This short text is to incite to think about what crypto does, and mainly why I think crypto is mostly harmful for its users.
If you happen to disagree with me, I'm interested in improving my view on this, you can drop an e-mail.
The original motivation of crypto appears to me to be quite legit and reasonable : the project started in 2008 round about the subprime mortgage crisis, when trust in the financial system was probably at its worst. The main motivation was to get rid of banks and replace them with decentralized software. Many things haven't been yet thought through, but it's an interesting project in response to what happened.
Indeed, keeping track of baking accounts in a decentralized manner is no trivial task :
- every copy of baking sheets are not necessarily in sync (→ double spending problem)
- need to prevent falsification
- there shall be no dependence on a central entity
The original approach was
Let $S$ be all possible seeds.
Let $A$ be all possible account states.
Let $B=S×A$ be all possible blockchain elements (a pair of an account state with a seed).
Let $t:A→A$ be a transaction (it transform an account state to another one).
Let $σ:B→ℕ$ be a signature, a hash function (ie super cheap to compute, but very hard to even partially inverse)
Now let's assume $b∈B$ to be consensus, and also $t$ to be the next transaction we wish to execute. We now try to find $s∈S$ such that $σ(s,t(b.a))$ ends with a lot of $0$ characters when written in hexadecimal.
Given that we chose $σ$ to be a hash function, there is no other choice than to test every possible cases for $s$ until we stumble upon a solution with many $0$. Whoever solves this problem first share the solution (which is super simple to check), and now we can work on the next transaction.
We can tune the difficulty (amount of $0$) to the power of contributing computers. Any computer that is able to solve the puzzle gets paid with a little bit of crypto.
This implies that it is super hard to find the solution alone. Thus :
- hijacking the account's state, require to compete against the whole world's computing power. One would require a computer so big, it would cost so much that it's not worth the effort.
- it is not worth spending time solving a wrong transaction $t$ : given how difficult the problem is, it enforces everyone to be in phase to agree on what account state to be currently valid.
This is quite cool, but it also has some problems : the energy consumption is ridiculous, not to say catastrophic. Some crypto evangelists tend to minimize this aspect and it's very hard to take them seriously with the idea that crypto is green because of ideas such as "bitcoin only consumes the energy of a dam"... Hopefully you agree with me that you need to be either brain washed or a total moron to think this makes a shred of sens.
The cryptocurrency ether has recently replaced proof-of-work with proof-of-stake so that mining isn't necessary.
[TODO : clarify how proof-of-stake works]
I think the goal was to :
- operate in a transparent way to allow audits, fraud detection, in contrast to banks that are obscure.
- prevent inflation by fixing a terminal amount of cryptographic coins.
- prevent speculative bubbles.
However the current situation of cryptocurrencies seems to have completely failed at most of its original targets : it seems to me that it only features the worst aspects of what money can do.
Let's first try to answer why we agree that $1 is worth a quantifiable value.
I think the reason that we are able to tell that a loaf of bread (or a car, or construction work, or anything) is worth some specific range of value in traditional currencies, is that we originally made up the money based on the fact that we want it to represent real things. Of course this is not an absolute thing : there is inflation, prices are negotiable and fluctuating. But we are able to tell that there is a range of price that is commonly acceptable.
Money allows an abstraction to quantify goods/services, which is a great tool.
Now let's look at cryptos : coins are created based upon computation of noise. The work behind coin generation is not a "real" activity.
There is a reason to this : it is very difficult to design a hashing function that does something useful without giving up "cheap to compute" and "difficult to inverse". If we did so, it would make the blockchain insecure.
So how is the value of crypto determined ? Because it's not based of representing something real, the value is determined by humans sentiments. The people's perception of a crypto determinees the price of the crypto : this is why it's price is able to go up out of thin air.
I do observe that cryptos are mainly used to sell/buy other cryptos or regular currencies. They seem to not participate in the real economy. An interpretation that makes sens to me is that crypto people don't want to attach crypto to the real economy as it would prevent speculation and price going up.
If a loaf of bread's price in crypto would change too much, nobody would be happy, so you would need to settle to something. But people are not in crypto for that. They are there to "go to the moon", which means pumping (and dumping). It is not in their interest that it does anything useful as attaching the currency to reality would destroy the dream of infinite growth for sentimental reasons.
In the context of crypto, the words "invest" and "gamble" look very interchangeable.
A rude way to describe the pricing mechanism is the following : an idiot buys some bitcoins, not because he wants to use the bitcoin for a real life purpose, but because he bets he'll find a bigger idiot who will pay more (either by reselling it, or holding it in the hope to be able to use the bitcoin). This continues up to a point where we reach the maximum stupidity level at which point everyone panic at what they have invested in : crash.
This is basically pumping, which is depicted in a positive way in the crypto culture... They request everyone to hold to make the price go up, so that the idiots keep tokens while the less idiots cash in the money from late comers, which is dumping. This is cruel and illegal in traditional finance for good reasons.
I hope this provides an useful angle to interpret what "risk of not investing in crypto", "fear of missing out" really mean.
If your house has an incredible door-lock, thieves will target your windows made of paper.
Blockchain do features a strong security feature : account reliability. It is almost impossible to modify without affecting near than half (if not more than half) mining computers.
why I think it's only reasonable future is to crash
Crypto harms most users while benefiting few. It has become a somewhat sectarian cult that push users to grandiose level of delusion, which is quite worrying. It does not create wealth or goods, it helps scammers and criminals.
Wealthy people in crypto haven't produced anything : they took money from others who hoped to get rich quick.
It's not that I don't like crypto. I despise it. It started as a well motivated project, failed in a spectacular manner.
Every time I see a crypto evangelist, I feel sorry for his lack of critical sens. I think most crypto people are trapped in a nonsensical position and decided that the only way is to dig themselves deeper in their believes.
I think something has to be done to stop this madness, help people out.