Bitcoin doesn’t work.
- Technical – Blockchain doesn’t scale.
- Social – Why should Bitcoin believers (and speculators) profit at the cost of everyone else.
If Bitcoin was the solution then there would be no need of the FOMO. Everyone could adopt it when it is stable. But nobody interested in Bitcoin wants it to stabilize — because they wouldn’t profit.
And alternatives — from Etherium to everything else — show both these flaws in Bitcoin.
Bitcoin forks try to address issues with Bitcoin but primarily want to to a piece of the pie. And other crypto currencies do the same even though there are interesting diverse ideas being tried like proof of stake, blockchain contracts, non-fungible tokens, and many others I’m sure I’m not even aware of.
Lighting network seeks to offload the technical limitation but at the cost of losing the blockchain and its guarantee of trust.
But even though there are technical improvements and social innovations in the crypto / blockchain space — I’m not sure what to call it because neither term is exclusive or all encompassing — both the ultimate technical limit and unavoidable social problem remain.
The two challenges are:
Because of greed there is either a proliferation (and thus devaluation) of coins and networks.And because of lack of trust, no one network can be relied on implicitly.
Bitcoin was created to combat both the greed engendered by the corrupt legacy monetary system and the lack of trust engendered by that greed.
But as I said in my opening statement. It failed to address both. Blockchain and cryptography are used to eliminate the need for explicit trust but the way Bitcoin proposes to do so is with an infinite ledger — that you can’t read.
Bitcoin’s proof of work was primarily meant as a way to give the profit to the technical class — and it did so very well at first, but it turns out that like PCs and Windows, once someone figures out how to sell a computer with software to someone else, it doesn’t take a technical person to use it.
Bitcoin miners are primarily not technical people. No more so than the average PC gamer. Their grasp of the technical aspects of blockchain is very limited. And their understanding of the social and economic aspects is non-existent. And of course, they’ve primarily cashed out to institutional investors looking for a way to expand inflation. Or they are hodling small stakes.
Privacy is non-existent
I, as a Bitcoin user, have zero visibility into transactions, but large organizations (and governments) can track your every purchase and paper trail — in a way they could never dream about with paper money.
Security is no better than physical assets.
As has been shown in several non-hypothetical scenarios, all it takes for a thief to get your bitcoin is to point a gun at your head, and then it becomes his — irreversible, and (nominally) un-trackable. And exchanges are as open to hacking and corruption as banks — perhaps more so, because the government won’t step in an defend an independent exchange or punish an offender. The mainstream financial system has the benefit of being defended by the mainstream legal system. And lastly, that same mainstream system can do the same thing as the thief, but more elegantly, and take your bitcoin from you.
But, it was a good idea. Just flawed. There are lots of good engineering ideas that have come from perpetual motion pipe-dreams, and Bitcoin suffers the same type of flaws — however much you try to reduce friction (in a mechanical, or financial system) you still need to have inputs — and you will still, inevitably have outputs.
You can’t dismiss the laws of nature any more than you can dismiss the laws of human nature.
What you still need in a financial system is trust — trust in transactions, in contracts, and in the institutions that enforce them. And you can have that, just not with a technical solution.
But here’s how you get trust — you earn it.
Once upon a time, banks and governments earned trust. You put your money in the bank, and you got it back out when you asked for it. The money was verified to be real and not depreciated. And the government enforced laws and punished criminals. And did not inflate the money supply. To some reasonable degree — no system is perfect. And you can’t replace a good system with a perfect one, only a with a bad one.
When the American monetary system (and the English before it) decided (reasonably) that inflation was bad, they tried to stop it. Only to learn that when the monetary supply doesn’t increase — but production of real value does, that deflation happens — in other words, money becomes more valuable. And those who have more of it become proportionally richer than those who have less of it. Folks like Benjamin Franklin and Alexander Hamilton saw the problem with this — the rich got richer — and kept a hold of their money because merely hodling it increased their wealth proportionally.
But the opposite, monetary creation, means that holding onto money has negative value — it decreases in value because it is diluted by the inflation of currency. So the wealthy are encouraged to invest it — and their investment in real properties (and imaginary ones like stocks) goes up in value by the very expansion of money.
So it looks like a win-win (or lose-lose, depending on which end of the stick you get), but the idea was that a modest inflation that tracks real growth reduces (but does not really eliminate) the disparities. And based on the growth of the past couple centuries, I’d say that was right — or at least it wasn’t as bad as the alternatives.
I don’t think the growth of the past couple centuries was founded — or even primarily based upon — liberal monetary policy, rather that the policy of modest inflation was possible because of the two factors that are cropping up as issues in Bitcoin: greed and trust.
Or rather, honesty and integrity. Because you could trust your bank and government not to be too bad — and because you could trust your neighbor, or customer, or employer, to fulfill their contracts, the existing monetary system allowed for fluidity and growth.
It doesn’t anymore. And it’s not the systems that are broken, it’s the people.
So what do you do in a broken system, or in a system full of (or infiltrated by) greedy and dishonest people?
You work with honest people.
But how do you do that — how can you trust people? How can you build a system of trust?
A-ha! That’s where encryption, digital signatures, and public ledgers can come in.
That’s all really Bitcoin is — it’s a digitally signed ledger, with a encrypted hash (block) of transactional history (chain). Well, that and a few gimmicks. Like the proof-of-work for mining (which provided an incentive for people to enter the system) and the limited supply (to combat runaway inflation).
These actually worked to encourage adoption, but as I argued (incompletely) above, their are both social and technical problems that are perhaps insurmountable. And there is also the economic problem of potential deflation which results in speculators and hodlers.
And finally, there is the inflation cycle of infinite alt-coins much like the government backed banking system of infinite debt.
Again, what can you do to solve all this?
You can build a network of trust by honoring transactions, not debasing your monetary system, and providing transparency. Independent banks did this by printing their own currencies — or receipts, really — and by building trust between each other — exchanges, and clearinghouses — and governments enforced contracts and punished thievery.
So, we can scrap the blockchain, the proof of work, the hocus-pocus, and the competition by providing real value — a safe, secure, transparent transaction system, and clearinghouse between competing systems.
There is an economy of scale challenge here. It does take millions to develop, and billions to promote. Maybe a bitcoin-like land grab is actually essential to get it off the ground. And it does take an open, benevolent government to both allow such a system to exist, and to enforce it’s contracts. Maybe that is insurmountable too with governments and banks in each others’ pockets.
But we don’t have to fall back to a barter system or wagons full of gold and silver coins and armed guards to deter robbers. We can use cryptographically signed receipts and public ledgers to transfer money and reconcile between competing systems — the competition between systems will build trust. Those who provide the service we need — transactions we can trust — will get our business.
There’s one more challenge — other than needing people and institutions to become honest and benevolent (not greedy) — and that is the tendency towards monopoly. If one system of exchange becomes more efficient, has more integrity, and hence gains more market share, and thus power, it will tend to corrupt.
But it’s a workable system, and it looks like it only needs a revolution every hundred years or so.