Is Wealth Ruining Digital Currency?

The growth of the digital currency economy so far has been truly amazing, and has already confounded the predictions of many sceptics. Like many others, I truly believe that this is just the beginning. I think that digital currency has the potential to transform the way we shop, do business, store value, and generally organize our global economy. In the future I see digital currencies and the technologies built on top of them, such as smart contracts or distributed peer to peer projects like Namecoin's DNS system, playing a major role in all of our lives.

But I also think that we are still near to the beginning of a very long journey, and there are many challenges and obstacles to be overcome for this technology to reach even close to its full potential. Unlike many other commentators, however, I do not see things like government regulation or associations with criminal activity in the public imagination as the biggest challenges facing digital currency right now. The more I think about the current state of the digital currency economy, in fact, the more I come back to the conclusion that the biggest challenge it is facing right now is learning how to deal with its own success and wealth.

A Victim of its Own Success

There are many ways in which digital currencies have become a victim of their own success, and that goes for Bitcoin and also most of the other alt coins.

Perhaps the earliest example of this was the rise of the ASIC miners. Bitcoin was created to be a de-centralized and distributed system. It was designed so that anybody with a computer - any regular user of the currency - could help to run the network and be rewarded with free coins. In the early days this mining was done by the community, from the wallet itself. As the price of each coin began to rise, however, it become economical for businesses to develop specialized hardware and software to optimize the mining process, and a relatively small group of people with resources at their disposal began mining on an industrial scale. This created a serious threat to the de-centralized nature of the system. Not only did mining cease to be viable for the ordinary user on a regular computer, but the concentration of power opened up new security threats and the possibility of the dreaded '51% attack' - when a mining group with sufficient market share could theoretically 'double spend' their coins.

Of course there have been many initiatives to tackle this problem, with new coins being created which are more or less 'ASIC resistant'. But the success of these initiatives have arguably been limited, as new optimizations always seem to appear over time to allow for industrialized mining. Part of the reason for this is because the de-centralized nature of the coins themselves mean that change and innovation post-launch is a much quicker and easier process for the miners than it is for the coin, and in any case the fact that there is more money in mining coins than developing them leads to an imbalance of power.

One could also argue that the problems faced by Mt. Gox were a result of the rapid growth in value of Bitcoins, with the value of the coins and hence their appeal to cyber criminals progressing faster than the ability of the community to establish the technology and its ecosystem of services in a secure manner.

The biggest threats which are causing digital currency to become a victim of its own success, however, are not technological but economic.

One of the most significant of these economic threats is the fact that rapid and dramatic price surges have caused many within the cryptocurrency community to view these coins primarily as investment instruments rather than currencies, payment systems, and so on (and I do admit that I am also guilty of this btw). People have become greedy. I was confronted with this problem quite starkly recently within the Fedoracoin TiPS community. Fedoracoin is one of my favourite alt coins. It was designed to target a very useful niche which itself has a lot of potential - tipping and micropayments. I think that micropayments will be one of the biggest areas of growth which could push digital currency more fully into the mainstream, but the high value per coin and the current transaction fee structure of Bitcoin mean that the big B is not really appropriate to be used for this purposs - creating a huge opportunity for an alt coin to take advantage of. FedoraCoin also seems to have some of the best developers behind it compared to other coins. It was the first coin to integrate a coin mixer into its standard wallet to make truly anonymous payments easy. They have built their own payment API which allows anybody to easily take payment in TIPS on their website without needing to use a third party payment system and pay the fees associated with doing that. Even amongst the community there are some great developers building really attractive and well designed websites. But regular users themselves seem to be obsessed with price. When the value drops, as it did not long ago when multipools targeted the coin, you can see that many of the community begins to become despondent and lose their enthusiasm, and when the price goes up you can see the excitement from many that their Fedoracoins are going to make them rich. But for a coin built around tipping and memes, this is very destructive. A coin like this can only really be successful if, like Dogecoin in its early days, its users don't really take it all too seriously. If too many people are buying and holding as an investment, then not enough are using the coin for its actual purpose.

A disproportionate number of traders and investors compared to regular users is also to blame for massive price manipulation, outright scams, and endless pump and dump schemes on the digital currency markets. These things all harm regular users, can leave them out of pocket, and can ultimately put them off wanting to have anything to do with digital currency. They can also make it harder for legitimate businesses wanting to develop services for these currencies. This imbalance is a direct result of people making a lot of money in a short space of time with digital currency, and the fact that his has resulted in them seeing these coins (and inspiring others to see them) as a way to 'get rich quick' rather than as genuine solutions with a stable and long term place within the real world economy.

Even the number of new coins being created are a symptom of this. Many new coins seem to have little new to offer and are probably just naked attempts by their makers to make as much money as possible as quickly as possible. Unfortunately the open source nature of these projects make it reasonably easy for anybody to create a new coin with a few minor tweaks and release it to a credulous public. The sheer number of these low quality coins serves to fragment the market and increases the chances of newcomers to digital currency ending up with nothing more than a few worthless numbers on a computer screen in return for their hard-earned fiat cash.

What Can Be Done?

There is a good chance that all of these problems are the inevitable teething pains of a new technology, and that they will resolve themselves naturally over time. I'm afraid I don't have any quick fix solutions to suggest for these problems, except…

Use Devoins! Not only are Devcoins one of a small number of ethical cryptocurrencies, but curiously they are also one of a small number of coins for which greed may actually be good. That is because most of the newly created Devcoins are given out to open source developers and Devtome writers creating valuable products and content, rather than miners who are mostly performing otherwise useless 'proof of work' calculations or investors who have a 'proof of stake'. This means that if people want more Devcoins, one might assume that they will put more work into these things, which in turn will raise the inherent value backing the adoption rate and price of the coin.

This same principle can be applied to other coins and projects. Ripple, for example, would actually benefit from more traders and investors trying to make money from it. That is because it relies on an active peer to peer marketplace for making currency exchanges and transfers - and more people trying to make money from it means more competition, tighter spreads, and therefore better value for regular users.

Categories: E-Currency | Cryptocurrency | Currency | Finance

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