Last year was a breakout period for cryptocurrency, with major coins like Bitcoin and Ethereum skyrocketing in value.
While cryptocurrency value can be highly speculative, it is also affected by the problems, obstacles, and advances in the underlying blockchain technology.
The technology cryptocurrencies are built on can make a large difference to characteristics like transaction fees, use cases, and adoption.
Below is a brief look at the technology behind Bitcoin and Ethereum and some ways their respective communities plan to address their respective problems this year.
Bitcoin began the year below its all-time high following a steady increase in value throughout 2017.
It remains plagued by high transaction fees, backlogs, long transaction times, and various other network issues.
Despite this, many Bitcoin proponents consider the cryptocurrency a store of value due to factors including its market share and scarcity – and it has delivered impressive returns so far.
There have been many proposals to solve Bitcoin’s transaction issues and network congestion, but many of these have been rejected by the community or resulted in a divisive hard fork.
Protocol-level adjustments such as increasing the block size or the introduction of Segregated Witness are difficult problems for Bitcoin core developers, and there is currently no decided base-level solution to the scaling problem.
These solutions would be implemented by way of hard forks (which can result in a split and two different cryptocurrencies) or user-assisted soft forks (which require greater consensus and do not result in a divisive split).
Many Bitcoin community members instead hope the roll-out of the Lightning Network second-layer scaling solution will resolve this problem.
The Lightning Network is expected to launch in 2018 and will enable low-fee micro-payments which are built on the security of the Bitcoin blockchain but use a secondary payment channel.
The scaling issue is a problem for all blockchains, and it is difficult to solve without compromising the decentralisation or reliability of the blockchain.
Bitcoin is heavily supported and controls the greatest market share, but it will need to rely on a protocol or second-layer solution to improve its scalability and allow for reasonable transaction fees.
Resolving this issue in 2018 would allow Bitcoin to be used as a digital currency for everyday payments instead of being limited to large transactions.
Like Bitcoin, the biggest problem Ethereum hopes to solve this year is that of scalability.
Ethereum is currently processing over 1.3 million transactions per day – three-times as many as Bitcoin – with transaction fees below $1.
However, the Ethereum blockchain can also be used to create decentralised applications which run directly on the blockchain and can cause heavy congestion if they become popular.
Recently, a surge of mainstream interest in the CryptoKitties decentralised application caused transaction fees and confirmation times on the Ethereum network to skyrocket – indicating the need for scaling improvements to accommodate popular applications.
Developers have proposed numerous solutions to the scaling problem, including sharding and second-layer solutions.
A big change coming to Ethereum in 2018 is the change to a Proof-of-Stake (PoS) block validation method instead of the traditional Proof-of-Work (PoW) method favoured by other currencies such as Bitcoin.
This will result in miners moving away from Ethereum and will require users to stake cryptocurrency to verify blocks instead, which could have a big impact on the value of the currency.
These improvements are currently in development and some are set to launch this year, along with an increasing amount of decentralised applications and Ethereum-based tokens.