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Can Bitcoin Be Destroyed via Bugs or Hacks?

Another commonly proposed reason for which Bitcoin may be extinguished at some point is that it might have bugs and can be hacked. Clearly, if a hacker was able to obtain an arbitrary number of bitcoins from thin air or found a way to transfer bitcoins from other people's wallets at will, Bitcoin would quickly disappear into obscurity.

However, it is currently unlikely that such a bug exists. Many reputable security researchers have studied Bitcoin and have been impressed by the quality of its code. For instance, Dan Kaminsky, a respected security expert, wrote an article for Business Insider in April 2013 titled "I Tried Hacking Bitcoin and I Failed." In the article, he talks in glowing terms about Bitcoin's security model.

However, the most important reason to believe that the Bitcoin system is unlikely to contain serious flaws is based on an economic argument: If anyone figured out how to hack the core network, they could become phenomenally rich. Such a person could potentially extract billions of dollars from the network before the value of the currency collapsed. The simple fact that no person has done this yet, despite the enticing incentives to do so, makes a strong case against the existence of any such flaws in the currency.

Can Bitcoin Be Destroyed by Governments or Corporations?

In the early days of the Internet, we became accustomed to the idea that we would connect to a central server (run by Google, Amazon, Yahoo!, etc.) using a web client in order to browse online. This model for using the Internet is commonly called a client-server architecture. However, since those days, many new Internet-based applications have started using a peer-to-peer architecture. In this decentralized model, a software application finds other "like-minded" peer applications on the Internet and connects with these peers to operate the application. Early applications that used this approach include BitTorrent (for movie downloading) and Gnutella (for music discovery/downloading). Bitcoin also uses a peer-to-peer network in its design.

Peer-to-peer systems have many advantages over traditional clientserver systems, including improved durability and performance. Because of these advantages, it is likely that these systems will become increasingly ubiquitous.

One benefit of using peer-to-peer systems over traditional architectures is their indestructibility: As long as a peer-to-peer app user can find other peers to connect to, the network will continue to exist, and it can do so without any central point of failure. For this reason, it is extremely unlikely that a government or other entity could ever completely extinguish the Bitcoin network, no matter how powerful that entity is.

Of course, the government of a country could decide to declare the use of Bitcoin illegal, and such declarations could greatly impact the value and utility of Bitcoin. However, short of someone completely shutting down the Internet, Bitcoin will continue to exist despite any such declarations. Also, since Bitcoin is inherently global, there is a limit to the impact the laws of a single government can have on its value and utility. Draconian laws passed against Bitcoin in one country may merely shift its use and development (and associated jobs!) to other countries.

Can Bitcoin Be Supplanted by Another Cryptocurrency?

All of us had a front-row seat when Google appeared out of nowhere with its superior search engine technology and left a long list of defunct, and now almost forgotten, search engines in its wake. Does anyone remember the search engine powerhouses of Lycos or Altavista? Is it possible that Bitcoin will similarly fade into obscurity when some new, better cryptocurrency comes along?

Developers who contribute to the core Bitcoin protocol tend to be very conservative. Not only does no developer want to take the blame for introducing a bug into a multibillion-dollar system, but even if a more radical feature was added, the Bitcoin community would be unlikely to accept it. Arguably, this is exactly what you want to hear if you are one of the people who have, in aggregate, billions of dollars relying on a well-functioning Bitcoin network. It's in everyone's interest to be extremely careful in making any fundamental changes to the core Bitcoin system. Even so, this conservative approach heightens the danger that an upstart currency could emerge, a la Google, and eat Bitcoin's lunch.

Of course, we have no way of knowing what fantastic features a new currency would need such that it could supplant Bitcoin. However, three main reasons exist to believe that Bitcoin may be able survive the onslaught of newcomers: network effects, the nature of cryptocurrency volatility, and the recent development of cryptocurrency-pegging technology.

The network effect is the simple concept that people want to use a currency only if other people will accept it as payment. The more users a currency has, the more useful it is. This creates a natural barrier for the adoption of new currencies (and certainly has hindered the adoption of Bitcoin relative to traditional currencies in its first few years). Currently, Bitcoin has the largest adoption of any cryptocurrency, so newer ones would need to have easily distinguishable advantages over Bitcoin to overcome its network advantage. But how does volatility factor in?

From an economics standpoint, any asset that becomes newly available to an open market needs to first undergo a price discovery process. This was part of the reason for the Internet bubble in 2000: People simply didn't know the value of the stocks of eBay, Yahoo!, and other tech companies because similar companies had not existed in the past. Eventually, as people became more familiar with Internet-focused corporations, it became clearer how to reasonably assign a price to each company's stock.

Bitcoin has been undergoing a similar price discovery process, which is still in its very early stages: The price of a bitcoin has been swinging wildly up and down since the currency's inception. As more and more users have started to use it, however, the volatility has modestly decreased (i.e., the swings, in relative terms, have become less violent). If Bitcoin volatility continues to decrease, this trend may give Bitcoin a significant advantage over future cryptocurrencies: Because Bitcoin is guaranteed to be the oldest cryptocurrency, new currencies might be unable to catch up in this "volatility race," and Bitcoin will always remain less volatile than upstarts.

If Bitcoin maintains advantages in terms of network effects and volatility, it may make sense for new cryptocurrencies to use pegging to link themselves to the Bitcoin network instead of trying to replace the Bitcoin network entirely. Recently, two well-known cryptocurrency developers and entrepreneurs, Adam Back and Austin Hill, have suggested that the value of new cryptocurrencies could be directly linked one-to-one with the value of a bitcoin by using cryptography to allow coins to " jump" between block-chains using clever algorithms. If this idea succeeds, it may be possible to create cryptocurrencies with new technological advancements into side chains of Bitcoin. Side chains are separate blockchains with different rules that share the same pool of coins as Bitcoin, allowing the new currency to share the same volatility (or lack thereof, potentially) and network benefits as Bitcoin proper.

If the side chain idea (or a similar peg-based idea) is successful, future cryptocurrencies would benefit from Bitcoin's existence and even augment it rather than replace it. For these reasons, Bitcoin might never be entirely replaced by other cryptocurrencies. That being said, if a cryptocurrency is created that really is so much better than Bitcoin that we all switch, that wouldn't really be a bad outcome, would it?

Now that we've discussed the existential risks, let's explore what Bitcoin's future might look like.

 
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