Cryptocurrencies are a new technology, and the crypto space grows every year. There are new groundbreaking ideas every year in the crypto space. Yet, what advantages or disadvantages offer cryptocurrencies like Bitcoin or Ethereum? We will also discuss the pros and cons of blockchains.
Advantages of crypto/blockchains
Decentralization of the finance systems is the biggest advantage of cryptocurrencies. People don’t have to trust centralized institutions anymore. These institutions can decide how much money they want to print. Instead, there are preset rules.
Blockchains store every transaction on it. There is full transparency between all participants in the crypto network. Everybody knows who has how many coins. I should mention that there are so-called privacy coins out there. They have a primary focus on hiding how many coins everybody owns. In the case of Bitcoin or Ethereum, everybody knows which addresses own how much coins/tokens.
#3 Full control over your coins
Nobody can spend your coins if he/she doesn’t have the right private keys. In other words, you have full control over coins at any time, and you can spend your coins at any time.
#4 Smart contracts
Some cryptocurrencies like Ethereum support smart contracts. Smart contracts is code run by nodes and stored on the blockchain. They can be used to built platforms on an existing blockchain. They are, like transactions, immutable, and permanent.
#5 Changeable code / Adaptable
Features/functions from the code of a cryptocurrency can and get improved. Thus, the developers of a project can develop new features, and there is no end for innovation. For instance, Ethereum changes its mining algorithm from POW to POS and implements sharding. Sharding splits the blockchain into many smaller pieces to improve scalability.
#6 Transactions around the globe
It doesn’t matter where you are. As long as you know the crypto address from a person you can send him/her some coins. There are no extra fees if they live far away.
#7 No middleman / Trust
Because nodes (computers) handle everything, there is no need for a middleman. You don’t need to trust a middleman that everything goes right. Also, there are no fees involved because you can cut out the middleman.
Disadvantages of crypto/blockchains
#1 Slow transaction times
Transaction times on-chain are in most cases slow.
Because for instance, Bitcoin miners need, on average, 10 minutes to mine one block. Your transaction needs at least 10 minutes to get confirmed. Also, there can only be up to 1MB worth of transaction data in a Bitcoin block. Other projects like Ethereum have block times of around 20 seconds. Transactions on the Ethereum blockchain compared to Bitcoin are confirmed faster. However, that means that the blockchain grows faster.
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#2 Transactions are permanent and immutable
Transactions on the blockchain are permanent and immutable. If you submit a transaction to the wrong receiving address, you can’t change it. It can be frustrating but is important to understand. Always double-check the receiving address if you make a transaction.
Bitcoin and Ethereum for example are pseudonymous and not anonymous. This is a problem that occurs when transactions are recorded on the blockchain. Pseudonymity means that an address can be linked to a real person. You lose all your privacy afterward. This is a common problem with centralized exchanges. They know a lot about their customers. Also, they could link the addresses of the customers to the identities in their database.
#4 Growing blockchains
Every time a new block gets added to the blockchain it grows a little bit. If the blockchain grows to fast, becoming a node in the network can be expensive. For instance, Bitcoins blockchain size is greater than 300 GB. That means, if you only have 128GB, you can’t become a node because you don’t have enough storage.
#5 Not your keys, not your coins
If you lose your private key or your backup, you can’t recover your coins. The famous quote “Not your keys, not your coins” counts for every asset on the blockchain. You can’t prove that you own the asset if you don’t have the right private key.
Always make many backups to prevent that. Also, if you lose the passphrase to unlock the wallet, the result is the same. You can’t sign a transaction and thus, you can’t spend the coins (You can’t prove that you own it).
#6 Transaction fees
The scaling of a blockchain is capped, in Bitcoins case 7 transactions per second. If new users are joining the network, it can lead to a scaling problem. The problem occurs when there are a lot more transactions waiting to be confirmed by miners. Miners can choose on their own what transactions they include in the next block. They choose the ones that have the highest transaction fees.
Users are competing against each other to get their transactions confirmed faster. The result: high transaction fees. There are attempts to fix this problem. For instance, Bitcoin has a 2nd layer solution called Lightning network. Ethereum has a similar technology called Raiden.
#7 Stuck transactions
If the network is busy confirming other transactions and you paid to low transaction fees, your transaction can be stuck for weeks. There is no incentive for a miner to include your transaction if there are others where he can earn more.
#8 Tracking of transactions
Once a transaction is on a blockchain, you can’t go back and revert it. In combination with pseudonymity, this can be dangerous. You can be tracked if somebody else knows your address and you can’t go back and undo your transactions. Let me explain it with an example. The “attacker” would know when you spend coins, how much you spend, and who received it.
Cryptocurrencies itself can solve a lot of problems. Developers need to solve these problems before crypto can go mainstream.
If Bitcoin doesn’t solve the scaling problem, it can’t serve as a global currency. On the other side, Bitcoin is the best store of value. It is a good store of value because it has a max supply, transparent inflation rates, is scarce, and can be transferred around the globe.