by Evans Tucker
Twelve years on, cryptocurrencies play almost no role in normal economic activity. ... Twelve years is an eon in information technology time. Venmo, which I can use to share restaurant bills, buy fresh fruit at sidewalk kiosks, and much more, was also introduced in 2009. Apple unveiled its first-generation iPad in 2010. Zoom came into use in 2012. By the time a technology gets as old as cryptocurrency, we expect it either to have become part of the fabric of everyday life or to have been given up as a nonstarter.
In 12 years, blockchain technology went from one worthless cypherpunk experiment, Bitcoin, to a global movement of thousands of different blockchains and tokens with a $1.59T - TRILLION! - market cap that dominates the news. How is that not significant? Krugman compares it to a product like Venmo, Zoom, or iPads, but that's not the right comparison. This isn't a product, it's a group of protocols and languages akin to IP, TCP, HTML, and Javascript - the building blocks of the Internet. Compare blockchain tech to the Internet. Early on, the Internet was just a way to send "electronic mail" or check a Usenet forum to discuss topics and share files. Similarly, Bitcoin was only useful for sending a transactions, and had very limited capacity. Now, the Internet is used for everything! I'm not going to list the number of uses, but it's definitely more than 4 uses! Blockchain tech has also evolved past a simple distributed ledger to an ecosystem of interconnected, decentralized protocols and platforms that empower transactions, trading, decentralized autonomous organizations (DAOs), decentralized finance (DeFi), decentralized exchanges (DEXs), wrapped tokens, cross-chain bridges, and non-fungible tokens (NFTs). I completely agree that there is a lot of technical jargon, but calling it technobabble doesn't mean that real advancements aren't happening. There's a lot of development on scalability solutions like rollups, state channels, shard chains, plasma, etc. I don't understand all of it myself, but when reading whitepapers, I have occasionally have moments of lucidity where I get it, and it's amazing and inspiring! Blockchain tech does for finance and trust what the Internet did for information and communication. I'm not saying that it's all good, but it's definitely incredibly powerful.
Almost the only time we hear about them being used as a means of payment - as opposed to speculative trading - is in association with illegal activity, like money laundering or the Bitcoin ransom Colonial Pipeline paid to hackers who shut it down.
There are currently two reasons you don't see it being used for everyday purchases. First, it's not stable - value is exploding over the last 5 years, and no one wants to be like the guy that bought pizza for 10,000 bitcoin. And secondly, figuring out how to scale transactions in a decentralized way is hard, but that problem is being solved. Things feel like they're moving slowly, but when talking about a technology that holds a trillion dollars in assets, you don't want any breaking changes. I'm pretty sure that Ethereum, in particular, is likely to reach the scalability needed for everyday transactions in the year or two. And regarding illegal activity, I agree that that's a common argument, but it's also a false narrative.
What problem does this technology solve? What does it do that other, much cheaper and easier-to-use technologies can't do just as well or better?
Admittedly, crypto is better for illegal activity than the US dollar (and other fiat currencies), because it has all of those "libertarian derp" features that solve these problems:
Problem: Banks and stock markets have limited hours.
Solution: Crypto is open 24/7/365.
Problem: You need to provide ID, and get approval to create a bank or credit card account. Refugees, second-class citizens, people with bad credit history, and stateless people probably have difficulty with this.
Solution: Anyone anywhere can create a crypto wallet (account) in seconds - no application or approval required - you don't even need an Internet connection to create a wallet if you've previously downloaded some software (not recommending that you do this for your first wallet, but it is possible.)
Problem: Many institutions charges fees to open accounts, fees if your account is below a minimum amount, and overdraft fees.
Solution: Crypto doesn't. With the caveat that crypto does charge fees for transactions (these fees were less than a penny for a long time, but are currently stupidly high), and there is a fee for more advanced uses like using L2 contracts and various DeFi products. However, as a caveat for the caveat, once you get into an L2 like Loopring, fees are pretty reasonable.
Problem: Traditional banking transactions can be reversed. This is why you have to use cash to avoid scams on craigslist and other P2P marketplaces.
Solution: Depending on the chain, crypto transactions can finalize in seconds and are irreversible.
Problem: As a vendor, you have to pay credit card processors a fee of 1.3% to 3.5% to accept payments.
Solution: With crypto, the initiator of the transaction pays the fee, so your customers would pay it. Also, the fee is flat, not a percentage, so the customer isn't gouged for larger purchases.
Problem: Bank accounts are custodial. They control access to your account, have the ability to freeze your account, and can take non-wage garnishment (bank levies) from your account.
Solution: Crypto gives you complete control over your money. Your account cannot be frozen, and the only way someone could pry your money away from you would be if 51% of the entire network (the entire planet at this point) voted to take your money.
Problem: It's slow and expensive to send money across borders with services like Western Union.
Solution: With crypto you can send money to anyone in any country in seconds and that transfer cannot be blocked. It seems like some of the world's 232 million migrant workers have discovered how to send crypto remittances, and as scalability is achieved, I expect that to increase.
Problem: Traditional services like banks, credit cards, Venmo, Paypal, etc. track you - they collect data on all of your transactions. Venmo even set transactions to public by default!
Solution: If you choose to use a mixer or a privacy-based cryptocurrency, you will be able transact in an anonymous, cash-like way with anyone in the world. No central authority or company can be compelled to reveal your transaction history. Even if you don't use any privacy-protecting services, crypto accounts are pseudonymous by nature, so if you don't reveal your identity during any transactions with that particular wallet, you retain some privacy even though the transaction is public.
I'll briefly digress to address the elephant in the room: "Isn't this money laundering? If you're abiding by the law, you shouldn't have anything to hide." I'd recommend that everyone read about the "nothing to hide" argument, particularly its criticisms. I personally think that Phil Zimmermann, the creator of PGP, answers this really well in his short essay "WHY DO YOU NEED PGP?". An excerpt:
What if everyone believed that law-abiding citizens should use postcards for their mail? If some brave soul tried to assert his privacy by using an envelope for his mail, it would draw suspicion. Perhaps the authorities would open his mail to see what he's hiding. Fortunately, we don't live in that kind of world, because everyone protects most of their mail with envelopes. So no one draws suspicion by asserting their privacy with an envelope. There's safety in numbers. Analogously, it would be nice if everyone routinely used encryption for all their E-mail, innocent or not, so that no one drew suspicion by asserting their E-mail privacy with encryption. Think of it as a form of solidarity.
I believe that people should obey the law, but I also believe that it should always be a choice. Compulsory obedience is totalitarianism. I don't typically wave around the U.S. Constitution, but the Fourth Amendment pretty clearly states that we have the right "to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures". They didn't know about digital encryption back when that was written, but I think they understood that it's totally not cool for people to be rifling through your diary and your receipts, whether they are written on paper or digitized on a blockchain.
Problem: Services like lending, borrowing, derivatives, and trading are controlled by banks/brokerages. They can set the terms and halt trades (see what happened to GME stock recently).
Solution: Anyone anywhere can write smart contracts that provide these services - you can start your own bank/brokerage essentially - and anyone can use those service without censorship or sanctions if they pay the fee to run the smart contract.
Problem: When we moved from the gold standard to fiat, central banking authorities were given power to dictate economic policy and control our currency.
Solution: Blockchain tech and cryptocurrencies are decentralized by nature (the good ones are anyway). Any changes to the system have to have majority consensus. It's frankly amazing that we've made as much progress as we have in the last 12 years with this requirement!
And of course, the biggest feature that explains the current global interest:
Problem: Most fiat is inflationary - it's worth less the longer you hold on to it, forcing you to put it into interest-bearing or brokerage accounts to "grow your money" (although it feels like we're barely doing more than staving off inflation.)
Solution: Many of the most popular cryptocurrencies are artificially scarce, making them deflationary. This combined with their exploding value is why saving or "hodling" is the most popular thing to do right now, and the main reason you don't see retail adoption.
Are these big problems for me? Not really. The benefits of crypto are the strongest for people who have been forsaken by the traditional finance. The average citizen of an economically free country, who has decent credit and isn't affected by systemic bias won't benefit that much from the power of this technology. But I think someone who is struggling financially - someone who's a target for parasitic financial services - would see the value in this idea...
The legacy banking system had a good run. Just as print media, telephones, broadcast TV, and radio were affected by the Internet, the financial systems of the world will be affected by blockchain and cryptocurrencies. Fight it if you wish, but I think it's a losing battle.
The values of major cryptocurrencies fluctuate wildly - Bitcoin fell 30 percent Wednesday morning, then made up most of the losses that afternoon.
Yeah, no retort here. We'll just have to learn to ride the roller coaster... Just as we are having a crisis in truth and factual information on the Internet, we have big problems with FOMO and FUD causing fluctuations in crypto prices, and immature smart contracts (or users) causing flash crashes. We're going to have to learn to deal with a market that's available all the time, responds in seconds, and is completely programmable and uncensorable. It seems like it's getting less volatile as we see more adoption and maturing DeFi products/protocols, but that could be rose-colored glasses. As always, don't invest more than you're willing to lose...
This may sound to you like a speculative bubble, or maybe a Ponzi scheme - and speculative bubbles are, in effect, natural Ponzi schemes. But could a Ponzi scheme really go on for this long? Actually, yes
I won't deny that there are many Ponzi schemes in the crypto/blockchain space. Some of them are blatant - shout out to https://ponzi.finance/! One could play devil's advocate and call the US dollar a Ponzi scheme - it's backed by nothing but the faith of the people using it, and we seem to always be printing more money... At least blockchain is based on mathematics, cryptography, and cryptoeconomic principles instead of the whims of a few heads of central banking systems. It's possible that it was launched by and for the people directly as a result of the global financial crisis of 2007-2008, but even if that's just a fun coincidence, the story of a revolutionary new financial technology disrupting the entrenched systems that crashed the global economy is really damn compelling and inspiring for many of us!
Gold, after all, suffers from pretty much the same problems as Bitcoin. People may think of it as money, but it lacks any attributes of a useful currency: You can't actually use it to make transactions - try buying a new car with gold ingots - and its purchasing power has been extremely unstable.
Yes! Gold is terrible as a currency, but has hypnotic, shiny magic and thousands of years of history! The difference is that you can't send gold through the Intertubes unless you use a physical protocol like IP over Avian Carriers. But you can send digital data! When scalability is achieved, crypto users will see the benefits of gold - scarcity, value - with the benefits of online transactions - instantaneous, global - but without intermediaries tolling and controlling the money. And crypto has it's own inscrutable-yet-appealing, technological magic.
For one thing, governments are well aware that cryptocurrencies are being used by bad actors, and may well crack down in a way they never did on gold trading.
I suspect that, like the War on Drugs and the War on Terror, they will find that cracking down on crypto will not be very effective… I'm not saying we shouldn't try - we need regulation and oversight everywhere to protect us from ourselves, but we also need to avoid becoming a totalitarian state. In parallel to attempts to regulate crypto, I would love for us to pass some anti-corruption laws, find some effective alternatives to the War on Drugs, fight the causes of terrorism, and dismantle the structural factors of human trafficking.
The good news is that none of this matters very much. Because Bitcoin and its relatives haven't managed to achieve any meaningful economic role, what happens to their value is basically irrelevant to those of us not playing the crypto game.
Trying to learn new things and keep up with trends, especially in technology, is exhausting, so I understand this feeling. I hope that, when all our financial institutions adopt central bank digital currencies (CBDCs) and other blockchain tech and DeFi protocols, they will pass the cost savings and better interest rates to us - the end users... but I don't have faith that they will.
In the meantime, I'm happy to be one of the pioneers into this new realm of decentralized trust and value. It's not for everyone, and there are plenty of dangers and horror stories. Time will tell whether we are foolish or brave, but, to oversimplify it, there's market cap and trading volume, so I'm not as worried as I was a few years ago.
Wheels roll, fire cooks, crypto trades.