Professor Eswar Prasad: Bitcoin’s 3 flaws could spur demand for other cryptos

By: Daniela Kirova
Daniela Kirova
Daniela was born in Bulgaria, grew up in Chicago, and then moved to Michigan to attend the University of… read more.
on Jun 18, 2021
  • Professor Eswar Prasad highlights several Bitcoin flaws.
  • Privacy issues could boost the profile of Monero and Zcash.
  • One day Bitcoin is worth a cup of coffee, the next a 'lavish meal.'

Apart from its damaging effect on the environment, Bitcoin (BTC/USD) is not as anonymous as generally assumed, and it is not effective as a means of payment, Cornell professor and author of the upcoming book The Future of Money: How the Digital Revolution is Transforming Currencies and Finance Eswar Prasad told CNBC in an interview.

Anonymity issues

In early June, the FBI recovered $2.3 million worth of Bitcoins that had been paid as ransom to a criminal cybergroup as part of the Colonial Pipeline hack. Agents identified an e-wallet with virtual currency, which was used by the criminals to collect the funds demanded. Other coins are making efforts to help guarantee anonymity.

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“The main idea of bitcoin… was to provide pseudonymity. But it turns out that if you use bitcoin a lot, and especially if you use Bitcoin to get any real goods and services, then it becomes possible eventually to link your address or your physical identity to your digital identity,” Professor Prasad said.

Two cryptocurrencies working on improving anonymity, according to Prasad, are Zcash (ZEC/USD) and Monero (XMR/USD). These two coins could stand out as individuals look for a more anonymous alternative to Bitcoin.

Mining requires more energy than a whole country

To produce new coins, a lot of energy is needed – and wasted. In addition, the process of ensuring security and verification of the payment network is also energy-intensive. For a coin transaction to be performed successfully, miners need to solve complicated equations using special computers. According to the Cambridge Bitcoin Electricity Consumption Index, the energy needed to create even just one Bitcoin can be more than a small country consumes in the same time frame.

Professor Prasad noted that Ethereum was working on a new, less energy-intensive method of mining. He is speaking of the mechanism “proof of stake,” which activates network validators that have a stake (ether). According to the Ethereum Foundation, this mechanism will eliminate the need for huge volumes of computing power, as much as 99.95% less energy than before.

Ineffective as a currency

Bitcoin has proved to be cumbersome and slow as a means of payment, a far cry from its promised efficiency and effectiveness as an exchange medium. Given the volatility of the market, this is a major drawback as one day a Bitcoin can be exchanged for a cup of coffee while the next it could buy a “lavish meal.”

As such, Bitcoin’s real-life use case may have evolved from a mode of payment towards a speculative asset for anyone hoping to generate a return on investment.

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