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A Review of Cryptocurrency

Table of Contents

1. Introduction

Cryptocurrencies are often talked about as either a new technology that will solve everything, or an environment destroying, ponzi creating mechanism that has no real value other than to criminals or to people who want to scam other people looking to "invest" in said technology. I say it's still too early to tell what the economic impacts of cryptocurrency are, and I will be looking at this from the perspective of someone that is not a libertarian, but is nonetheless a techbro at heart.

1.1. "It's a ponzi scheme"

Yes, in many cases they are, but people who say this often aren't getting the whole picture. Popular cryptocurrencies such as bitcoin often have the expectation attached to them that whoever is marketing it is either a sleezy businessperson trying to take your money, a financial institution that likes gambling on retail liquidity, or a libertarian techbro whose only hopes are to make a money that is untracable, often to the detriment of society due to factors such as the lack of financial regulation, sound monetary policy, high transaction fees, etc. Bitcoin in particular takes a lot of the blame for being the biggest Ponzi scheme on earth. However, if other cryptocurrencies have value, that would peg the price of bitcoin to being the de-facto metric of cryptocurrency success, thus pegging it to some real value in the world.

To prove what I just said, most cryptocurrency prices move with bitcoin, rather than moving independently, which is a fact known to almost anyone that has done trading in the cryptocurrency world. Additionally, because bitcoin is the first of these currencies to exist, it is basically the face of the industry, with the largest market cap (as of me writing this) out of all of these cryptocurrencies. In essense, purchasing bitcoin is equivalent to an informal prediction market on cryptocurrency success, plus the added cost of the small chance it has of replacing fiat currency (something I think will not happen).

1.1.1. Other Currencies and Their Value

The Ethereum network is, generally speaking, what people in the cryptocurrency space point to when they talk about real world applications. Although this is currently far-fetched, I don't believe it's far-fetched enough for it to make sense talking about banning cryptocurrencies and investment into these industries. There are many competing networks that do essentially the same thing as ethereum but maybe better, but the point is to talk about the idea.

Ethereum is an interesting case because it is home to the idea of smart-contracts. They can be used to automate away the arbitrator in any agreement between two parties that can be formalized within blockchain internet (web3. See, it's a useful phrase!) facing code. Though there are currently centralization issues with using smart contracts and having to trust a single source of truth, projects like ChainLink solve this by using yet another decentralized information rewarding system that provides reliable information to smart contracts for the Ethereum network. I believe many other such centralization issues such as the ones outlined by, for example, various NFT critics (that NFTs aren't stored on-chain but rather via google drive links, etc…) can be solved with other projects such as something like Filecoin. Which leads me to this common talking point:

1.2. "You Don't Actually Own NFTs"

You have ownership to a pointer of a picture but not the rights to the picture via copyright. This is correct, but this is not usually what people value. Rather, what people value when they buy digital artwork is just some conception of "owning" the picture in question. Yes, you can copy the image, but the particular token you are trading will always be both non-fungible and scarce.

1.2.1. "But the Google Drive Links"

Yes, while many NFTs are stored on google drive, many are stored on IPFS, a decentralized storage system where, if pinned, IPFS addresses always host the same content. If any one of these protocols becomes standardized, then it could be easy to see how these NFTs suddenly become quite valuable, because a given CID on IPFS will almost always correspond to a given piece of data, and vise versa. Now, on Ethereum, for example, any person can create a contract that points to the same data. However, for a particular contract, everyone can verify how many of each NFT is actually created, and if you believe that the contract supplier is trustworthy (where there is an open market for contract suppliers), then it can be easy to see how you can trace the chain between NFTs and some form of value. If you could own IPFS addresses, it would actually be easy to see the value, and all that is needed is a particular set of contract providers on Ethereum to be trusted from consumers in order to see how you could assign IPFS links to NFTs that could be considered to retain value in the same way owning art retains value. If you just see the system for what it is and the logical chain of ownership, you can see that the only link in the chain that is inconsistent is not the ownership of the tokens, not the IPFS links, not even the problem of your token always corresponding to the same image (as some have claimed), but the tokens corresponding bijectively to the IPFS links, and that can be solved pretty easily with the market naturally trusting a single or set of providers.

What's particularly frustrating is that I've had people tell me that they host images on IPFS like this is somehow scamming the person buying the NFT, when IPFS is pretty rock solid, only requiring a little bit more trust compared to storing the image on-chain. But of course, NFTs are only a small part of why smart-contracts are useful.

1.3. "Just Buzzwords"

Smart contracts! DeFi! Web3! Those are all just buzzwords, they couldn't mean anything, right? Well, if you've actually been paying attention for long enough, you can assign a meaning to all of these words in a completely logical manner. DeFi is actually a particularly interesting usage of smart contracts, as it allows one to automatically transfer liquidity (make loans, make financial contracts between willing parties; see AAVE). This is useful because it automates the job that banks have. We like automation when it comes to everything else (unless you're a luddite or don't know anything about economics), so we should try to automate arbitration jobs in the same way. But people, for some reason, lose their minds when we do this.

In any case, Web3, like I said above, can literally just be taken to mean Blockchain-Internet Facing. This is important as a phrase because blockchain itself is a walled garden, with very specific informational requirements (the network and all data that gets supplied to the network as inputs to smart contracts have to be trustless). Smart contracts are legitimately just the term used to describe the type of financial transaction automated by cryptocurrencies.

1.4. "Global Warming!"

That's all industry/technology right now, why would you expect blockchain to be any different? Okay, maybe it uses more power than some other things, but that's because I think we have a combination of a few things:

  1. we might have a genuine blockchain bubble
  2. the technology is not mature, so everyone is rushing to use blockchain while the technology to make it scalable is not there

but proof of stake does really well at counteracting blockchain energy usage, currently.

1.5. Transaction Costs

Proof of stake solves this to an extent, but there are also some high transaction-per-second (TPS) networks (such as Polygon) that stack up well against existing payment processors with respect to TPS. Also, I think some currencies should be more liberal for how much they print for miner rewards (paying miners/validators costs a lot of money for the network it turns out), which is pretty easy to try out, and would reduce the transaction costs by quite a lot.

1.6. "Do you Think It'll Actually be Useful?"

I don't know, and if I knew for sure, I would be trading options on cryptocurrency right now, but I'm clearly not. However, what I do know is that the promise of automating arbitration jobs is niche yet enticing (also, blockchains can do other cool things like with Chainlink and manufacturing truth with a decentralized network). Already, they have some niche usecases like in prediction markets and in the NFT space (although, yes, that space does run a lot of scams, it'll eventually be just the beneficial stuff). Monero is already used as THE currency on the dark web because it's anonymous (not an endorsement of the dark web usage, just a living example of a crypto economy). If one of these experimenters could come up with a good enough algorithm that could keep into account price stability, cryptocurrency might actually be the superior way of transacting, simply because it has a lot of programability baked into it.

Even anonymity can be used to its advantage. With the inception of Monero, corrupt governments have a harder time tracing usually-legal citizen activity. Yes, it does give a lot of power to money launderers, but at the same time, it's not like it doesn't have its upsides and usecases.

1.7. Were we Better off Without Cryptocurrency?

I don't know, I can't go to the universe where they haven't been invented, but so long as they exist, we should probably make the most of them. My personal opinion, though, is that they are a net gain.

2. Misc.

There are other curious things within cryptocurrency that are not explained in this article, so I'm adding them here.

2.1. DAOs

DAOs, or decentralized autonomous organizations, is made up of a collection of smart contracts that enables certain NFT or token owners to be able to take part in actions in a particular organization, usually something like a company. Because they are trustless, they are sovereign which means they need no other institution to legitimize them. In this way, DAOs usually outline an ownership structure of stuff on the blockchain (which represents capital) and contracts can be made that mimic the shareholder capabilities in conventional companies.

They are useful already for managing DeFi organizations. For instance, AAVE, the smart contract linked above, runs on a DAO and they generally move (as of me writing this) $14B USD in financial assets* at any given point in time.

So there are successful DAOs on-chain because they seem like a natural and integrated company structure for on-chain services, but are there any DAOs which run in real life? Well, that would be pretty illegal at the moment, but at the same time, I think it's plausible that they will in the future. People are experimenting with the many ways in which DAOs could potentially out-perform joint-stock companies in a trustless manner, and I think they have potential as a systems engineering tool for formalizing the hierarchy structure of existing companies via code. It's pretty enticing to just be able to copy and paste an existing management structure that you think works well for your own company, and I think it would be pretty useful for that reason. But also, maybe something can be done with trustlessness that just beats the government-granted joint-stock system out there in some miracle of efficiency, which is definitely something that can happen.

2.2. Off-chain Systems

There are projects such as Layer Zero which work off-chain but in a conventional peer-to-peer trustless fashion, which aims to provide the ability to communicate between different blockchains. These kinds of projects also exist within the cryptocurrency sphere, and utilize conventional computing methods in order to take load off of blockchains. Blockchains only need to handle a small part of the job, i.e. they are an environment that both provides incentives and ensures trustlessness. But in some cases, the incentives part can be done in other ways, so you can scrap the monetary or scarce aspect of these networks, which means you don't need a blockchain. In the case of layer zero, it is believed that any organization which manages a blockchain would also want to host a node because they gain access to liquidity over a wider range of blockchain networks, for example. Volunteer networks such as tor already run decently well (with a small centralization problem with NSA controlled nodes but overall pretty secure), with i2p being another protocol that incentivizes hosting nodes without any direct payment, only entry into the network.

3. Conclusion

While many critics talk about cryptocurrency in a fair way, time and time again, it is misrepresented on the internet in several terrible ways, often leading to the spread of misinformation about these new technologies. This wave of cryptocurrency hate was garnered by an initial wave of scammers, crooks, and utopian techbros that were (and still are) unsavory parts of the cryptocurrency ecosystem, with Coffeezilla playing a big role in the takedown of many of these scams where retail money lost big. As a result of this initial wave, there has been a pushback on cryptocurrency and the culture has since not reflected the amount of good work that trustworthy players in the industry are doing.

3.1. For the Laymen

Before you talk about cryptocurrency like you know everything about it, you should figure out more about the underlying ecosystem. Although I like listening to and reading Paul Krugman, he gets cryptocurrency pretty wrong, maybe because a lot of libertarians shill the technology. You might be the same. I'm pretty confident that I know a decent bit about the technology, but if you think I'm wrong, then you can message me. Though, it seems pretty obvious that how legacy media talks about cryptocurrency isn't the full picture, and neither is how libertarian tech-bros talk about it.

Copyright © 2024 Preston Pan