Bitcoin’s Technical and Financial Flaws

The bitcoin protocol is reliable. It guarantees the credit of bitcoin virtual currency. Others will not steal my bitcoins, and the bitcoins I get are real and reliable. There are many benefits to using bitcoin transactions, which can be easily listed:

• Convenient transactions: You can operate on your computer without installing bank control plug-ins. You can trade at any time, and transactions are almost instantly credited to your account (within 10 minutes on average).

• No transaction fees: no longer differentiate between remote and local payments

• It is difficult to track and cannot be frozen: it can be used for tax evasion, gray transactions, etc.

Based on the above characteristics, it is conceivable that it will be easily accepted by some geeks and may become one of the mainstream payment methods for some special goods on the Internet. However, for Bitcoin to become a truly tradable and widely accepted currency, there are still some key issues that need to be resolved. The following will discuss my views from a technical and financial perspective.

Bitcoin's Technical Flaws

Lack of scalability

If you are currently using bitcoin, you need to obtain all transaction records locally. These transaction records currently occupy about 350M of space and store information about about 130,000 blocks. These blocks store all previous transaction information, and most blocks are between 10K and 50K.

But this is based on a very small amount of transactions. Currently, there are only about 50 transactions per block on average. Here is an estimate of what will happen when Bitcoin's transaction activity reaches the same level as VISA (2,000 transactions per second): a block will reach 1G , and producing a block will become a task that requires a large computer to complete. In order to publish this block , 60G of network transmission capacity is required .

If the above may not become a bottleneck due to technological progress, there are still two things: it is impossible for an individual to save all blocks. Can you imagine that everyone's computer saves a bank database? This makes it possible to store blocks in a distributed manner and concentrate them in a few central databases, but this destroys the P2P attribute of Bitcoin. Another more serious problem is that in order to obtain the book balance of the address, each transaction needs to query all historical transaction records. This requires traversing all blocks, which currently number 130,000, with one block added every ten minutes, each 1G, and this traversal must be performed on the local machine .

Bitcoin is not that safe

The security of a system is determined by its weakest point. The Bitcoin protocol itself may be secure, but it has a fatal flaw: once stolen, there is no way to appeal. Trojans are rampant in China, hacking accounts are rampant, not to mention that the operating system itself may also have vulnerabilities, all of which pose a threat to the use of Bitcoin.

The cryptographic protocol that the protocol relies on is not necessarily reliable. Although the possibility of completely cracking SHA256 is relatively low, it is not impossible to invent a method that is faster than enumeration. For example, Wang Xiaoyun once increased the collision cracking speed of 160-bit SHA-1 by 2^11 times. It is entirely possible that some institutions or individuals have mastered a method of producing blocks thousands of times faster than others, which makes it possible to attack Bitcoin.

Bitcoin is not completely anonymous

Everyone's bitcoin cannot be frozen, but that doesn't mean it is anonymous. The bitcoin protocol can be understood as a bank with public accounts. Everyone can see every transaction information in it, and this bank can open an account anonymously. Since the accounts are public, it is easy to check the transaction information of each account, and even draw a currency flow chart, which is more convenient than checking the bank. As long as you catch a node in the transaction network and interrogate the node, you can find the related nodes one by one. This is not particularly difficult for government agencies.

Bitcoin’s Financial Flaws

In the official Bitcoin documentation, Bitcoin is described as an anti-inflation currency because its issuance is known and grows slowly. But anti-inflation, or deflation, is not a good thing. The central bank never maintains the inflation level by fixing the total amount of money, but by linking the total amount of money to economic activities (although there are often large deviations in the implementation process). What's more serious is that this characteristic of Bitcoin will make it a speculative commodity rather than a currency.

The Fisher equation is the easiest to understand equation that describes prices and the amount of money:

P×Q=M×V

Among them, M represents the average amount of currency in circulation in a certain period; V represents the average turnover of a unit of currency in a certain period, that is, the currency circulation velocity; P represents the weighted average of the prices of goods and services; Q represents the number of transactions of goods and services. Then when V and M remain unchanged or grow at a fixed rate, the prices of services and goods will be inversely proportional to the transaction volume of service goods using the currency, that is, the value of the currency is proportional to the popularity of the currency.

When the popularity of Bitcoin remains unchanged, the value of the currency remains basically stable (depreciating at the current rate of currency issuance, i.e. very low). However, the current transaction volume supported by Bitcoin is too small. As it becomes more and more accepted, the number of goods and services provided by it will increase. According to the above equation, the goods will begin to depreciate, and the value of the currency will increase (note that the price of goods and the value of the currency are inversely proportional). In fact, in the past 14 months, the value of Bitcoin (in US dollars) has increased 1,000 times.

If we consider bitcoin as a commodity (similar to gold), its value will increase with its popularity, making more and more investors choose to hold bitcoin instead of trading it. When investors choose to hold bitcoin, the number of bitcoins in circulation in the market is reduced, which means reducing M in the above Fisher equation, thereby continuing to reduce P, which means the value of bitcoin continues to rise.

This is a typical bubble formation process. The value of bitcoin will not rise indefinitely. At a certain stage, the bubble will burst and the currency value will plummet until the next round of bubble formation. This makes the price of bitcoin very unstable. Would you be willing to accept an item that is worth $10 today, but may be worth $20 or $5 tomorrow as payment for your labor?