Beyond Bitcoin
By: Markus Maiwald
Tags: Bitcoin, Libertaria, Cryptocurrency, Decentralization

And it goes deeper than that. The average person is still unlikely to promote or understand the benefits of decentralization, but they are at least waking up to the problems of centralization, even if they can’t articulate the cause. In just a few years, there has been a huge surge in public discontent at how governments and businesses reap the benefits from centralized economies of scale, all while collecting, exploiting and ultimately failing to secure our personal data.

Combined with the phenomenal rise of bitcoin and other cryptocurrencies, decentralization is now in the mainstream like never before. Admittedly, it’s still treated with confusion, suspicion and often even derision, but when every major news site is running almost weekly articles about cryptocurrencies, it’s clear the genie is out of the bottle.

But for all its new-found momentum, the decentralization movement feels like it might be in danger of stumbling at the final hurdle.

Yes, recent advances in computing and communications infrastructure have helped decentralized technologies become a reality, but centralized platforms seem to be benefiting even more.

Yes, discontent at centralized platforms among regular people is growing, but this doesn’t seem to be translating to any kind of migration. People are complaining, but they’re staying put.

Yes, cryptocurrencies are receiving daily mainstream attention, but the stories are all the same: price talk, more price talk, and endless “So what is cryptocurrency?” guides that are more confusing than helpful. The news is there, but it’s already stale and shows little sign of growing more nuanced.

Ironically, if the decentralization movement does falter, the culprit may be the movement’s biggest success story:

Bitcoin.

A Victim of its Own Success

Bitcoin, and the blockchain in general, is nothing short of incredible. A system that ensures that even unscrupulous users are compelled to play by the rules, it revolutionizes transacting and accounting, promising a global, transparent payment system with no bottlenecks or middlemen.

But as anyone who has actually used bitcoin will know, the reality falls far short of the promise. The wallet and key system is mathematically elegant, but practically off-putting. You pay enormous transaction fees in exchange for transactions taking hours or days to resolve. And far from freeing us from the whims of powerful individuals or groups, the battle between the mining pools and wealthiest token holders is proving just as destructive as any bricks and mortar banking scandal, just without the safety net of government oversight or regulation.

In fact, the only regard in which bitcoin can be considered an unqualified success is that it’s made a lot of people a lot of money.

But it’s that very particular success that’s the heart of the current problem. With the scent of money in the air, the vultures have descended. They don’t care about decentralization, they don’t care about blockchain. They don’t even understand it. They don’t want to understand it. Their motivation is the same as everyone who is already rich: they want to get richer. And there’s no shortage of people happy to oblige. Even the few people who started off with strong principles have found themselves swayed by the siren song of vast riches.

In the frenzy around the massive increase in the value of bitcoin, people are rushing to hitch their wagon to blockchain in whatever way they can, no matter how flimsy, whether or not a project actually needs to be decentralized, tokenized or have its data publicly recorded in a blockchain.

People who compare bitcoin to the Dutch tulips don’t understand bitcoin OR bubbles, but there is a very real sense in which this current gold rush is unsustainable. People are greedy, but they’re also suspicious, and they know when something is too good to be true. Look how quickly people bolted from the recent Bitcoin Cash price surge, a move which now seems to undeniably have been an orchestrated manipulation by a few very powerful crypto owners.

Exactly the kind of abuse of power and resources that decentralized technology and philosophy is trying to stamp out.

Even if it wasn’t deliberate, and the price jump really was a reflection of a shift in the ongoing debate in whether bitcoin’s true utility is as digital cash, digital gold or something else entirely, the huge swings in value meant that investors were spooked and the money poured out of Bitcoin Cash almost as quickly as it poured in.

At the moment it doesn’t matter which side of the bitcoin vs Bitcoin Cash debate is right: Those are not graphs of anything useful.

Ethereum

So what would a useful token look like? Well for one thing, its value would be relatively stable. To be useful, tokens need to provide utility commensurate with not just their current value, but also their potential future value. Whatever a token is used for, whether it’s transacting or voting or running programs on the big decentralized world computer one line at a time, the act of using it means you can no longer sell it, because using the token means it leaves your wallet.

People don’t mind there being a cost to use things. But they really hate missing out on increases in value. No-one is going spend tokens to vote in a decentralized governance system or notarize official documents in an offline storage system if they could do nothing with them instead and watch them increase in value by 10 or 20% overnight. If tokens are ever going to be truly useful, people have to not feel like they’re missing out on huge windfalls by using them. For that, the price needs to be stable.

Is there anything that fits the bill here? There are certainly lots of coins with relatively stable prices, but they usually have limited value and very low market caps. It’s important to distinguish between stability and flatlining. In fact, the only token which really seems to buck the trend here is cryptocurrency’s other, slightly more modest success story: Ethereum.

In previous articles, I’ve been less than complimentary about Ethereum, especially the proliferation of ERC20 tokens. The idea of all these apparently different tokens actually sitting on the same chain always seems like a textbook definition of a centralized bottleneck. But it can’t be denied that, unlike any other token, people are mainly using ether for something other than speculating on its value. That’s a huge improvement over bitcoin.

It’s important not to overstate the success of this. Ethereum was pitched as a world-changing decentralized computer, but what it’s become is a repository for tokens to power ICOs. So once again a decentralized technology has been corrupted and diminished purely for the pursuit of wealth, and it’s very possible that the only reason Ethereum seems to be immune from the whales’ market manipulation is because they have too much locked up in ERC20 based ICOs to risk screwing with the platform that supports them all.

But even though ICOs, at least in their current form, are a far cry from the promise of decentralization, the case of Ethereum is still notable. The question is how to take this kernel of success and transfer it to another project, one whose tokens have real utility beyond supporting the current investment boom.

In fact, some would argue that this has already started.

(F)Utility Tokens

On July 25th 2017, the US Securities and Exchange Commission issued an excruciatingly unclear and unhelpful report and investor bulletin on ICOs.

In the aftermath of this, many projects have begun to insist that their tokens are “utility tokens”, tokens which are primarily designed to be used within a system and which are not intended as investment vehicles.

This could be seen as evidence that the shift to more varied and useful tokens has already begun, and my complaints in this article are just impatience. Yes, the crypto space moves incredibly fast, but it’s unreasonable to expect new useful tokens to spring up overnight. Despite raising millions of dollars upfront, crypto projects are still beholden to the usual cycle of development, testing, release, adoption, etc. Maybe in six months as these project mature, we’ll see a whole new generation of truly useful cryptotokens that puts all my concerns to rest.

But I wouldn’t bet on it.

You only have to read the latest round of white papers or talk to people at any of the many ICO conferences that have sprung up overnight to understand that the shift to utility tokens is just preemptive semantics to avoid legal repercussions down the road. 90% of people are in the ICO game for the money, and they don’t care if their greed brings down the whole of crypto, as long as they get their piece before everything collapses.

(And the utility token gambit probably won’t even work. The harsh truth about going toe to toe in a legal battle with government institutions is that it’s not enough to be right. You have to be so obviously, staggeringly right that they don’t even bother you in the first place. If the case makes it to court, it will cost you so much to defend that you’ll be bankrupt before it even reaches a verdict. Sticking a couple of lines of disclaimer at the end of a white paper isn’t going to cut it.)

Which is not to say that every new crypto project or ICO is pointless. There are many good ideas out there, and the rushed nature of ICOs mean there will be many projects that turn out to be good despite currently seeming half-baked. But even if we’re genuinely seeing a new wave of useful crypto tokens, the overwhelming influence of bitcoin makes it very hard for these projects to thrive.

It’s difficult to convert bitcoin back into fiat, especially if you want to avoid having your private data harvested by centralized authorities, but it’s trivial to convert bitcoin into other cryptocurrencies. So when bitcoin plunges, the whales retreat into other coins, increasing their market cap by several orders of magnitude overnight. The whales don’t care what those projects are: they’re just a temporary safe harbor during the storm. But for the people genuinely invested in the utility of those projects the effects are devastating. Remember, people only use tokens if they’re confident they’re not missing out on huge increases in value. If bitcoin money floods in, even if it’s only for a few hours, any utility those tokens once had is obliterated as they become nothing more than a temporary store of bitcoin value.

And even when bitcoin is relatively stable, other tokens aren’t safe. “Pump and dump” groups, presumably unhappy with their mere 5% daily gains in bitcoin, make their money by artificially inflating the value of coins and then quickly leaving again.

And that’s just what’s happening when crypto is thriving. If (whisper it) bitcoin really does see a proper crash, the repercussions for every other project will be seismic. If bitcoin goes, is the rest of the crypto market really stable enough to survive, or will everything collapse like a house of cards?

A Solution?

So what should we do? What can be done to inject some essential stability into the whole crypto ecosystem?

Given the politics of many in the field, I suspect a common answer would be: “Absolutely nothing”. Decentralization is about dismantling centralized control and regulation, and many would claim it’s important to let market forces do their work as a matter of principle. Yes, there will be blips and corrections, they’ll say, but eventually everything will settle in its proper place and find its proper value.

It’s hard to understate the naivety of this position.

First, crypto markets aren’t operating in a vacuum. There are powerful outside forces at work, and this means that regulation is inevitable in some form or another. What isn’t inevitable is the kind of regulation we end up with. If crypto can get its act together quickly and present to the world a variety of different tokens with different values and uses, then the regulation, when it comes, will be much kinder than if crypto is still a free-for-all Wild West dominated by flimsy ICOs and an ideological price battle between bitcoin and Bitcoin Cash.

Second, the huge chasm between bitcoin and everything else may mean it’s too late for market forces. Market forces are a good way to nudge back towards an equilibrium, but there’s less evidence that they can correct for potentially market breaking disequilibria.

Finally, the “leave well alone” argument would be a lot more compelling if people weren’t manipulating prices and markets on a daily basis, at which point “leave it to market forces” starts to sound at lot like “leave us to rig things in peace or else”.

This all sounds pretty dire. If the markets are in the hands of the miners and the major token holders, what hope is there of making a useful correction before the regulators step in and hamstring everyone?

Ultimately, the only solution is to try and change regular people’s attitudes to crypto in general. Once people see a blockchain-based tech that has changed people’s lives in a way they understand other than just suddenly getting rich, they will be more willing to accept the promise that this is a useful technology with world-changing potential.

At Libertaria, we’re creating decentralized technologies to help communities of real people all around the world. Over the coming months, in addition to showcasing use cases for this technology, we’ll be highlighting the stories of real people whose lives have been changed by blockchain and other decentralized tools. We’ll also be showing you how crypto and decentralized technology might help you and people you know, in ways that having nothing to do with the price of bitcoin. In doing this, we hope to raise awareness of one of the greatest technological advances of our lifetimes, one which is in real danger of being dismissed before it’s had the chance to show its true potential.

If you’re interested in learning more about Libertaria technologies or the practicalities or theory of decentralized living, there are lots of ways to get involved. Sign up to the Libertaria newsletter, follow this blog or the Decentralized Society Blog, or come and join us in our Discord. We hope you’ll join us on our decentralization journey!