A Future History of Cryptocurrencies
Anything of value attracts the attention of the powerful. If that value cannot be accumulated, controlled, or used by established power, it will attempt to destroy it.
The early generations of cryptocurrencies fell victim to this phenomenon.
Designed by anarcho-capitalists who imagined a currency free of government control they built systems that cut out the government-regulated banks and finance systems. This almost certainly guaranteed that it would be co-opted or destroyed.
The first generation had several serious flaws. The distributed security was underpinned by proof of work or proof of stake. These required either massive computing power or large cryptocurrency stakes.
Both approaches gradually pushed out the mass of individuals contributing to security and currency creation(mining) in favour of fewer centralised actors that were then more readily influenced or attacked by the establishment.
The decision by most governments to treat crypto payments as cash and therefore subject to anti-money-laundering reporting completed the power grab, and the libertarians were left with another failed project that ended up co-opted into the existing systems of power.
It was, however, the wild fluctuations in value that ultimately destroyed most early cryptocurrencies.
Anything that fluctuates too much can leave organisations that accept that currency with a huge potential loss. If, for example, payment was accepted using a cryptocurrency that fell by twenty percent the next day, a sale that was profitable one day becomes a loss the next.
This can also happen outside of cryptocurrencies for international trades that accept multiple currencies. Most international traders use currency hedging to avoid this, but the volatility of cryptos meant hedging was too expensive to be effective for anything other than government-backed fiat currencies.
The net result of this situation was that most cryptos ended up as highly speculative investment vehicles. One such cryptocurrency was ironically named Tulip.
There was a second class of cryptos named stable coins which were tied to external values such as commodities like gold and even government-backed currencies, including the US dollar.
While these were not subject to extreme volatility, the uptake tended to be limited to commodity and currency investors who saw it merely as an asset value holding mechanism.
The arrival of Chain addressed all the existing issues sufficiently to take off as the dominant crypto.
The currency was a joint initiative between finance organisations and endorsed by governments.
The coins were stabilised by changing the creation process from mining to minting. Minting was the process of creating coins when paid for in other currencies. The value of a new coin was based on the fractional cost of adding renewable power supply and compute infrastructure to vast data centre complexes around the world.
This was politically popular as part of a move towards “green” technology, but the real reason the renewable element was key was that it was a one-off capital expense that created tangible value linked to the process of running the currency. It was predictable and whilst subject to real world inflation, it was typically more stable than most traditional currencies.
Linked to infrastructure capital costs rather than commodities or false scarcity, the upward value was constrained by the mint cost. No one would buy a coin on the market for more than they could purchase it through a mint.
Coins were also minted for finance organisations based on the number of transactions processed, thus creating revenue and profit for the banks and a self-sustaining ecosystem for the currency.
The currency could be held in traditional bank accounts or in digital wallets, which were effectively private accounts with zero customer identity information, much like the original cryptocurrencies.
This concession was key to the currency achieving widespread uptake now that government and the finance industry were keen to promote it. Whilst security around blockchain was still a distributed model, it was limited to a restricted number of verifiers, all traditional finance organisations. The finance industry and government regulators were back in control.
