Cryptocurrency Community - Are We The Baddies?
As an early fan of cryptocurrency, I hoped that it could improve the monetary system. However, as the environmental costs grow, and the use cases are still primarily limited to get-rich-quick schemes, I’ve had to reflect and ask myself -- why are we still doing this? Should we stop? The following isn’t meant to be a referendum on cryptocurrency, just my thoughts on how cryptocurrency and the community surrounding it has developed over time.
What I Originally Found Exciting
During December of 2010, there was a record breaking amount of snow (28.7 inches!) where I lived, so I spent a bunch of time indoors reading blogs. I was squarely in the Bitcoin target market (interested in programming, economics, and somewhat skeptical of institutions), so it didn’t take long for it to pop up on my radar.
In the early days, the general idea was that Bitcoin would be ‘digital cash’ that could provide a better alternative to the existing online payment methods. People felt that credit card purchases were designed for the physical world, and that a decentralized, digital solution could improve things.
Here were some of the things people felt Bitcoin could improve:
Security: When you purchase something with a credit card online, you essentially just give the merchant all of your payment information (card number, CVV, etc) and then trust they will charge you the correct amount and will only charge you once. You also have to trust that they will store your payment info in a secure way, and they won’t accidentally expose that info if they are hacked or otherwise compromised. The hope was that Bitcoin would improve security by making each transaction unique and independent, so whatever info you gave the merchant couldn’t be used after the transaction had completed.
Independence: With typical online payments, there are multiple entities involved in each transaction. The card processing companies, affiliated banks, governments, etc. all have the ability to halt transactions or freeze your account. At the time, Paypal was a very common payment method, and they were notorious for freezing people’s accounts for seemingly arbitrary reasons. The potential to have a direct customer-to-seller payment method that wasn’t subject to 3rd party restrictions was alluring.
Lower Cost: On every online transaction, the card companies charge merchants somewhere between 1.5% and 2.8% of the total purchase value. Over time, this results in vast sums of money being diverted to these payment processing companies, when it could otherwise remain with the buyer or seller. In the entire world, Visa is the 13th most valuable company, MasterCard the 18th, and Paypal the 28th. Just for processing payments! The hope was that Bitcoin could provide an alternative to this oligopoly, which would result in lower fees for buyers/sellers.
Crypto Switches From Cash to an Investment
Although the original dream was for Bitcoin to be ‘digital cash’ and replace the card companies, Bitcoin never really gained much traction for these use cases.
Reasons why you aren’t ordering your coffee in Bitcoin:
Existing Card Networks Are Actually Pretty Good: Although crypto transactions are theoretically more technically secure than using a credit card, there isn’t much difference in practice, because you can just dispute charges if the merchant tries to do anything shady.
Increasing Value of Bitcoin Stinks For Usage: In 2010, Laszlo Hanyecz paid 10,000 Bitcoin for 2 large pizzas. Bitcoin was relatively worthless at the time, but those 10,000 Bitcoins would now be worth 490 million dollars. Because of stories like this, those in the Bitcoin community are very reluctant to ever actually spend their Bitcoin. This creates a culture where the most passionate members of the community purchase Bitcoin and then just talk on Twitter about how they will never sell or spend them.
Crypto Networks are currently Slow And Expensive: Based on how Bitcoin is currently designed, the maximum number of transactions per second on the network is 7 and is usually closer to 4 tps. This is very slow! It’s also quite expensive, with Bitcoin currently around $23 per transaction and Ethereum around $14 per transaction.
Huckster Heaven
As the price of cryptocurrencies increased, people became less concerned with whether they would ever be used to actually pay for things. Instead of ‘digital cash’, people began touting it as a ‘store of value’ and a way to get rich.
Here are some of the investment opportunities:
ICOs - Initial Coin Offerings were supposed to democratize how startups raised capital, but most ICOs were either misguided or fraudulent. Half of ICOs stopped operating within a year.
NFTs - Non Fungible Tokens seem to be the 2021 remix of the ICO. Do you want to pay $2.5 million to ‘own’ Jack Dorsey’s first tweet? With crypto, you can! I think this is relatively harmless, but it’s not exactly inspiring either.
Perpetual Futures - Crypto exchanges took advantage of the lack of regulation to offer things like 125x leverage on incredibly volatile cryptocurrencies. Instead of a decentralized future without banks, we got these unscrupulous exchanges that refuse to be audited and act like casinos. (I like coinbase though)
‘Crypto to Infinity’ Culture - The online discourse used to center around encouraging people to use Bitcoin as a payment method, but that was eventually drowned out by people who only care about Bitcoin going up in price. Some of the obsessively positive Bitcoin messaging started off as fairly lighthearted and joke-y, but as crypto grew, the joking aspect was lost somewhere along the way. The most obnoxious people from the finance and poker industries are now posting crypto memes and trying to sell their own crypto products/programs. Some people seem to be true believers, but much of this behavior seems calculated and manipulative. Small time investors are being misled by the community about the true risks of these products.
This is just from today, I didn’t need to hunt for them or anything.
I don't care about macro.
— Alex Wice (@AWice) March 7, 2021
Fiat supply goes to infinity.
Bitcoin price goes to infinity.
It's that simple.
1.9 trillion more reasons to own #Bitcoin
— Cameron Winklevoss (@cameron) March 6, 2021
The @dallasmavs have done more than 20,000 #Dogecoin in transactions, making us the LARGEST #DOGECOIN MERCHANT IN THE WORLD ! We thank all of you and can only say that if we sell another 6,556,000,000 #DOGECOIN worth of Mavs merch, #dogecoin will DEFINITELY HIT $1 !!!🚀🚀🚀
— Mark Cuban (@mcuban) March 6, 2021
#bitcoin is life
— Tyler Winklevoss (@tyler) March 6, 2021
Invest now and make massive benefits from home through trading, with Bitcoin trader you can earn $10,000 in just a week ask me how let get started on how it works pic.twitter.com/77hi0H1gJZ
— lisa mogan (@trade_lisa247) March 7, 2021
Kraken CEO Jesse Powell believes that Bitcoin is going to infinity, especially when it’s placed side by side with Dollar. He shared that Bitcoin is expected to replace dollar as a store of value in short term. Hence, Powell thinks that bitcoin hitting $1 million dollars price pic.twitter.com/KBRMF9ZlJw
— KATHRINE BITCOIN INVESTMENT📊 (@kathy_mali23) March 7, 2021
Yuck
Environmental Costs
As the price of cryptocurrency has increased, so has the electricity usage. Bitcoin recently made headlines for using approximately the same amount of electricity as Argentina.
The environmental cost really puts a damper on otherwise interesting crypto projects.
Projects such as selling digital art on the blockchain is interesting, but it’s difficult to justify doing these fun but ultimately trivial projects on the blockchain, given the environmental cost.
In a recent interview, Treasury Secretary Janet Yellen said crypto is “an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.” When regulators ask the cryptocurrency community to justify using this much electricity for processing transactions, what valuable use cases are we going to point to?
Hope For The Future
Luckily, solutions for some of these problems seem to be on the horizon.
Ethereum is planning on moving from Proof-of-Work (which relies on electricity-intensive computer calculations), to Proof-of-Stake, which is much more efficient. Also, the development team believes planned improvements to the network should boost the number of transactions per second from around ~35 to ~10,000. Ethereum has been talking about some of these changes since 2015, so some skepticism on the timeline would be understandable, but it does seem like they are making concrete steps towards releasing a more efficient network in the near future.
I’m actually very excited about the proposed Ethereum changes. If they are able boost throughput to 10k transactions per second, we could actually use cryptocurrency as ‘digital cash’. If they’re able to dramatically reduce the electricity consumption, we can start interesting projects without worrying that they’ll melt the polar ice caps. This could be fun again!
On the other hand, it doesn’t seem like Bitcoin is very interested in making their infrastructure more efficient. They decided against making relatively minor changes such as increasing the Bitcoin ‘block size’ to improve throughput, so major changes such as moving to a Proof-Of-Stake system seem out of the question. Hopes to increase the efficiency of the Bitcoin network seem to rely on external ‘Layer 2’ solutions that aim to keep work off the main Bitcoin network when possible. Although these additions should increase efficiency somewhat, it seems unlikely that these changes will ever allow for the levels of energy efficiency or throughput that Ethereum is aiming to reach.
Conclusion
Cryptocurrency started out with idealistic goals, but ten years later many of those dreams are still unfulfilled. Compared to Visa/Mastercard, cryptocurrencies charge higher fees, are painfully slow, and are much more damaging to the environment. We’ve swapped out regulated and audited banks for offshore exchanges that refuse to open their books. And we’ve elevated crypto ‘thought leaders’ who misrepresent the risk to small investors by telling them that crypto will go ‘to infinity’. We’re using as much electricity as Argentina, and for what?
Even though the above is disappointing and fairly damning, I’m also legitimately excited about what Ethereum is planning. If Ethereum 2.0 is able to get the throughput to 10,000 transactions per second and reduce the electricity used, it does seem like we could accomplish many of the original goals of cryptocurrency. I can still see a future where cryptocurrency enables a better digital payments system, democratizes aspects of finance, and facilitates new kinds of projects that wouldn’t be otherwise possible. Ah, the conundrum!
To conclude, I do think cryptocurrency is still defensible, but we should focus our money and attention on projects that aim to provide actual utility to people, and be more proactive in calling out people who push get-rich-quick schemes.
I suspect that dev groups who are fine with their coins just being a wildly inefficient ‘store of value’ will either be outcompeted by coins providing real utility or will be forced to change by regulators.