Cryptowashing

Posted: March 16, 2021 in Uncategorized

Bitcoin is junk by now but deserves the honor of arms for showing us the powers of the blockchain. Which in turn is biting the dust behind a myriad of pseudo contenders.

(Source: Southerly Clubs of Stockholm)

Bitcoin was blockchain’s primary application, the very reason Satoshi Nakamoto invented the technology.

Turns out it has also become a substantial addition to the climate crisis: bitcoin mining is currently consuming more electric current than The Netherlands, a country of 17 million. And most of that electricity is coal-derived. (Incidentally: AI is poised to get to that level soon).

At the same time, Harvard economist and chess Grandmaster Ken Rogoff thinks that bitcoin now exists almost exclusively as a vehicle for speculation. And so does the Swiss government, according to whom bitcoin embodies “none, or only a few, of the functions of money, as [its] value fluctuates too widely”.

If the juxtaposition is not too irreverent, I agree with both.

Furthermore, the U.S. Secretary of the Treasury Janet Yellen recently described bitcoin as “an extremely inefficient way to conduct transactions” and Nobel winner Oliver Hart said, “like many economists I don’t understand why its price isn’t zero”.

In other words,

Bitcoin is a failure because it has morphed from liberated, unchained peer-to-peer currency to speculation vehicle and because the societal costs are awful.

Bitcoin might have saved Carlos Hernández’s family, its ATMs have been around for years, the number of merchants accepting the currency is growing, and surely there are people who buy stuff with it rather than just speculating. There is no denying that.

It just does not seem a game fun enough to be worth the price.

The same is true of all other, unnumberable, existing blockchain tokens that work like Bitcoin.

Improvements

Blockchain developers have started years ago to refine the technology in order to make it scalable and performant.

For example, blockchain implementations based on Proof-of-Stake consensus protocols (and variations thereof) are far more energy-efficient than those based on Proof-of-Work, which is the one used in the original implementation with bitcoins.

To give you an idea, energy consumption per transaction in a Proof-of-Stake blockchain is believed to be 100,000 times lower than in the bitcoin blockchain. At the other extreme, a Proof-of-Stake blockchain is still 10,000 times less efficient than an ordinary centralized system.

Somewhere midway, by the same source and measure, a permissioned blockchain’s transaction consumes 1,000 times less than a Proof-of-Stake one.

Here we go

This is good news.

Permissioned (and ‘semi-permissioned’) blockchains are the foundation of blockchain-inspired applications, i.e. the vast majority of implemented applications to date -well beyond currencies.

These are private or consortium-led distributed ledgers. As an example, I discussed one in this post.

Fintech examples include Facebook, Inc. and the related consortium backing diem/libra; the Central Bank of The Bahamas and its digital Sand Dollar, the first Central Bank Digital Currency issued so far and still existing; Germany’s Bankhaus von der Heydt and its recently-announced euro stablecoin. And many others.

They are simulacra of the full-blown, open, permissionless Satoshi blockchain (bitcoin), where users participate anonymously or with sufficient pseudonymity to be considered anonymous and where viewing transactions or editing records is not the prerogative of a central entity or its designated users.

With that in mind though, given that blockchain-inspired applications are displacing old good blockchain, it is reassuring to know that they may not accelerate climate change. Or at least that they are only 10 times more energy-hungry than transactional database management systems. Um.

What happened to the dream?

The Nakamoto blockchain was extremely ingenious and its impact will be timeless.

However, in addition to suffering from technical drawbacks, it was a bit naive in its aim to replace democracy with a society governed by a software robot.

This nerdy credo (1) overlooks the simple fact that software, like democracy’s institutions, can be fallible. And it (2) assumes that users/citizens would understand and appreciate the content and the modifications of such software. Modifications which, let us not forget, (3) must be made by people who someone designated and organized.

The old good blockchain also generated a ‘trust restlessness’. Blockchain’s fans did not trust banks and credit card companies, and now these very businesses are using blockchains. Although they do not really trust the technology and only pick edulcorated versions allowing for some control.

We end up with many ‘cryptocurrencies’ that unlike bitcoin are not born out of solving crypto puzzles hence aren’t really crypto. Pseudo-crypto-currencies…

So be it.

It is a fact that blockchain technology continues to evolve. Admirable innovations followed bitcoin, like for example Stellar, R3, Hyperledger, and many more. Ethereum, the creation of child prodigy and genius Vitalik Buterin, showed the world the power of smart contracts. Algorand, by Turing Award winner and cryptography guru Silvio Micali, promises to revitalize the technology.

So what?

If you think that all bankers, economists, technologists and journalists understand each other when discussing digital currencies, virtual currencies, cryptocurrencies, electronic money et cetera, then it means you need to read the digital currency Wikipedia article. 

I also suggest as very well-sourced supplemental reads this blog post by International Monetary Fund’s analysts and this report from the Swiss Federal Council.

This segment of fintech is a mess. It had been so since the dot.com bubble era and the advent of the smartphone, but the situation aggravated a lot after heroic Nakamoto invented the blockchain.

A great future awaits us. (But it will not include bitcoin in its current manifestation).

Paolo Magrassi Attribution-ShareAlike 4.0 International (CC BY-SA 4.0)

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