Ponder if crypto-currency will reach the decentralized Promise Land freeing us from the chains of centralized fiat control, given that Bitcoin’s ecosystem is acquiescing to the reality that the super majority of the economic activity in the Bitcoin ecosystem is not as a unit-of-account:
WIRED Magazine: The Future of Bitcoin Is Not as a Digital Currency
The bitcoin blockchain helps drive Circle Pay, the app that lets you trade dollars with friends and family. And the company just unveiled a new open source project called Spark that seeks to use the blockchain and similar distributed ledgers as a means of moving all sorts of currencies
Not a Unit-of-Account
Bitpay computes the price and pays to the merchant in fiat currency. Given I live in the Philippines, someone alerted me to the recent news that Stellar is now accepted by Coins.ph and thus can act a money transfer medium for remittances paying out in Philippine pesos to 22,000 local retail affiliates such as pawnshops, banks, payment centers in the malls, etc..
Bitcoin is employed for speculative investment and as an on/off ramp from the fiat world, e.g. a medium-of-exchange for global money transfers†. Coinbase’s co-founder and CEO Brian Armstrong wrote:
Since launching this feature we’ve helped about 3 million people convert $3 billion worth of their local currency into and out of bitcoin. In fact, this feature became so successful that 80% of all activity on Coinbase is people buying, selling, and storing bitcoin as an investment, and 20% is people using it as a wallet for day-to-day spending.
We set out to build a bitcoin wallet, but it turns out we were building a retail exchange.
Blockchains Are Winner-Take-All Power Vacuums
Those who think widespread adoption of Bitcoin as unit-of-account with Hashed Time-Locked Contracts payment channels such as Lightning Networks for increased transaction volume scaling are apparently unaware the technology apparently won't scale without centralization. Those who are hoping for Blockstream’s side-chains apparently haven’t yet heard the latest revelation that they appear to be insolubly insecure.
Centralized systems don’t scale for analogous reasons that closed source software doesn’t scale because for one reason, open source has the only known positive scaling law of software engineering (as opposed to the Mythical Man Month). And because investing in systems controlled by some group (e.g. whales) is a risk that group will have some conflict-of-interest or otherwise destroy your investment in the future due to any of a number of reasons including changing priorities, negligence, and incompetence. As I wrote yesterday while pontificating on Dan Larimer’s critique of Ethereum’s Casper (and Synereo’s Rchain) consensus-by-betting design:
But the problem is that consensus-by-bet doesn’t solve the problem which it shares with proof-of-work as pointed out by Dan Larimer, which is that these systems are power vacuums with a non-diminishing marginal utility of attaining increased portion of the total control of the resource that provides control in the system, e.g. stake or hashrate. And thus they will not be decentralized.
Centralized consensus ordering systems kill network effects for the analogous reasons that we refuse to invest in closed source software development. If you want a pertinent example, look at the ongoing 51% attack on Bitcoin by the Chinese mining cartel who is positioning for their ability to extract maximum transaction fees from the market. And look at how the Bitcoin ecosystem has stagnated and network effects had shifted to altcoins but these have stagnated for the same reason that they are centralized “scams”. Until we get on with true decentralization, we are just in a geek-cool circle jerk.
I have a lengthy whitepaper (currently 23,000 words and 161 cited references) written to be educational for and approachable by the average analytical person, to be published in entirety perhaps within Q1 2017, which will elaborate in technical detail how all of the currently known consensus ordering systems are winner-take-all power vacuums (i.e. analogous to centralized fiats in their own microcosms). And thus I posit are unable to create the network effects that could potentially develop a decentralized unit-of-account (which doesn’t preclude their potential success as a whale-controlled business of less ubiquitous scope). I am not going to attempt to put all that detailed explanation into a blog post. My paper also contains a technical specification for a posited solution (which I am trying to implement).
Killer App
Although decentralized scaling is an essential lacking ingredient, the lack of a compelling efficiency that requires crypto-currency as a unit-of-account is another stumbling block.
Facilitating remittances and unregulated speculation/gambling are good for niche markets which so far have driven a multi-billion dollar crypto-currencies ecosystem. We need to find that killer app which every human needs and which can only be done efficiently with decentralized crypto-currency and/or decentralized databases. And preferably a killer app in which the crypto-currency is a unit-of-account for the masses in some ecosystem, i.e. a bifurcated virtual economy separate from the fiat economy.
We’ve all got the ideas around virtual commerce and social interaction. But proving that as a killer app remains to be demonstrated.
Mass Onboarding
The other aspect of decentralization is how to onboard the masses into a decentralized unit-of-account. Bitcoin is obviously going to own the role as the on/off ramp between crypto-currency and centralized fiat to serve the investors, i.e. the reserve crypto-currency (which will likely continue to bolster the price of Bitcoin), but as a mass adoption on-ramp that is a choke point.
Steem(it) has provided the example of decentralized onboarding where “blogging is the new mining”, but it hasn’t yet demonstrated mass adoption and stickiness. Steem(it) and its ecosystem of developments are experimenting now to refine this experiment to try to achieve those goals.
Yet one of the problems that seems insoluble in the Steem(it) ecosystem is the level of centralization. Exponential and power-law distributions of wealth and ownership are natural, ubiquitous, and unavoidable. My whitepaper makes the case that it is the control the whales have and don’t have which determines whether we actually have decentralization and thus the concomitant analogous network effects from an ecosystem where nobody has the control of the level playing field. That was the entire point wasn’t it of Satoshi’s idealism― that we would all compete in an monetary ecosystem where no one has the ability to use their economies-of-scale to squash smaller competitors by employing a non-meritorious lever of control due to simply their influence and control over the system.
The Internet has massive network effects because it is has been (at least in its early days) a mostly level playing field where everyone could invest without fear of some group grabbing control of the Internet to subjugate everyone else to their vested interests.
This is an exciting time to be doing research and development in the virtual currency and decentralized databases (aka “blockchain”) because there are no clear winners yet. The major technical and political-economic problems are not yet solved (unless the solution is already lurking is some yet unpublished whitepaper). The big enchilada is still untapped.
P.S. I chose to Power Up 100% of the rewards from this blog post.
† Tangentially, USA President-elect Donald Trump may soon find it difficult to tax every remittance paying out south of the border which will presumably have numerous crypto-currency avenues for bypassing regulated banking north of the border. Also it makes no sense for China to mess with the tiny but rapidly growing crypto-currency option for side-stepping China’s capital controls.