Are crypto currencies money? Maybe they aren’t. Who would spend 1 bitcoin to buy anything today while BTC/USD price is rising? Who would accept bitcoins while BTC/USD is falling? I would not. I think nobody is using bitcoins to really buy and sell goods today. The reason is pretty simple: how could I spend a coin today if tomorrow its value can be 50% more? This is called deflation, and Bitcoin is known to be a strongly deflationary asset. I’m not a guru in monetary theory, however it is straightforward thinking that currencies with such instability are practically unspendable.
One of the most important objectives in Bitcoin design is to prevent double spending, of course. The beauty and power of its solution is here and we all celebrate it. However, its monetary policy and the strong volatility is making less practicable the single spending as well for the reasons we discussed in the paragraph above.
The crypto currencies are becoming the new dotcoms.
This is a conjecture and I am conscious I will pull on me some irate flamers. For many this conjecture might look a too stretched comparison, but there are some clues to believe it is well sound. Keep in mind that history does not repeat the same facts and with the same shapes all the times. We are prone to think of dotcoms as startups legally registered in some chamber, but this is the beauty of revolutions: they present new facts and new players in a completely unexpected way.
Let’s start from technology. The web in the 90s was no more than an easy, decentralized and efficient protocol to transfer information. Likewise the block chain (from now on I’ll name it blockchain, a term never used by Satoshi but today a de facto hyped keyword) is a decentralized and a clever solution to transfer notarized attestations through the network without a notary being in charge. From this capability comes the creation of money, or maybe the misunderstanding about creation of money.
Satoshi defined and shaped the concept, implemented it and gave this embryo to the community which, as often happens in software, took the traits of a religion articulated in different schools of thought: some more tolerant and others more intransigent. I find pretty scary reading excerpts of Satoshi’s paper quoted like unquestionable truths falling from the sky.
If Bitcoin is not a clear sign of how the cryptos are the new dotcom, Ethereum provides us with some stronger clues. It shows how an open source community becomes a crypto company or better, a crypto currency un-company. Ethereum does not aim at becoming just another unicorn drawing the attention of small and big investor in some tech hub. It rather promises a new platform for universal and decentralized computing and asks bitcoin to the crowd to fund this dream. Vitalik and associates sell the shares of this project which are called ethers. The ethers are supposed to be the fuel to make the new platform grow and run. The ether are also the shares of the new uncompany Ethereum.
Ethereum is not the first and likely won’t be the last, it is perhaps the most remarkable. We may argue that every single altcoin out there is a new crypto uncompany. In some cases it is funded by means of crowdsales and in some it is not. Synereo and Melonport come to my mind just to mention some of the newest. There are hundreds of altcoin. If we sort them by capitalization we see how Bitcoin is not only the biggest, but it is worth many times all the others summed together. This is the power law at work. We will talk again of power law later in this post.
There is already a market where Bitcoin is the incumbent and the others must struggle to find their niche. They must sell their value proposition and must be a good case. Litecoin is an early competitor in this market, its value proposition is “faster confirmation” and PC based mining. It has been a good rival for a while, now it is declining.
When we open the page coinmarketcap.com we are actually looking a natural stock exchange of a new industrial sector with no control authority and directly subject to the diverse market forces. A remarkable characteristic of this market is that anyone can buy/sell shares of the crypto uncompanies trading their coins with a very little entry barrier.
The product of the crypto currency uncompany
Bitcoin and all its small brothers are not simply information protocols. Unlike HTTP, Bitcoin is an economical system subject to different forces and it must be analyzed by means of games theory rather than computer science.
This equilibrium comes with a cost and this cost is the electrical energy devoured and used to ensure the perfect integrity of the blockchain. Without the economic incentive there is no integrity, no usefulness, no blockchain at all. There is no coin without blockchain and no blockchain without coin.
Here we are referring to permission-less and public blockchain. On the other hand what other blockchain could we talk about? The threat model which warrants the blockchain is pretty unique: nobody is authenticated, nobody is in charge and all are potentially attackers and willing to game the system creating fake copies to double spend their coins. This threat model can be counteracted with a proof-of-work, and maybe proof-of-stake, blockchain only. Any weaker threat model does not warrant a blockchain. A more traditional distributed transational database could do the work.
Who’s in charge?
The CEO of the crypto uncompany is the head of software, or rather the board of such uncompanies is the crew of developers who control the protocol. The concept of decentralization must be refined and articulated. No need to say that decentralized is more than distributed. All Google services are deployed on massively distributed systems, but this doesn’t make of Google a decentralized system.
Google is tightly controlled by Alphabet Inc. There is one owner and no decentralization at all. Decentralization is rather the distributed ownership of the network and there are at least two different level of decentralization. One is about execution, in other words it is about who owns and runs the nodes. The second level is about the governance and it is merely the power to approve and announce the changes in the protocols. Who controls the reference implementation is de facto controlling the network and he/she is equivalent to the board of executives of a traditional company. The current board of executives of Bitcoin is the Bitcoin Core team.
Bitcoin is an uncompany which runs a B2B (business to business) and its direct customers are the miners. Miners mine by definition, they are the users of Bitcoin protocols, and their profits come from minting coins and from transaction fees. Coin holders are the shareholders of Bitcoin. Every satoshi is like a share. The shareholders do not have a direct means to vote and influence the executives, however given the nature of Bitcoin supply, the early adopter hold such huge amounts that can operate pump and dump schemes and act as kind of central authorities and can give strong signals to the community.
The miners have more means to influence the board because they can adopt a software instead of another, approve the large block instead of small block and finally can make the core team stronger or irrelevant.
Bitcoin Unlimited is carrying on a hostile takeover on Bitcoin. The current board (aka Bitcoin Core) doesn’t appreciate, of course. Only the team in charge decides the size of the block and any other detail of Bitcoin protocols. I’m not interested in the debate on the block size and on the adoption of Segwit. I’m rather interested in understanding how this debate is taking the shape of a no-confidence motion against the core team from another team allegedly ready to take over.
This takeover try is not the first and likely won’t be the last of Bitcoin history, which is only 8 years long, but longer enough. Ethereum too has had its moments of profound crisis related to the notorious theDAO hack. A significant percentage of all ethers were almost siphoned for a mere programming error. An error in a contract (or read in a transaction) and not in the mining software itself and in its protocols. Vitalik and his followers stronger fought to work around this event and to prevent the consequences. They decided to hard fork the blockchain to erase from its history any effect of the hack. They succeeded in making mutable the immutable.
Why such a violent reaction? Why endangering the very first principle of blockchains? Perhaps the stakes were higher than the mere coins stolen, the very roadmap of Ethereum was at stake and stake is the recurrent word. The transition from the current proof-of-work to a new proof-of-stake consensus protocol would give a huge power to the theDAO hacker which would own a lot of coins.
Hardfork or not to hardfork, that’s the question. In any cases some consequences will follow. The Ethereum hardfork generated a subcommunity and a new coin called the Ethereum Classic which put itself in charge as custodian of the immutability principle. In the early days just after the hardfork, this squatter coin reached almost 30% of the Ethereum capitalization. Bitcoin is sailing in different waters, the core team does not want the hard fork but this wouldn’t prevent someone else to lead the majority of miners to a new direction.
Also the newborn and so far underrated Zcash got its moment of hardforking. Some devs keen on the protocol but less keen on the company behind forked and coined Zcash classic. A move which is interesting, legit and hostile.
The role of the élites
The élites. As for startups where who invests a little sum in the seed can become a billionaire when they skyrocket to unicorn status, in the crypto un-companies we assist at a similar phenomenon. Who mined bitcoins in 2010 or bought them in big quantities in 2011 is now owning a significant portion of Bitcoin’s shares, however without the contractually means to define the strategy and influence the governance, at least, not directly.
As of today, there are a few dozens of early adopters who own the 95% of all bitcoins issued so far. What if bitcoins were the only money circulating in the world? Wouldn’t be this a scenario with one of the highest degree of social iniquity of entire history. And what about the ideal revolution promoted by advocates of crypto currencies? This revolution was expected to get rid of actual iniquitous and corrupted banking system and not to replace it with another iniquitous scheme where few actors owns the majority of wealth.
A new bubble? Now please.
Are the believers who today buy bitcoins at the price of 1000$ simply falling in the trap of a well refined and appealing pyramid scheme? If the mother of all crypto currencies is not a currency than what about the crypto dream of a better society? All legit questions that won’t be answered here, I’m afraid.
The today on going war to control Bitcoin is not answering either. This war is just a war to get the power. But if value proposition and benefit of crypto currencies is not the one promised by their inventors, then it is better to see this bubble blow and burst, the sooner the better. It is better getting rid of what is wrong and keeping what is good. It is better to rethink the role of this wonderful technology and not just to use it as a tool for a speculation at the sole advantage of who adopted it early.
The burst will be a violent reality check for most of us. But keep in mind that after a bubble burst you’ll get the best of the underlying market. The dotcom bubble was rode by pets.com and google.com among the others. Who really provides a value can withstand, we simply forget about the others.
Finally, we know that some élites will be ruling the world. This is life and the power law gives the figures. But for the user base down there must be some value and not only the pigeon poop of a bubble burst.