More on the problem and solution for cryptocurrency. Delineating the Crypto Space follows The Protocol Layer, Cryptocurrency Market Valuation II, and Free Banking and Cryptocurrency.
The Big Picture
The cryptocurrency blockchain space appears to be a chaotic morass of confusion. There are thousands of cryptocurrencies defined as currency, blockchains, tokens, securities, and outright scams. It is possible to cut through all this confusion, simplify the crypto space, and see it for what it is. I delineate the crypto space into three categories.
- Bitcoin and its derivatives
- Blockchain solutions
- Tokens of various utility, most of which have none.
Bitcoin
Only Bitcoin has the potential to revolutionize our global fiat financial system because only Bitcoin creates a decentralized currency that can compete with government fiat. All other crypto is a derivative of Bitcoin in varying forms of technological design and utility.
Bitcoin has evolved into three separate chains, Bitcoin core BTC, Bitcoin cash BCH, and Bitcoin SV (Satoshi Vision) BSV. These splits occurred for ideological reasons. The personalities who control each of the three Bitcoin blockchains have separate visions for Bitcoin’s creation and ultimate promise. The degree of privacy and competition with government fiat and the conventional financial system define the primary ideological differences.
The initial attempts at decentralized cryptocurrency originated in the Cypherpunks group and mailing list that formed in the Bay area in the 1990s. The internet combined with public-key cryptography provided a foundation for the creation of peer to peer digital currency. Early forerunners of cryptocurrency were E-gold, David Chaum’s DigiCash, Wei Dai’s b-money, and Nick Szabo’s bit gold. Adam Back’s hashcash demonstrated proof of work, PoW, as a cryptographic digital security function. Satoshi built on the early attempts with his creation of Bitcoin.
Bitcoin has anarchist roots from its Cypherpunk origin. A currency whose value is independent of government control and that one can transact peer to peer without a trusted third party was the initial goal for the creation of cryptocurrency. Certain anarchist thought holds the ideal that private peer to peer cryptocurrency transactions will free individuals from government control.
Craig Wright claims to be Satoshi Nakamoto, inventor of Bitcoin. Wright’s history is well known within the crypto community. He is impossible to ignore. To scale Bitcoin and restore the original protocol in his Satoshi vision, he forked from the original BTC blockchain to BCH, and then due to disagreements with BCH’s scaling plans, to BSV. BSV introduced unlimited block sizes in February 2020, and Wright has between 100-200 patents granted and plans hundreds, if not thousands, of more patents on blockchain technology. As Chief Scientist at nChain, Wright has the capital, vision and technological background to make BSV a global financial system. He is creating solutions to define a new blockchain-based internet architecture. Wright rejects the anarchist goals for Bitcoin and sees BSV acting within the traditional financial, legal, and governmental framework. Bitcoin, in his view, is a revolutionary, disruptive financial system that acts within the same boundaries that govern the traditional financial system.
Wright’s solution for BSV keeps all transactions, in some form, on the blockchain. With a permanent transaction record on an immutable ledger, BSV not only allows for complete and open records, it enormously expands it. Corruption hides in darkness. An immutable public blockchain shines a light on all transactions and makes them transparent.
Bitcoin Derivatives
Other decentralized cryptocurrency blockchain solutions are derivatives of Bitcoin. They use the Bitcoin open source code to create a blockchain that differs from Bitcoin under their own uniquely defined protocol. Privacy, contract creation, or a marketing ploy may differentiate a decentralized derivative of Bitcoin. The extent to which a decentralized Bitcoin derivative competes with the Bitcoin blockchains and offers a better solution will determine its ultimate longevity. For the reasons I explain in Free Banking and Cryptocurrency, the crypto space will eventually devolve toward a cryptocurrency of the most stable value that can compete with the fiat dollar.
Consensus Algorithms
Beyond the decentralized Bitcoin derivatives are the blockchain solutions that attempt to create a more efficient blockchain. In the early days of Bitcoin, observers saw its scaling and transaction throughput as limiting roadblocks. This was due to the sheer size of an exponentially growing blockchain and the inefficiency of PoW as a validating system that requires increasing amounts of computational power and energy consumption. Developers are creating many variations of consensus algorithms designed to overcome the perceived blockchain size and PoW limitations. Their solutions negate the energy costs by eliminating the computational mining requirement. Common to consensus algorithm design is their lack of a decentralized cryptocurrency. Instead, they issue their cryptocurrency supply based on spurious economic theories that have no relation to the three essential roles that define a currency. Often, the issued consensus algorithm currencies seem an afterthought. They concentrate their effort on the technical solutions for a more efficient blockchain.
There are many blockchain consensus cryptocurrencies. They include the efforts by big banks and corporations for private blockchains designated as digital ledger technology, DLT. The currencies involved in DLT are not decentralized and do not compete with the fiat system. These types of cryptocurrencies are attempts to make the fiat system more efficient through blockchain technology. There is nothing wrong with these efforts at increased efficiency, but they will not redefine the internet architecture and overthrow big data. They will only play around the edges of the fiat system and enable it.
Currencies like Libra and other central bank crypto efforts are merely digital fiats. They are not decentralized, are issued and controlled by a central bureaucratic authority similar to any central bank, and use fiat as their underlying support value. They are another form of fiat with all the same problems.
Tokens
The third derivative of Bitcoin is tokens. Initial coin offerings, ICOs, govern token creation and they are the least respectable of Bitcoin derivatives. Many ICOs were outright scams that piggybacked on the initial crypto speculative mania and lost their value very quickly. The SEC has been late to the token game but has now issued regulation that defines a token as a utility or a security. Tokens designated as securities have to comply with the same SEC regulation required for any financial instrument issued as an investment vehicle.
Other tokens are designated as utility tokens and offer the purchaser a future in whatever the issuer promises to create. The definition of a utility token is: a digital token of cryptocurrency that is issued in order to fund development of the cryptocurrency and that can be later used to purchase a good or service offered by the issuer of the cryptocurrency. Many utility tokens have lost their value, where others offer the promise of real value. All tokens have one thing in common. They are built upon the underlying value of the cryptocurrency that supports them—mostly Ethereum—and are dependent on Ethereum’s success and stability of value for their own success. Ethereum is unable to scale and is rewriting its code and protocol to transition from a PoW system to proof of stake, PoS. At some point, Ethereum will reinvent itself as Ethereum 2.0.
State of Cryptocurrency
The cryptocurrency blockchain space continues to evolve. Wright’s BSV has unlimited scaling and promises to enact the transaction throughput that consensus algorithms were created to solve.
The cryptocurrency blockchain vision is for a new internet architecture, defined in George Gilder’s Life After Google. Gilder’s vision foresees an internet defined by heterarchy rather than hierarchy. An internet architecture that democratizes money, revolutionizes the financial system and opens the world to a new era of unimaginable innovation based on security, privacy, and the individual at the center of the system rather than a few massive corporations.
The current reality of cryptocurrency is a constantly increasing list of speculative assets that are expected to increase exponentially in value while their functional, underlying utility remains elusive.
The thousands of cryptocurrencies that exist today will have no reason to exist once a decentralized cryptocurrency and blockchain solves the problem of stability of value and acts as a unit of account along with a medium of exchange and store of value. For now, cryptocurrency remains a speculative playground and no real threat to the fiat system.