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The scalability and traceability of bitcoin and blockchain based cryptocurrency

They are many concerns about bitcoin and most cryptocurrencies. On one hand there are a lot of criminals who like it because it is anonymous. Illegal trades can be easily conducted and we have seen this before where the mode of payments for WannaCry Ransomware used bitcoin as a mode of Ransom payment1. But there are a lot of other criminals out there as well. The types that take advantage of other people's greed and gullibility. Creating getting rich schemes such masquerading as a investment fund manager. Often times, people lose a whole lot of money in this scams and unregulated investment firms.2. However, that does not mean it is totally anonymous3. While there is a way to find these perpetrators, the authorities should now be smart and start monitoring illegal activities better.

On the other hand, the distributed nature of bitcoin makes it desirable for it to be used as a backend system that is both reliable and fault tolerant. However, there is also doubts about it to be totally scalable4. This articles shares some links about arguments made on these two issues.

So, you think you can get a way with crime on the internet using cryptocurrency, because you are totally anonymous? Well, thats partially untrue. Bitcoin is purely anonymous because there is no enforcement for KYC. However, each transaction is publicly viewable. When i say each, i mean every transaction. the link here5 visualizes the transactions that have occured. While its true your name and details about you are not linked to the account of each transaction, it does shows the flow of money going in and out of your account. That means that regulators can trace your account once they have made a transaction to you. Similarly, they can then use the banking system to correlate the data of where and when you choose to cash out.

Other criminals who prey on the gullible and the uninformed may also use cryptocurrency for certain scams on the internet. While they can still be caught, this is not an easy task. Probably a lot of people will lose money first before the criminals get caught. Therefore, there are some government agencies who are trying to create a list of blacklisted companies working on such activities. In Malaysian, Bank Negara and Securities Commission tries to help out the public with warnings for illegal investment individuals and companies6. Mostly are operating without a license and are operating in a pyramid scheme model or very high return investment. Unfortunately, this list is growing and most of the time, by the time they hit the list, there will already be many victims. Some of this scams operate using crytocurrencies. BNM updates the public through its website7. Similarly, the Suruhanjaya Sekuriti/Securities Commission Malaysia also tries their best to inform the public. SSM have publicly list out unauthorized website investment product companies/individuals8 and a list refered to by foreign regulators9. BNM and SSM particularly do not classify the scams as cryptocurrency related or not but generally classifies them being a scam. Some other countries are more systematic to address problems related to cryptocurrency. For example, in Russia, they are creating a specific regulators cryptocurrency detective agency to address the problems that arises from related crimes using cryptocurrencies10.

Despite the crimes that are occuring in cryptocurrencies, the underlying technology, which is blockchain have huge potentials for innovating how we conduct business today. However, adoption have been slow due to some concerns about scalability. The concerns are basically revolving into two issues which is block insertion delay and concensus delay.

Block Insertion Delay

For most cases in Bitcoin, you have to wait for 10 minutes for a transaction to go through. That is the time when a new block is mined to add your transactions. However, due to the volume, transactions usually gets inserted into the block in average about 13 minutes. There have been cases where it took almost about an hour or more. This is due to the volume and low transaction fees. The higher the fees the better your chances of getting your transactions added to the chain.

Concensus Delay

Blockchain does not rely on a single central server. It is distributed. Hence why we call it distributed ledger. In order to achieve this, the system works by verifying their blockchain with other nodes in the network. This is done to achieve concensus and to verify all nodes to know about what transactions have occured. Since all nodes are homogenious nodes (we don't consider anyone more special than the other). They tend to talk to each other like a bunch of aunties exchanging stories to verify the true story. Achieving consensus takes time. And this is one reason for the delay in a blockchain network and it effects the scalability of things as more transactions exist and more nodes comes into play.

Nonetheless, the future seems bright and there are a lot of smart people working on it. Particularly, scalability issues can be solve now that we know the problems. Some of the changes that will effect future crytocurrencies and its implementation of blockchain is by reducing the blocksize, sharding, moving from a proof of work to proof of stake or importance, off chain transactions and plasma.

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