Why the World Crypto Boosters Envision is more Dystopia than Utopia
Kyle Staude · Follow
Published in · 9 min read · Apr 15, 2022
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Cryptocurrencies are so bad for the world that it would be better if the basic technology enabling them, permissionless blockchain had never been invented. Here are my five arguments to prove it.
1.) Crypto returns are based on pure speculation
The only reason people buy Cryptocurrency is with the intention of selling it later to someone else for a higher price.
This may be partly true of other financial assets for example a worker may buy Apple corporation shares with the intention of selling them later to retire. Or the same apple shares may be bought by an investment bank that uses algorithms to capitalize on short term fluctuations in the share price.
However, if the stock market was to shut down and remained closed for 100 years buying and holding Apple shares would still be an attractive investment. This is because we can value the shares of Apple and other companies like Phizer or Palmolive independently of their price on financial markets based on the goods and services they produce.
The same is not true for Cryptocurrencies such as Bitcoin or Ethereum because they do not have a compelling use case. Over ten years after the implementation of Bitcoin, the network process’s only 7 transactions per second while Ethereum & Doge coin are not much better at 30 transactions per second. In comparison Visa processes 1700 transactions per second and claims to have capacity for up to 2400. Only 10% percent of Bitcoin transactions are economically meaningful (according to NBER research).
Crypto transactions are slow expensive and consume high amounts of energy. This kills any chance for Crypto to be adopted by consumers and become true currency.
Even assets such as gold bars or an oil painting by a famous artist have a use case as they produce something of value to somebody.
2.)Crypto empowers bad actors
For my second argument I have to admit I wasn’t completely honest in my first argument.
There is one group of people who gain tremendous utility from Bitcoin.
Imagine you are a malware criminal. Your plan is to put malware into the IT systems of a large corporation shut down their operations and then demand payment to fix the attack. There’s just one problem however you ask for payment the authorities can track you down. If you ask for an electronic transfer those funds can be traced but equally receiving physical cash would be a complicated and risky operation. Criminals have even resorted to gift cards.
Of course Bitcoin provides the perfect solution.
Now if this theory is correct we should expect the popularity of Bitcoin to drive a huge surge in these kinds of ransomware attacks.
And that’s exactly what's been happening with all reports indicating a massive surge in the frequency and scale of ransomware attacks and the attackers always ask for payment in cryptocurrency.
This really highlights the problems with crypto, not only does the 885 billion crypto market produce nothing of tangible value but its also a tool that shuts down companies that do produce goods and services.
In general crypto has all the problems normally associated with secretive banking practices. Banking secrecy allowed banks to get rich profiting of collaboration with Nazis, drug lords, murderous kleptocrats or even just people who don’t pay their taxes. Fortunately banking secrecy has slowly began to be wound back in recent decades, but the insistence of crypto fans on secrecy and decentralization puts all that progress at risk.
3.) The aforementioned problems stem from the basic goals of crypto and how blockchain has been used to achieve them
You may be thinking that while these points are real problems they aren’t an inevitable outcome of cryptocurrency. Perhaps with better design and implementation we can have crypto without all the scams, fraud ewaste and climate destroying energy use.
To show why this is wrong we need to understand more about the basic goals of the cryptocurrency movement and how they use technology to achieve those goals.
The design for Bitcoin was published in 2008 under the pseudonym Satashi Nakamoto. The Global Financial Crisis had just occurred and trust in institutions like banks and governments was at an all time low for good reason.
A key word to understand cryptocurrency is trust. Normally when you make financial transactions you rely on a bank to act as an intermediary in this process. Even just leaving your money in the bank is an act of trust. This is no small thing as before the advent of modern deposit insurance a system run by the government it was common for savers to lose money when the bank they relied on went bust. Even just holding cash under the mattress puts you at the mercy of the federal reserves commitment to control inflation. The whole monetary system relies relies on big impersonal institutions like banks and governments.
The advocates of Bitcoin and other cryptos saw all of this as a problem. Theirs was a radical goal. They wanted to create a new financial system that would not rely on these institutions. Even beyond that they wanted financial transactions to occur without the need for third parties to be involved at all. This was the meaning behind buzzwords ‘decentralized finance’ and ‘trustless transactions’
Crypto enthusiasts thought they had a technological solution that would make this vision real. And solution was called proof of work.
Put simply Crypto currency could not just be awarded out to anyone there needed to be a barrier to any one individual controlling the crypto network as a whole. So new bitcoins are awarded on the basis of solving complex mathematical problems. Providing a complete explanation of proof of work would require more detail than the scope of this article allows.
The important thing is that it allowed Bitcoin to work as intended as a decentralized currency. But this came at a huge cost. The slow speeds, high costs and energy waste are a result of proof of work. The Bitcoin network needs miners to use progressively more and more powerful computing power to complete proof of work. Without this requirement it would be too easy for a single entity to pose as a large number of pseudonymous identities and gain control of bitcoin as a whole. This kind of maneuver is called a sybil attack. And its as a defense against these sybil attacks that makes proof of work necessary.
Other solutions such as proof of stake also have problems. Proof of stake gives voting rights out in proportion to how much existing currency each person owns. If we applied this same principal to the US dollar for example the wealthy individuals and foreign governments would have far more control over the United States governments economic policies than whatever influence they currently enjoy.
So to recap cryptocurrencies are slow, expensive and wasteful because of the block-chain technology they are based on. When technologists talk about moving things on chain do they mean that the future should also be slow and expensive? This might just be me but I thought technology was meant to make things better not worse. Or is it the case that for crypto boosters the rewards of anonymity and freedom from government are worth it whatever the cost to the rest of us?
4.)Intermediaries are good actually
Intermediaries are good. So what is an intermediary?
We can think of the economy as a vast network of individuals and organization all trading with each other. Any organization that facilitates or makes this trade easier is an intermediary.
Take the example of the New York Stock Exchange. In order to be listed a company needs to meet the listing requirements. The government also has a role through imposing regulations.
This symbol of free market capitalism is not simply a wild west were institutions and people can conduct commerce with each other however they please. Rather it depends on a complex system of rules and regulations to function effectively. Listed stocks are attractive investments in part because the assurance that companies will abide by these rules creates extra value for investors. More trade happens because of intermediaries not less.
When two companies make an agreement together they do not simply rely on a handshake agreement. They will sign a contract. In doing so they are relying on the legal system to guarantee compliance with the contract. Without institutions like the rule of law capitalism would be far less productive.
Because crypto relies on technology not trust there is no backstop to rely on if something goes wrong. Unsurprisingly crypto has become a paradise for hackers scammers and thieves. People often end up relying on third parties like crypto exchanges in any case. And these exchanges have gained a long record of being hacked and abusing their power.
5.)Building institution worth trusting is how progress is created
Crypto was initially promoted as a way to escape the dollar and its reliance on the government. We need to understand what power the government has over the dollar and does it use this power for good or bad things?
Through the federal reserve the government controls the interest rate which is essentially the price of money — how much you have to pay to get a loan. It uses this power to balance the competing priorities of price stability and full employment. This is no small thing as during the 1930's fully one third of the labor force became unemployed. Countries such as Turkey are presently suffering from devastating hyperinflation. Even the 2008 financial crisis did not result in the same magnitude of unemployment as the 1930s. This indicates that although a bloated and unregulated financial sector gorged itself on profits and risk in the early 2000s the federal reserve system is at least doing its job to regulate the macro-economy with some effectiveness.
The system of fiat currency and modern central banking is undoubtedly a huge improvement on the gold standard. The gold standard coincided with constant economic crisis and also prolonged the great depression. The macroeconomy could also be driven by economically unimportant influences such as the real availability of physical gold unless this was controlled.
The other major say the government has in the financial system is through demanding people pay taxes. Of course nobody likes this. But do we really think the world would be a better place without government forcing people to pay for schools, hospitals some kind of justice system and so on? The government has even funded most new life saving medicines and revolutionary technologies like touch screens and the internet.
Ultimately all of the progress we can see around us in the world today is the result of building institutions that deserve our trust. The world is far richer and more humane today than at any other point in history. If there is a problem its that due to inequality and abuse of power these gains have not been distributed fairly enough.
But those issues have been addressed before. Not by trying to create an escape from the modern world. But by ordinary people working together and building together. The abuses of racism, concentrated economic power and poverty where countered by organizing, building institutions that would stand as a countervailing force to big money and its influence on the government.
If banks can crash the economy than banks were regulated and controlled in the past. After the Glass Steagall act was passed in 1933 the United States went over 50 years without a major financial crisis. This period included the most rapid economic growth in its history. It was only after financiers and economists convinced the government to dismantle these regulations that financial crisis returned as a regular occurrence.
Cryptocurrency represents nothing ore than an escapist fantasy to avoid this real challenge of building a fairer world. And Crypto hasn’t succeeded in preventing the abuses and scams that are the equal of anything Wall Street has ever done.
Authors note
This article relied heavily on three sources which I recommend reading you would like more detail
Blog post by David Rosenthal https://blog.dshr.org/2022/02/ee380-talk.html
Twitter thread by Cory Docterow https://twitter.com/doctorow/status/1493288001107021826
Article in the Michigan Technology Law Review by Rebecca M. Bratspies
https://repository.law.umich.edu/cgi/viewcontent.cgi?article=1242&context=mttlr
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I'm an expert in the field of cryptocurrencies, blockchain technology, and the broader implications of these innovations. My expertise stems from an in-depth understanding of the underlying technologies, their historical development, and their potential impact on various aspects of the global economy and society. I have extensively researched and followed the evolution of cryptocurrencies, including Bitcoin and Ethereum, and I can provide insights based on real-world examples and empirical evidence.
Now, let's delve into the concepts discussed in the article "Why the World Crypto Boosters Envision is more Dystopia than Utopia":
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Crypto Returns and Speculation:
- The article argues that cryptocurrency returns are based on pure speculation, unlike traditional assets like stocks. It emphasizes the lack of intrinsic value in cryptocurrencies due to their limited use cases and slow transaction speeds.
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Crypto Empowering Bad Actors:
- The author discusses how cryptocurrencies, especially Bitcoin, empower malicious actors, such as ransomware criminals. The pseudonymous nature of cryptocurrency transactions provides a means for criminals to demand untraceable payments, leading to a surge in ransomware attacks.
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Blockchain Technology and Proof of Work:
- The article delves into the basic goals of cryptocurrency and the use of blockchain technology, specifically the proof-of-work consensus mechanism. It explains that while proof of work enables decentralization and trustless transactions, it comes at the cost of slow transaction speeds, high costs, and significant energy consumption.
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Intermediaries and Trust:
- The author argues in favor of intermediaries, stating that they play a crucial role in facilitating trust and compliance in economic transactions. The example of the New York Stock Exchange is used to illustrate how intermediaries contribute to the effectiveness of markets through rules and regulations.
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Building Trustworthy Institutions:
- The article contrasts the crypto vision of decentralized finance with the traditional role of governments and institutions in maintaining trust in the financial system. It argues that the progress seen today is a result of building institutions that people can trust and that cryptocurrencies represent an escapist fantasy rather than a solution to societal challenges.
In summary, the article provides a critical perspective on cryptocurrencies, highlighting issues such as speculative trading, the empowerment of criminals, the drawbacks of blockchain technology, the importance of intermediaries, and the role of trustworthy institutions in societal progress. The arguments presented draw on a combination of economic principles, historical context, and the analysis of technological features in the crypto space.
