EconVue fintech expert Collin Canright moderates our new panel on bitcoin that includes a bitcoin maximalist, economist Saifedean Ammous, a self-confessed crypto-contrarian, Dr. Gina Pieters at the University of Chicago, and Grant Hummer, an Ethereum development leader in San Francisco.
There are two broad prevailing views of cryptocurrencies: they are worthless, as the Economist reports this week, or they put the power of money back in the hands of the people. Which view do you support and why?
In any case, bitcoin clearly is the king of crypto, as other cryptoassets are valued and purchased in bitcoin. Will bitcoin be the winning standard in the cryptocurrency future? Why or why not.
Link to the Economist article: https://www.economist.com/leaders/2018/08/30/bitcoin-and-other-cryptocur...
Contrary to popular misunderstandings, Bitcoin’s value proposition lies in one property it possesses: immutability, which means its monetary policy and payment settlements are automated and outside the ability of anyone to control. In other words: The supply of Bitcoin is practically impossible for anyone to change, and anyone who operates the Bitcoin software correctly cannot be stopped from sending a transaction with it to anyone else in the world. Bitcoin is not a particularly fast, efficient, cheap, or user-friendly mass payments platform. There are no advantages to Bitcoin’s design other than its creation of an unstoppable digital cash with a hard monetary policy. Critics of Bitcoin who complain about its electricity consumption, transaction costs, or scaling potential are tilting at imaginary windmills. They are comparing bitcoin to consumer payments and money transfer options, transactions performed quickly and cheaply because they rely on trusted third parties. But Bitcoin transactions are irreversible final settlement transactions that require no trust in any intermediaries, and so, as I argue in my book The Bitcoin Standard, they can better be compared to final settlement transactions between central banks and financial institutions, in particular settlement in a neutral monetary asset controlled by no government, i.e. gold. When comparing Bitcoin settlement payments with these kind of highly critical and time-sensitive payments, Bitcoin’s competitive advantage is apparent, as it allows the unstoppable global settlement of hundreds of thousands of transactions daily in under one hour each, incomparable to any other asset. Perhaps most importantly, Bitcoin might be the best bargain humanity ever got if it continues its growth and ends up replacing government money, taking away from governments the power to increase the money supply to finance their calamitous wars and centrally-planned economic catastrophes. Bitcoin’s electricity consumption would be a waste if it were in competition with Visa transactions, but it is a bargain as a free market open-source voluntary global payments settlement network in competition with government’s central banking monopolies. Mass consumer payments are likely to be built atop Bitcoin’s network with less security, much lower cost per transactions, and much higher transaction capacity.
Speed, throughput, and cost of individual bitcoin transactions can be reduced significantly with layered scaling solutions, but on-chain bitcoin transactions will likely remain expensive and scarce precisely because that is essential to the maintenance of the network security in the absence of a trusted third party. This is a feature, not a bug. And the fact that Bitcoin has been constantly rising in value and users and throughput in spite all the criticism of its throughput and transaction costs suggests critics should rethink their view of Bitcoin’s value proposition, and recognize that it lies not in processing payments, but in doing so with no potential for censorship, and with an immutable hard monetary policy.
Bitcoin’s immutable and uncensorable nature is not a design feature enshrined in its code, it is the emergent result of its spontaneous growth as a neutral internet protocol with no central control; a decade-long open-source development process most of which occurred after the anonymous creator had disappeared. Unlike virtually all of its supposed competitors, Bitcoin had no marketing budget, no foundation, no public figurehead, and no partnership with real world businesses. It grew not in spite of the absence of these factors, but precisely because of it. Copying Bitcoin’s code is a trivial and virtually costless process, as thousands of new copycats testify. But replicating the spontaneous growth of the network without a central controller is a paradox that’s proving impossible to resolve, as the fate of every one of these altcoins attests. To the extent that the reader has heard of any of these coins, it is strictly because of an active group of developers who have promoted it aggressively, and invested heavily in its early stage growth. None of these groups, foundations, or genius prodigies can ever credibly claim to not be in charge of their creation. On the other hand, nobody can credibly be claimed to be in charge of the Bitcoin network. It would be trivial for a small group of people to alter the monetary policy of any of the altcoins, as the current ‘monetary policy’ discussions being held by Ethereum’s equivalent of the FOMC attest. In 2017, it proved impossible for a large number of highly influential bitcoin figures, allied with a large majority of bitcoin miners and businesses, to even change one tiny technical parameter in bitcoin, the blocksize. Until an altcoin resists similar attempts by its controllers to change it, it remains a practically centralized rube Goldberg machine pretending to be decentralized to lure in speculators.
Of the thousands of Bitcoin knock-offs, absolutely none has demonstrated any ability to perform any commercially viable service that Bitcoin cannot perform. Their only technical capability remains that for which Bitcoin was designed: Using private keys to move digital coins between public addresses. It is time for people to consider seriously the alternate hypothesis that Bitcoin’s design is only useful for creating Bitcoin, and nothing else.
Good engineering begins with a clear problem and attempts to find the optimal solution for it. An optimal solution not only solves the problem, but also does not contain within it any irrelevant or superﬂuous excess. Bitcoin’s creator was motivated by creating a “peer-to-peer electronic cash”, and he built a design for that end. There is no reason, except for ignorance of its mechanics, to expect that it would be suited for other functions. After ten years and millions of users, it is safe to say his design has succeeded in producing digital cash, and, unsurprisingly, nothing else. This electronic cash can have commercial and digital applications, but it is not meaningful to discuss blockchain technology as a technological innovation in its own right with applications in various fields. Blockchain is better understood as an integral cog in the machine that creates peer-to-peer electronic cash with predictable inﬂation.
A few years ago, I was one of the very few people suggesting that “blockchain technology” has no use but the creation of a trustless digital cash, and that Bitcoin is the only one that can ostensibly be said to have not failed in the task. Many promoters of altcoins and “blockchain technology” heaped scorn upon us, along with long tales of how blockchain technology was going to transform everything. Today, after 10 years from the introduction of the bitcoin blockchain, and many billions of dollars invested into financing blockchain projects, there exist precisely zero commercially viable application of blockchain technology other than Bitcoin. The commonly believed mantra that blockchain will revolutionize everything is beginning to sound like a hollow marketing slogan, and the scorn is increasingly being directed at the buzzword merchants promoting this supposed panacea.
What many of these currencies have succeeded in doing, however, is generate a speculative bubble around their superfluous tokens. To the extent that any token has achieved any sort of wide adoption, it is as a speculative asset for short-term traders. This has grown to outstanding proportions during 2017, but now the bubble seems to be unraveling. This would not be the first generation of altcoins that has ridden Bitcoin’s coat-tails and fallen off it. While all coins will likely drop in price, as has happened before, Bitcoin will likely be the only one to bounce back because it is the only one that provides a valuable market good that has demonstrated demand: a decentralized, immutable, uncensorable payments network running on reliably hard money. Every altcoin’s buzzword salad is exactly as functional, marketable, and dispensable as the next, and so a new generation of worthless knock-offs, with improved and flashier buzzwords, will likely be around to ride bitcoin’s coat-tails on its next bull run.
Dr. Saifedean Ammous is author of The Bitcoin Standard: The Decentralized Alternative to Central Banking, available from Wiley, and soon to be available in 9 other languages. He produces the monthly Bitcoin Standard Research Bulletin, to which you can subscribe on pateron.com/Saifedean or on his blog, thesaifhouse.wordpress.com.
There is no doubt that Bitcoin was intended to be electronic money (the original paper was titled Bitcoin: A Peer-to-Peer Electronic Cash System, leaving no doubt as to Satoshi Nakamoto’s intention). This purpose, however, is not shared by all tradeable outputs of a blockchain, so for fairness in the following discussion I consider strictly cryptocurrencies that were intended to be used as money.
Economists usually define an item as money if it is used as a medium of exchange, a store of value and a unit of account. An item is a medium of exchange if people exchange it as an intermediate good when they want to buy or sell things. An item is a store of value if it retains its value over time. Finally, an item is a unit of account if the values of other economic items are measured in it.
While this definition seems straightforward, it is challenging to apply decisively. Time and location matter---what is accepted as money in a grocery store in South Africa would not be accepted as money in the United States. The reverse, however, is not necessarily true as US dollars are frequently accepted around the world. Cigarettes, the Yap’s Rai stones, and gold have been accepted as money at certain times and in certain places. Finally, the ability to use something as a medium of exchange can lead to it being used as a unit of account, and transfer upon it the ability to act as a store of value.
Where am I going with all this? The first thematic question is “are cryptocurrencies worthless, or do they put `the power of money’ back in the hands of the people?” Well, once you restrict attention to only cryptocurrencies that are intended to be used as money it’s possible that both statements are true at the same time---depending on location.
In countries like Venezuela, Zimbabwe, or Iran---countries with a history of troubled state-issued currencies---cryptocurrencies present a money-option outside of government control. However, in countries with a comparatively more stable monetary system like the United States, Canada, or the Euro-zone cryptocurrencies do not represent an improvement on the status-quo, and therefore do not represent anything more than a speculative asset.
Will Bitcoin be the winning standard for future cryptocurrencies? One of Bitcoin’s benefits is that is has a very wide network---it is one of the most convertible cryptocurrencies. It is also highly decentralized. On the other hand, it has technological limitations: the blockchain and public wallet numbers allow trades to be traceable (unlike alternatives such as Monero), the 10-minute block time is slow (the Lightning Network may change this, but settlement occurs off-chain unlike faster cryptocurrencies such as DASH), fees can be high, exchanges rates to state-issued currencies are very volatile, and so on. A cryptocurrency that makes improvements to these shortcomings and achieves the same number of conversion options as Bitcoin would almost certainly replace Bitcoin as the winning standard.
I believe the first question presents a false dichotomy. Also, not to be a stickler, but I think 'cryptocurrency' is the wrong noun to use - I prefer the term cryptoasset, as I believe it better connotes the characteristics of this new kind of investment, which is more similar to commodities than to traditional money. The most important trait of cryptoassets is that they commoditize trust. Hence, they are doing far more than merely putting money back in the hands of people; they are giving people digital sovereignty, and when they are operable at scale they have the potential to reshape civilization by enabling humans to coordinate in ways that were previously impossible. Cryptoassets such as Ethereum could enable the transformation of entire industries by disintermediating centralized parties who earn monopoly profits from serving as trusted coordinators. Think of it this way: in a world with decentralized Uber, instead of paying a 20% fee to Uber each time you take a ride, you'd pay a mere 0.2% fee to the blockchain protocol to incentivize miners/validators to process your transaction.
As for the second question - bitcoin will always be around, but it will almost certainly not be the most highly valued cryptoasset by market cap in 10 years. There is a Cambrian explosion of R&D in the blockchain space right now, and I believe the odds that bitcoin will persist as the best platform will be quite slim, as the bitcoin developers and community are strongly against upgrading the bitcoin protocol to incorporate new discoveries around scalability and privacy. There is a lot of structural and sociological inertia in favor of bitcoin right now, but at the end of the day, I believe the best technology will win. That is, after all, the driving force of capitalism.