchanges in the world, is releasing a monthly Bitcoin futures, the first of its kind. This is on the back of growing institutional interest in Bitcoin. CME of course, hopes to profit immensely from allowing big money to trade the iconic crypto-currency. Many speculate that this will be strongly bullish for Bitcoin. And while the contracts will be cash-settled, with no actual Bitcoin delivery taking place, it will be very interesting to note how, if at all, the futures market influences the Bitcoin ‘spot’ market, or the other way around. This too, is an experiment in largely uncharted waters.
To recap some other developments, Bitcoin’s scalability problem is being addressed with the upcoming implementation of the Lightning Network, currently being trialled on the testnet of Bitcoin’s loyal sidekick, Litecoin. Should Lightning Network succeed, it will enable a massive amount of transactions to be performed off-blockchain, dramatically lessening the pressure on blockchain transaction processing times. Litecoin has already implemented Segregated Witness (SegWit) back in April 2017, which basically lessens the data overhead of a standard block by segregating the ‘witness’ data from the transaction data in a block (i.e. the signatures, which are data-heavy). SegWit also tackles the transaction malleability problem, which is a known security issue in the blockchain, whereby an attacker can alter a transaction (so it becomes ‘malleable’) before it is confirmed on the network. These changes ultimately pave the way for Lightning Network adoption, which should be very good news for Bitcoin. Note that Bitcoin Cash (BCH) has not implemented SegWit, thus placing itself outside the realm of the Lightning Network, unless it forks again. It has instead opted for a one-off increase in the block size to 8MB from Bitcoin’s current 1MB limit. Bitcoin Cash will eventually need to fork again to increase the block size.
Ethereum in the meanwhile, is working on its major upgrade to switch from a Proof-of-Work (PoW) mining algorithm to a Proof-of-Stake (PoS) algorithm. Basically, what this intends on solving is the problem of high transaction fees and centralization of mining nodes in terms of computational power. PoW enables those who have the highest hashing power to mine more of the crypto-currency, by being better positioned to find the nonce in cryptographic games, and this costs electricity. Bitcoin is the best example of PoW. So a miner can invest in the latest mining hardware, at say $1 million, and begin mining profitably. With PoS, the miner is limited in mining with how much of the crypto-currency he owns (the ‘stake’). So a miner must firstly invest $1 million in the crypto-currency, and then purchase the mining equipment, effectively spending double the amount, $2 million, to become profitable. If aggregated, these purchases will push the price up, making mining monopolies more and more difficult. To be a true monopolist under a PoS environment, one has to purchase and own most of the coins, which is infeasible. And with mining rewards exponentially decreasing with supply (hence value), PoS is supposed to make mining a more level playing field and decrease transaction fees over time. At the moment, Bitcoin rather than Ethereum, has more of a problem with mining centralization, however, Vitalik Buterin wants to set a new standard with Ethereum.
2018 will be a very interesting year for both #1 and #2 crypto-currencies, Bitcoin and Ethereum, with significant strides made in Lightning Network and PoS expected next year. Many other alt-coins also face exciting changes. The year 2017 has been the most incredible year for Bitcoin and crypto-space so far to date. Next year looks even more promising.