The meteoric rise in the price of Bitcoin has brought renewed attention to the world of crypto and driven millions to purchase the digital currency for the first time, which is cause for celebration for anyone pushing for mass adoption.
However, according to Ripple CTO David Schwartz, the architecture of the underlying blockchain means Bitcoin is doomed to fail its most important mission: to deliver a system whereby people can transact freely with one another, without the involvement of any intermediary.
Over a Zoom call, Schwartz told TechRadar Pro that the design of the Proof-of-Work (PoW) consensus mechanism at the heart of the Bitcoin blockchain is such that true decentralization and disintermediation was never a possibility.
In a PoW system, miners compete to solve complex mathematical problems as quickly as possible. The first to do so earns the right to validate a block of transactions, in exchange for both fees and newly minted cryptocurrency. But Schwartz believes these miners are, in practice, no different from any other third-party that skims from the top.
“A cryptocurrency should be a one-sided market; the users want a store of value and a means of exchange,” explained Schwartz. “But what Bitcoin did was turn it into a two-sided market.”
“Miners have historically fought for high transaction fees, because that’s their revenue. The reality is that you have another set of stakeholders who are trying to charge the highest fees they can get away with, and that’s not much different from the way payments work at a bank.”
An alternative route to consensus
In 2011, having identified the problems with PoW, Schwartz and former Ripple executive Jed McCaleb sought to found a new cryptocurrency on a different approach, with a greater focus on both speed and decentralization.
“At the time, the philosophy for most people was that PoW was Bitcoin’s secret sauce, but the very first cracks in the foundation were beginning to show,” said Schwartz.
“What we were starting to think was that PoW wasn’t what was amazing about Bitcoin. It was the fact that all transaction data and transaction rules are public and that there is no central operator.”
Schwartz credits McCaleb with first coming up with the notion that PoW could be replaced by something else. And it was this idea that formed the kernel at the core of what later became XRP, the lightning fast cryptocurrency operated by Ripple today.
Instead of using proof-of-work or proof-of-stake (PoS), a popular alternative that replaces miners with a lottery-like system, Ripple opted for a novel mechanism for achieving consensus and securing the network.
The XRP Ledger (XRPL) operates on a distributed agreement algorithm that performs the same core function, but without the downsides of PoW (e.g. unnecessary intermediation and environmental toll) or PoS (e.g. the need to lock up assets).
“What we did is radically trust-minimize the system, eliminating the incentive to attack the network,” said Schwartz.
“The way we designed the XRPL is that the consensus algorithm just puts transactions in order. There are no cryptocurrency rewards, so the process is cooperative as opposed to competitive.”
Asked why anyone participates in the XRP network (which still involves some cost) without the incentive of a crypto reward, Schwartz explained the network survives exclusively because people find value in using it.
“It’s the same thing that incentivizes people to run Bitcoin full nodes. With Bitcoin, only the miners are compensated; if you run a node for your customers your only compensation is that you have that node for your own use.”
“There are enough people who want to use the [XRP] system. If there aren’t enough people willing to run the software because they find some value in using the network, the project has already failed.”
The main issue with this approach, Schwartz concedes, is that the quality of network…