How cryptocurrency may save us

Cryptocurrency may save us, but that’s why I’m staying away from Bitcoin for a while

There is lots of speculation as BTC passes $15,000 whether it is or isn’t a bubble. My own opinion is that short term, of course it is a classic mania inspired bubble, but that isn’t really the point. If you are thinking in terms of fiat exchange value or “market cap” then you are missing the point about crypto and treating it in the same way as, say, credit default swaps or even tulips in the past. We all know how that ended.

The ability of blockchain currencies to link reward mathematically to value created without the need for intermediaries is intriguing. The traditional finance industry is reacting to their emergence in the only way it knows how. It is treating them as an asset class and using the fiat “exchange rate” as a point of attack that can be intermediated and gamed. The problem is that the infrastructure around fiat exchange doesn’t have the properties of a functioning market. It isn’t like a stock market where there is tangible business as a backstop of value, or even a ForEx market where real world trade balances mitigate towards intrinsic liquidity.

The upcoming crypto crash and liquidity crunch will see exchanges temporarily turning the lights off when they realise they can’t source enough fiat currency to fulfill sell orders. One speculation of my own is that kill switches are probably already coded into their systems to trigger once the limited liquidity they have looks like it will be under pressure. If you doubt this, and are speculating in BTC, read the T&Cs of the exchange you are using to trade on to see what is going to happen when you try to sell into a decline. If this happens it is going to badly burn a few folks but that will be a really good thing for the long term future of crypto currency. Speculation inspired bubbles are a destructive side show that can only hurt people and bring stuff like kneejerk bad regulation.

It is pretty amazing what Bitcoin has achieved as a trailblazer of the technology. It has proved the entire concept of decentralised currencies at (limited) global scale. It also unfortunately has two huge architectural flaws:

• Proof of work as a mining regulator, where the work is energy paid for using fiat currencies at exponentially increasing valuations. This is just unconscionable against a backdrop of climate change. It is impossible to think of a more irresponsible idea.
• Max transaction rates are currently lots of orders of magnitude less than they need to be to carry a non-trivial proportion of real world trade.

Of course, long term, both of these are going to turn out to be solvable whether by the BTC ecosystem, or another entrant.

Ethereum has plans to move to proof of stake which, if it happens, will reduce the enormous, immoral cloud of CO2 emissions that envelops the whole industry. Another approach is a proof of work scheme which has some net positive side effect to society but there is no stand out method to architect that. In the meantime, I find it really hard personally to buy into Bitcoin use knowing that it has such a negative impact on the planet.

The transaction rate issue still needs to be solved and it will take a lot more than a linear increase to the block size or gas limits. This is hard, but the technology will get there with enough space and time to innovate.

The way that will happen will be to ignore the fiat valuation side show and concentrate on the properties and communities of users that will organically build the volume of transactions that occur natively within their network: Alice commissions development services from Bob and pays with Bitcoin or an Ethereum Smart Contract, Bob buys lunch from Charlie’s Restaurant, and Charlie buys his accounting software monthly subscription from Alice.

This isn’t the same thing as Declan sees Bitcoin taking off, takes out a loan at historically low interest rates and buys loads of it from his favourite exchange to stash in a wallet hoping to cash in 10x just before it crashes (good luck with that). It isn’t even the same as Eve and Frank agree a dollar price for a transaction but then do the transfer in Bitcoin to reduce local transfer costs or avoid the gaze of a regulator.

Building a critical mass of authentic peer to peer transactions which retain and circulate value on the blockchain rather than at it’s interface to fiat will prove the genuine utility of crypto currency networks. Once we do, their potential to transform the way we organise society to benefit value creators rather than speculating intermediaries will be profound.