The Future of Cryptocurrency Goes Way Beyond Bitcoin

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Bitcoin’s price is rising as speculators pile in. But it is not, as some of these speculators believe, a new world currency. It is a technology from 2009 sporting limited features, slow processing abilities, and hugely energy-inefficient design. Its success is rather due to the promise of the technology it represents: the blockchain. This technology allows a decentralized system of computers to work together to function as a secure server; allowing for the replacement of centralized servers that are vulnerable to tampering, mismanagement, and misuse, but which power critical websites, financial transactions, and currencies. This has allowed bitcoin to function as a decentralized store of value, but this is a mere prelude to the potentials of blockchain technology. In the long run, blockchain can potentially solve the problem of centralization. This would disrupt banks, big tech, and governments, and bring benefits to most everyone else.

The key problem cryptocurrency can solve is one of trust. To verify the legitimacy of gods, currencies, identities, etc. in a transaction between two parties, a trusted third party is needed. In a large-scale society such as our own, the only body that can do this effectively — being both accountable and powerful enough to handle all our transactions — is a central authority: either a government or a large corporation. For this service, the third party always charges fees to support itself, and the self-interested individuals who are its members always look out for their own interests when handling transactions. This leads to abuses of power, the potential for mismanagement, and at the very least the charging of unnecessary fees.

As we saw particularly in the 2008 crisis, with the collapse of Lehman Brothers and the Eurozone crisis, banks and governments are both open to being mismanaged. More recently, we have seen dominant tech companies abuse their access to data and control of sales platforms to stifle competition. All of these ultimately impose fees and taxes on the consumer as well. We have put up with this so far since this was the only way of creating a trusted third party.

Yet blockchain technology could change this by providing a decentralized means of third party verification. By means of being a decentralized server, a blockchain serves as a program immune to tampering whose results can always be trusted; allowing it to verify legitimacy without the need for centralization.[1] Such a technology allows for the minimization of the risks and expenses entailed in trusting potentially abusive or incompetent third parties.

The problems and expenses created by these third parties are numerous. Banks use their position to charge unnecessary fees for international transfers as well as for other basic monetary services. Lines of credit have also been at their discretion, resulting in historic racism in mortgage access, and subjecting any applicant to paperwork and wait times that nonetheless did not promote responsible lending leading up to the 2008-crisis. Governments similarly — particularly the US one — take advantage of their role as the guarantor of currency for geopolitical gain.[2] Depending on the validity of Modern Monetary Theory, they may also be guilty of reckless borrowing and mismanagement of inflation. Either way, the dependency of the economy on them is a potential failure point for the whole system. Big tech companies have also allegedly used their position to stifle competition, and their data to manipulate consumers.

Blockchains and cryptocurrency can be used to minimize or eliminate these problems. Since no one controls the blockchain directly, no one can bend its rules or enforce them in a biased way. This would increase egalitarianism, and reduce the failure points for the global economy. Costs can also be reduced by a highly competitive fee structure that rewards the efficient processing of transactions. This is due to the incentive structure created by cryptocurrency and mining. Whereas in the current system money is earned for middlemen by manipulating the rules of interaction for their own profit (adding fees, distorting currency value, pushing their own products, etc.), miners earn money by providing processing power and ensuring the integrity of the rules of interaction built into the blockchain. Rather than their personal and institutional interests being aligned with warping the system to their benefit, their incentive is to secure and run the system as-is — short of critical problems needing attention. This is enhanced by their reward being in the relevant cryptocurrency; therefore only having value if they have ensured the integrity of the system. Proof-of-stake takes this further by ensuring that miners maintain a vested interest in the well-being of the system and its token by locking up their funds for a period as they mine.

Of course all of this potential innovation is pointless if not backed by meaningful interest. Fortunately, crypto is already seeing interest by the wealthy as a hedge of value against potential depreciation of the US dollar. Yet this is only surface level adoption, and the full realization of blockchain’s potential depends on adoption by other key demographics. Among these are small and large businesses who may prefer crypto’s ability to cut out middlemen such as Amazon or banks, thus reducing costs and risks. Consumers too may seek out these benefits. International transactions, credit, banking, online retail, social media, currency exchange, and many other areas can all be reduced in costs both monetary and otherwise. Two problems, however, stand in the way of this adoption.

The first of these is that the middlemen are likely to oppose changes to a system that already benefits them. Governments especially will be hostile to being disrupted and have the means to prevent it. As such, a total replacement of fiat currency or government-verified property deeds is unlikely. Big tech similarly has powerful means to warp or prevent disruption (short of being broken up by antitrust suits). Any blockchain-based disruption to them is likely to be slow, especially considering that the direct benefits of big tech’s replacement are mostly felt by smaller actors such as individuals and small business. Most vulnerable is the banking system, which is already under threat from advances in fintech. Cryptocurrency and blockchains can help to push this fintech revolution further and so at least partially replace or disrupt the traditional banking system.

The second is the current technical limitations of cryptocurrency. Innovations in speed and efficiency are desperately needed to make the technology scalable and powerful enough to undertake the role of decentralized third party throughout the digital economy. Yet this is only a failure of execution and not of concept, and so is likely to be overcome as time goes on. Ethereum 2.0, if successful, stands to be a significant step in this direction, improving speed and scalability. The power of processors will also improve over time.

Though blockchain technology still requires further improvement, optimization and adoption, it stands to be a major innovation in the way we organize our society and execute our commerce. By replacing currently centralized middlemen, blockchains can reduce the risks of mismanagement and abuses of power. Instead of a selfish profit incentive, mining and cryptocurrency incentivize the maintenance and integrity of the current system.

This transition would be appreciated by numerous important actors, including consumers, businesses large and small, and wealthy individuals. While resistance is likely from the middlemen themselves such as governments, big tech companies, and banks, it is likely that blockchains will disrupt some if not all of these in some way. As such, cryptocurrency has the potential to be considerably more influential than simply bitcoin serving as a temporary speculative investment soaring to massive prices.

[1] Buterin, Vitalik Ethereum Whitepaper | ethereum.org 2013, updated 2020

[2] GILPIN, Robert. US POWER AND THE MULTINATIONAL CORPORATION. NEW YORK: BASIC BOOKS, 1975. 148–149