In this Cryptonomics article I will abstract slightly from the theme of the last few posts. Setting aside my model for the bitcoin market, the next two posts I write will take a look at cryptocurrencies on a wider scale and in particular discuss the notions of anonymity and decentralisation. These are key issues that need to be discussed and will become increasingly scrutinised as the industry develops.
As discussed in my previous post, a vast proportion of traders in cryptocurrency markets like bitcoin are primarily concerned with making money. Their interest goes as far as the price and what may affect it. These are typically people who entered the market in the last few years since the industry hit the ‘mainstream’. However, those who have been interested in crypto for years are considerably more likely to be technologically minded and choose to invest in coins with innovative tech behind them. To these people, the early-adopters of bitcoin and its ilk, the allure of crypto stems from the ground-breaking innovation behind bitcoin – the blockchain. More specifically, the development of a market with no need for any central governance or ‘backing’ by a single institution required.
There has always been a certain level of romanticism about a world without government, especially amongst young people. This yearning has become even more pronounced in recent years as younger generations are holding increasingly left-leaning political views. This love for decentralisation translates into the cryptocurrency industry and the potential to ‘do away’ with regulators and market controllers. Although the word ‘decentralised’ is frequently thrown around, whether cryptocurrencies are actually decentralised and if they are, what this actually means in practice, are blurry concepts at best. In general terms, a ‘fully decentralised’ asset seems to be referring to an asset which has no single regulator or governor. To me, a regulator or governing body in this sense would fulfil three roles: maintaining the currency itself, regulating the circulation of the currency and punishing bad behaviour. So let’s take a look at whether these capacities are missing from the world of crypto…
Firstly, it is well known that the creators of cryptocurrencies frequently keep large amounts of the coin to themselves when they create it and they often take control of developing the currency as tech progresses. To this extent they fulfil the ‘maintenance’ role of a traditional regulator. All the major cryptocurrencies having a limited supply so to some extent this fulfils the management of circulation role, despite it being an impersonation of a governing body with a very rigid rule. Thirdly, the extremely volatile nature of the price of cryptocurrencies acts as a natural deterrent from any attempt to manipulate the market. This is because if any hint of foul play is detected or if a hacker steals a certain coin, the price of that coin will plummet, leaving the gains from this bad behaviour far lower than they otherwise would be. This leaves only the problem of criminals using cryptocurrencies to launder money. This single issue appears to me to be the only real difference between a the cryptocurrency industry and a non-decentralised industry. It is tied into the concept of anonymity and will be discussed in my next post.
There is of course, a significant reduction in the margin for human error or corruption with a decentralised market. This can only be a good thing but it is unclear if these issues would actually be prevalent in a non-decentralised cryptocurrency industry.
In conclusion, ‘decentralised’ is a word that should be clarified more, used less and questioned widely when applied to the cryptocurrency market. This post also ties into an earlier post in the Cryptonomics series where I questioned whether Bitcoin et. al. were really any different to every other asset in history, albeit with a slightly more capricious nature (see Cryptonomic: Unique or Déjà vu? – https://cbeconomics.com/2018/01/10/cryptonomics-01-unique-or-deja-vu/).
Thanks for reading and stay tuned at cbeconomics.com and follow me on twitter @cbeconomic for more interesting economics-based thoughts and discussions! Over the next few weeks I will be continuing the Cryptonomic series, looking at anonymity and then returning to my discussion of a theoretical model for the Bitcoin industry. I will also be starting new series about sports economics, mental health and any other topical issue that catches my eye.