In a recent article I pointed out the suitability of cryptocurrency (CC) as an economic mechanism for modern networked societies, but also listed problems which must be addressed before CC can be truly viable as a currency per se. Any economic mechanism underlying cooperative behaviour must be stable and reliable, whereas current CCs are not only susceptible to extreme boom/bust cycles but are also prone to speculation and hyperdeflation. In other words, many people buy CC not to use it as a currency in regular transactions, but simply to make a profit if others also buy it (thereby driving up the price). The value of the currency rises – at least in the short term – but is also subject to potentially dramatic swings in value as market sentiment shifts. Such things are the characteristics of commodities which do not make for particularly stable or useful currencies. When intending to hold and actually use currency as currency, people quite rationally prefer to use a token with a predictable value and trading base.
The original idea behind CC was to “back” the currency with something of intrinsic value by nature of its (measurable and predictable) scarcity, in contrast to government-sponsored “fiat currencies” with no intrinsic value. Paper money was historically backed by confirmed stores of precious minerals (usually gold and silver), meaning that it could in theory be redeemed for a fixed amount of those minerals at any time, and CC replaces the natural scarcity of precious minerals with the artificial scarcity of mathematical solutions to cryptographic problems.
That sounds straightforward enough, but the design details of any such system have significant consequences for the currency’s use and distribution. For example, the earliest cryptocurrencies use a “Proof of Work” protocol, in which coins are “mined” by solving cryptographic problems, which naturally favours those with access to powerful, dedicated computers optimized for that purpose (and the money to pay the electricity bill for such machines running around the clock). Proof of Work clearly does not favour the “little guy”, but then large-scale mining operations are the preserve of the wealthy in the world of rare and precious minerals, too.
An alternative protocol known as “Proof of Stake” addresses such issues by making it easier to mine coins if you already hold a store of those coins, which does give a “first-mover advantage” to those individuals who are early adopters of the currency. Proof of Stake appears to have its own issues, however, in that it presumably encourages miners to hold on to their currency rather than spend it, and any system which systematically compounds advantages for those who are already advantaged could of course be accused of ethical shortcomings. My point here is not to advocate a particular approach to mining Proofs, but to make it clear that cryptocurrencies do not have some morally neutral default architecture. All design decisions have implications for the practical and ethical consequences of the currency’s use, and it seems likely that they will frequently be unforeseen.
The issues implicit in cryptocurrency design appear to bear some relationship with the deepest questions about Capitalist economics which were raised in the 19th and 20th Centuries. Marx famously focused his criticism of the new industrial economies on the “Means of Production”, which is to say who owns the manufacturing infrastructure and thereby enjoys economic advantages that their workers do not enjoy. In other words, investors and company owners receive the company’s profit rather than a limited wage, use those profits to further invest, and so ride an “upward spiral” of self-reinforcing advantage. CC is frequently depicted by its Libertarian advocates as an intrinsically ethical and anti-authoritarian economic tool because it is not controlled by government, but unless CCs are designed with some kind of fair distribution model in mind, then they will simply reinforce pre-existing advantage as much as (if not more than) the central operating model of Capitalist ownership and investment.
Another necessary factor in working toward stable, ethical cryptocurrency is the need for a mechanism to dampen the effects of speculation and extreme market volatility. In the case of fiat currencies, such things are compensated for by government and central bank measures, which of course are exactly the kinds of intervention which Libertarians oppose, with some good reason. Governments do, after all, frequently abuse their powers of monetary manipulation in order to fund wars, favour certain companies, and so on. Such resilience to market shock is, however, exactly why some currencies are favoured over others as a store of value. In short, what is needed is balance between a non-governmental measure of value (i.e. a non-fiat currency, backed by some scarcity function) on the one hand, and some kind of volatility-mitigating “anchor” on the other.
The simplest way to both ensure (and signal) a currency’s longevity and to base its value in something other than pure speculation is to have it strongly associated with a community or user-base of some sort, such as a State, Intentional Community, or subculture. If the currency is likely to remain viable and actually be used as long as its associated community exists, then the currency will be (and be seen to be) more stable in both these regards. Historically the strongest currencies have been those both backed by some scarce resource (which is both well quantified and verified as being available), and used for both internal and external trade by some large, well understood community which itself is generally believed to have great stability and longevity. In short, cryptocurrency and blockchain technology are potentially very powerful tools in the new digital age, but they have limitations in their current forms. The most widely used and long-lived cryptocurrencies of the future will be those that have fairness baked into their algorithms, and which – while deriving their value from cryptographic scarcity rather than government fiat – are known to have long shelf-lives because of their close relationships with large, stable communities.
*hero image from adobe stock